“The desire of gold is not for gold. It is for the means of freedom and benefit.”- Ralph Waldo Emerson
Many people, especially those who lived through the 70s, have strong beliefs about gold. Owning physical gold can bring comfort to some during uncertain times. Examining the claims about it can trigger emotional reactions (especially for those who own great quantities of it.)
I’d like to examine a key claim about gold that informs the opinion of financial advisors who desire to see their clients enjoy a life of financial freedom.
A piece of metal is not an “investment” per se- it doesn’t produce anything, or pay dividends or interest. I get it- like real estate, you can see and touch it, and you don’t get a statement each month showing its fluctuating value.
Gold is beautiful and has been used as money throughout human history due to its real or perceived scarcity. I would say gold is central to human civilization across cultures and time. It feels hard wired into our brains to value it! In Colorado we know the romantic histories and great wealth that mining ore brought many hardscrabble pioneers during the western expansion of our country.
When the U.S. went off the gold standard in 1971, the price was fixed at $35 and by 1980 it adjusted up to $800 per ounce. This rapid price increase during the inflationary 70s fixed its reputation as an inflation hedge into the collective consciousness.
While you can follow all kinds of charts to track the price of gold and read millions of pages of commentary, there is no denying that a quick calculation using 43 years of inflation data tells a different story.
If gold had merely kept up with cost-of-living inflation since 1980, its price should be $3,200 per ounce. It hasn’t ever reached that price. It is currently close to $2,000 per ounce, the highest price it ever achieved was $2,075 in 2020.
As a comparison, $800 invested in the S&P 500 index in 1980 with reinvested dividends and taxes paid from another source would be $95,000 today.
$2,000 versus $95,000: this is why advisors like myself tout a portfolio of publicly traded companies as the way to accumulate wealth and maintain purchasing power over any other long-term strategy.
If gold ever had its chance to shine on the stage as an inflation hedge, it was 2022. However, after a brief bump at the beginning of the year, gold ended the year right where it started.
There is no denying that both gold values and stock values go up and down, and you can find time periods such as the 70s and early 2000s where gold increased in value when the market was down.
In a diversified portfolio, there is nothing wrong with owning some gold, and if you do not want to pay the extra costs to buy, store, and insure physical gold, you can own funds that track commodity prices. There are also other investments we use that historically zig when U.S. stocks zag AND pay dividends or interest.
Where I and other advisors get concerned, is that asset diversification is not what many gold buyers are doing.
Investors look at history, and look at ongoing development and innovation in every area of the economy and the circumstances of the citizens participating in it to form our assumptions about the future. To be a successful investor is to have faith in the future grounded in our historical resilience and adaptability.
Gold sellers don’t exactly have the historical facts on their side about the ongoing purchasing power of gold, so they often paint a picture of a near future where the dollar has lost its value, no one will take your dollars, and other fearsome hypothetical scenarios.
Gold sellers have been predicting the imminent demise of, something, at least the entire 25 years I’ve been doing this and despite many challenges we continue to endure.
An ugly cynicism is apparent when you consider that these salespeople are happy to accept your “soon-to-be worthless” dollars in exchange for their golden treasure. We examined pessimism in a previous post: “pessimism sounds like someone trying to help you, optimism sounds naïve.”
I admit a grudge toward these gold story-tellers, not because gold is not worth owning, but because of the catastrophism that they must sell in order to get people to buy into the story.
Peace of mind, brotherhood, faith, and love are more valuable than gold but at vulnerable points in time, some people can be convinced to trade off.
This can be a consequential financial mistake for folks who need growth and income to sustain themselves in retirement.
Financially successful people plan for their security, but maintain an outlook of resilience and positivity. Indeed, I would say fear and a persistent negative outlook are warning signs of financial failure.
Analysts say that you have to look at really long time frames, a century, to see gold earn its reputation as an inflation hedge and store of value. This may be true for all I know, but it isn’t really relevant to the financial needs of my lifetime, and those of my clients.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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