In this episode of the Ready for Retirement podcast, James discusses gold and whether it is a good investment or not. He begins by giving an update on the current price, reminding listeners that this is a unique environment and conclusions should be drawn from historical data only.
After giving a disclaimer about his experience, he explores whether gold has a history of holding value. Prior to 1971, the gold standard kept the price of gold artificially low. This can skew the data, so the question is not whether it held its value, but what are the alternatives? Most notably, can you compound your money by investing in companies instead?
Next, James discusses whether gold is an inflation hedge and finds that the real return (earnings minus inflation) during this period falls at just 1.3%. By using the standard deviation to determine risk, James concludes that the stock market actually exhibited less risk over time. Gold hedged against inflation, but at a significant cost because fluctuations and swings were dramatic.
To conclude, James studies whether gold is good for portfolio diversification. The way he looks at it, gold is not an investment because it can’t generate earnings. So is it a good investment? It depends on the decade.
By looking at the growth of gold compared to the S&P 500, it is clear that gold’s growth mostly came in the period following the end of the gold standard. Not only did it have more down years than companies, but it also had more down years of large percentages. In short, James determines, gold is not the best investment given the alternatives.
1) Does gold have a history of holding its value? (1934-present)
- The gold standard kept the price artificially low until 1971, a brief explosion followed.
- Gold had an annualized return of 4.8%.
2) Companies hold actual value through tangible profits
- Dividends provide additional monetization
- The compounding effect is a possibility
3) Gold is a risky, somewhat ineffective inflation hedge
- The real return/purchasing power during this time was only 1.3%.
- Fluctuations created greater risk and a higher standard deviation than the S&P 500.
4) By most standards, gold is not truly an investment
- Gold has no earnings and is only worth what the next person will pay.
- You can’t run the same type of valuation as with shareholding companies.
5) Investment potential is dependent on the time period
- Since 1971, gold has been down 19 years compared to 12 years for the S&P 500.
- Outside of the post-gold standard explosion, gold has been primarily down or flat.
0:04 — Today’s topic- Is gold a good investment?
0:42 — Three reasons people give to own gold
2:15 — #1- Gold and its history of holding value
5:03 — What are the alternatives to gold?
6:54 — #2- Gold as an inflation hedge
9:45 — #3- Is gold good for portfolio diversification?
11:19 — If gold is actually an investment, is it a good one?
15:40 — Gold throughout the decades
18:42 — The verdict
20:05 — Summary/Final word