If you want to know how to make money in gold , you might be surprised by my answer. First, a disclosure: I’m happy I didn’t buy gold five years ago even though I’d have made a bundle had I done so. And if you ask me “What should I invest in right now?” my answer won’t include the yellow wonder. Take a look at what the price of gold has done (red line) compared to the S&P 500 (blue line):
What this chart indicates is that anyone who invested in the S&P 500 five years ago has no gain to show for it. Had you invested $10,000…you’d have $10,000 today. That’s it.
Had you invested $10,000 in gold (as represented by GLD – an ETF which seeks to replicate the price of bullion), you would have accumulated $22,000! Booya…
Regardless of that, I’m proud to admit that when folks asked me about investing in gold in the past, I always counseled them against it. I know you are asking yourself a few questions:
1. “Is he crazy?”
2. “Does he feel like an idiot now?”
3. “Does he have something against those people?”
4. “Does he dislike making money?”
While I can’t give you a clinical answer to the first question, I can tell you that my best answer is “no” to all four. Here’s why I’m not a fan of gold:
1. Gold is a speculative investment.
Take a look at the chart below:
Look at the price of gold in 1980. It breached $800 an ounce. But if you bought gold in 1980, how long did it take you to make any money? Just about 28 years. It wasn’t among the best investments over that period of time.
In fact, gold seldom made money over the last 36 years. There were only two profitable periods – one from 1977 to 1982 and the other from 2003 to the present. All the other years were duds for gold investors.
Therefore, you’d have to conclude that the odds are against making money with this investment. Not impossible…just difficult. Gold investors are speculators. That doesn’t mean they are doing something wrong or bad. But it’s important to understand that speculators take on more risk.
History tells us that gold has only done well over short periods of time. If you buy gold, you are speculating that we will continue to be in one of those periods. You could be right. But what if you are wrong?
Here’s what the S&P 500 did over the same 30-year period:
As you can see, there certainly were periods of underperformance (and losses). But if you are an investor, which picture do you want to be in-between the two? Investors – people who look for long-term results – would probably feel more comfortable with the S&P 500.
2. Speculators continue to speculate.
If you take the plunge and sink your dough into gold, you could make a lot of money – this time. But what is going to happen the next time you make a speculative investment? And believe me…there will be a next time.
A few years ago, real estate was the “can’t miss” investment. Before that, it was high-tech stocks. You probably already know what happened to folks who speculated in those areas. It wasn’t pretty – yet many people piled on at exactly the wrong time.
And once you get on the speculation train, it’s tough to get off.
If you abandon your investment strategy and discipline just because something looks like it is a slam dunk, you no longer have an investment strategy. You are flying by the seat of your pants. You might have a beautiful flight…but you might also fly right into the side of a mountain.
Again, this doesn’t mean you are going to lose money every time you speculate. But sooner or later you will, and it might be a disaster.
3. Gold isn’t the only thing that might do well in an inflationary cycle.
You might like gold because you think we are headed into a period of high inflation. You might be right. I tend to think you probably are…but that doesn’t mean gold is your only (or best) investment. Maybe you should look into buying a condo instead.
I’m not qualified to write about economics and I’m not going to pretend that I am. But it’s important to remember that stocks and real estate might also do well in a period of higher inflation.
Oh…and by the way, both real estate and stocks are still 30% to 40% below their all-time highs (unlike gold). Also, both offer the possibility of earning an income while you hold them (please read What is a Dividend for more information). Gold doesn’t offer any income – just hope.
Ever since the government ramped up its spending spree earlier this year, gold prices have done well. But so have stock prices. Look at the chart below. You can see that gold and the S&P 500 have performed equally well:
I’ll admit that U.S. stocks may not do well if we have hyperinflation – but who says you have to stick with U.S. stocks? I’m a big fan of paying attention to the market and shifting investments as the market shifts. Such market timing strategies might be well suited in an inflationary period.
Obviously, I’m not trying to tell you how to invest your money through this post. You should consult your own advisor before you make any investment decision. Also, any time you invest, you take the risk of losing capital.
I am trying to make the case that there are downsides to speculating…especially when it looks like a “slam dunk.”
So now it’s your turn. Am I crazy for not buying gold right now? How do you feel about it?
Stephen Davis says
This is great work. It is another example of people getting in too late. By the time you hear it is great, it is over.
I actually consider stocks speculative too.
Chad Smith says
Really enjoyed the analysis. Speculating often results in a really great fake-out unless you can pinpoint the perfect time to exit. Here’s another commentary on the prospects of investing in gold…
Five Ways to Beat the Gold Rush http://bit.ly/4fbm0M
Neal says
Monevator,
It’s my nefarious way of keeping you reading (or an error)…..you guess which… he he he 🙂
Monevator says
Great article. Couldn’t have said it better myself – and I know because I’ve tried!
One point though – your post slug says ‘4’ reasons… what are you keeping from us Neal? 😉
MoneyEnergy says
Great article. Everyone’s made all the important points here already. Gold doesn’t have to be an investment (as you said, it doesn’t even pay dividends!) – but it can be bought as insurance.
Just as we don’t make money from our insurance policies, we don’t “make money” from gold, but it’s still there for those “in case” scenarios.
And you’re right, US stocks are not the only game in town – there are many ways to play the coming inflationary cycle!
Neal says
Right Money Energy…..I agree completely. But still, if I can buy “insurance” that also pays dividends or rent, doesn’t that make sense to consider?
Gary Seidler says
Neal,
thanks; very helpful. l finally have a well thought out answer to the oft-asked question –
“Dad, why have you not invested in gold?”.
l am sharing your thoughts with both my sons
and know they will value your balanced insights.
Financial Samurai says
Neal, great stuff. I like your view point. There are some mega bulls out there, including Jim Rogers (Investment biker author, and ex hedge fund manager) is talking about $2,000 gold. He’s a funny guy who spoke at our investment conference in March this year.
When things are on fire, like the stock markets and gold now, there’s always a beautiful pile on. It’s just about getting out before the herd does that matters.
Thank goodness the bull market is back! 🙂
Ron says
Another reason — check out the commissions on buying bullion. I have seen them as high as 50%. TRY, just TRY to find someone to sell you gold bullion for $1,050 an ounce. DCA into gold and you’ll lose your shirt in commissions.
Neal says
Thanks …..
Matt J and ERS,
Wouldn’t real estate also serve as a hedge against a collapsing $$? Maybe not quite as well but given the uncertainty on both sides, and given the lower prices of real estate, doesn’t that look more attractive to you?
Russell Dunkin says
Great work! I hadn’t had time to research much of this myself, and REALLY appreciate you compiling it here. I have a few folks I need to share some of these stats with soon.
Matt Jabs says
Excellent breakdown of the historical facts Neal.
One thing is certain for me… I would not buy gold as an investment, but I may buy it as a hedge against a collapsing dollar.
Kyle says
@ere I respectfully disagree. I can’t go to jc penny and pick up a suit with a gold nugget. If I had a gold coin thy would only give menthe face value of the coin, not it’s weight in gold. Gold is not, and hasn’t been for some time, an actual currency. I can’t rip the copper pipe out of my wall to buy a loaf of bread either. Most people aren’t picking up actual boullion either. I think the actual value of old in today’s economy is overhyped. Just my 2 cents
Early Retirement Extreme says
Gold is also a store of value. Stocks are not.
One ounce of goal buys a good suit, always. And one pound of copper buys a loaf of bread, always. You can’t say the same about 5 shares of GE. Gold is real wealth. Stocks are just a claim on the bottom line which is subject to change.
If you DCA in and out of gold as part of your retirement savings there is very little financial turmoil that can destroy you. With the stock market dropping, there are many commentators making statements about the importance of diversifying into bonds and if only … well, those that actually did that are going to see their bond holdings eroded by inflation.
JoeTaxpayer says
Let me add fuel to your fire.
From 1980 till now, a dollar invested in T-bills would be worth about $4.75. So the $800 gold needed to get to $3800.
Your S&P chart doesn’t include dividends, when you look at total return, a dollar invested at the end of 1980 would be worth about $16.80 today or $800 would be worth $13,440. The S&P could crash from here, even 90%, and still beat gold during this timeframe.
To be fair, there are times gold will rise or fall far more than other investments, but I’m laughing at how few recommended gold at $250, yet are screaming that it’s a buy now.
Good article.
Neal says
Matt and Baker,
Coming from you guys….I am on cloud 9.
Glad this is helpful.
I think it’s really important for investors to keep clear on goals and risk tolerance.
No question about it….gold is a speculative bet. Possibly a good one…but speculative and investors need to really get that loud and clear.
Thanks for your extremely kind words.
Retirement Savior says
@ERE – you say it very well, gold is the least risky way out there to maintain purchasing power.
One thought I have is that with the inverse correlation today of the dollar and stocks, a stock market correction could be the effect (probably not the cause) of a short term dollar rally.
Matt SF says
Great article Neal! You hit this one out of the park!!!
You make an excellent point by asking “how long will it take to make my money back” if someone had bought into the gold hype in 1979-1980. I consider myself to be a fairly patient person, but 28 years to break even on my money is pushing it a bit.
I’m really hoping that many of the gold bulls are right, but all it’s going to take is the Fed raising rates or the government making a statement to strengthen the dollar, and the fast money speculators will hit the door.
Baker says
Fantastic examination of this topic, man. You said what I thought, but found the perfect world that I never could.
This is bookmarked as my definite post when referring to this issue from now on. Good work!