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?