TSI #25: Should you invest in gold?

Hello Stoic Investors,

Today I want to focus on gold as an investment. You may have heard how gold can be the ultimate hedge when times are bad. Or how you should always hold a little bit of gold just in case. Continue reading and I’ll tell you why gold is not as great as you think.

What is gold actually?

Of all the precious metals, gold is the most popular as an investment.

Gold has several qualities that make it exceptionally valuable. It is attractive in color and brightness, durable to the point of virtual indestructibility and usually found in nature in a comparatively pure form. That’s why in the past, gold was the global currency.

It is often used to hedge inflation because, unlike paper money, its supply doesn't change much year to year. We could say that gold is indeed a safe investment.

Where can I buy gold?

You could just go to a jewelry store or a reseller and buy gold in physical form. But then you’d need to also find a safe place to store it.

That’s why most prefer to buy shares of gold mining companies or gold exchange-traded funds (ETFs).

Is it a good investment?

I have mentioned the safety of it as an investment. Let me explain what I mean by that. Historically, gold was able to keep up with inflation. However, that only applies on the long run. You can see the relationship between inflation and gold in the image below.

This year so far, gold is failing miserably in that role. Inflation is near 40-year highs and gold is down approximately 3%.

Although the last time inflation was a problem (1970-1979), gold returned 21.71% per year (in real terms). I guess we’ll have to wait a while to see how it performs during the current inflationary period.

Is gold really the best option?

When you’re looking at investments, you always have to consider opportunity cost as well. If you have $1000 stashed away and put it into an investment yielding 5%. You’ll have $1050 next year. But if you’re able to find an investment with a 15% annual return. You’ll probably want to devote that $1000 to the latter.

Following the same logic, let’s look at the S&P 500 index and compare that to gold.

If you had bought gold 10 years ago, you would have booked a 22.81% total return. On the other hand, the S&P 500 index returned 183.09% in that same period.

I think the choice is obvious.

Does that mean I should abandon gold?

Some believe that holding a tiny percentage of gold in your portfolio can help you through difficult times. When the stock market is doing poorly, maybe gold will give you a little lift and reduce your overall loss.

So, note down these points and start investing today:

• Gold has historically been able to keep up with inflation
• Investing in gold is inferior when compared to the S&P 500
• A tiny percentage of gold can reduce portfolio drawdown

This Christmas gift yourself with something different and start your journey with me.