With the recent prices of gold, and all the fast talking salesmen trying to convince us that gold is, was, and always will be a safer investment, you might conclude the answer is yes. But as Paul Harvey used to say, let’s look at “the rest of the story.
Long before stocks, bonds, and mutual funds were available to investors, gold was considered one of the most valuable universal currency, and one of the best investments. The reality is that for most of us, there is no silver bullet, no one strategy that will be the best place to put all of your money, all of the time.
There are several reasons to invest in gold, not the least of which is the satisfaction of owning something that you can hold, feel, look at, and enjoy, knowing that it can never go bankrupt, and it will always have value. As a hedge against the dollar, international currencies, and political uncertainty, it provides some safety and peace of mind. Additionally, as an alternative investment that has historically demonstrated a low correlation to the stock and bond market, gold can provide valuable diversification helping to potentially reduce the overall risk of your portfolio.
It is important to also consider what gold does not do. First, it does not pay a dividend. It also doesn’t always appreciate, the price of gold can fluctuate, and believe it or not, the price can go down and you can lose money on an investment in gold. Let’s take a look at the best and worst year’s performance of gold in the last 30 years, and compare these annual returns to the performance of the S&P500 in the same years.
Best years for Gold:* S&P 500
2010 30.6% 2010 12.78%
2009 25.0% 2009 23.45%
2007 31.9% 2007 3.52%
2006 23.9% 2006 13.62%
2002 23.9% 2002 -23.37%
Worst years for Gold: S&P 500
1997 -22.2% 1997 31.01%
1996 -4.65% 1996 20.26%
1984 -14.9% 1984 1.40%%
1983 -14.9% 1983 17.27%%
Which years would you have wanted to own gold, and more importantly how can you predict what years to buy or sell gold?
The above comparison displays the best and worst performance over the last 30 years as compared to the same years in the S&P 500. A reasonable conclusion is that gold has had some great years, and some difficult years. The same of course can be said of the stock market. Because gold and the stock market have demonstrated a low correlation to each other, it is reasonable to conclude that an investment in both can provide diversification, which has in the past shown to reduce volatility.
An important consideration when considering investing in gold is that of storage. You can’t put gold in your brokerage account; it needs to be kept in a safe or safe deposit box. Be very leery of dealers claiming they can store your gold for you at no cost.
As one component of a well-diversified portfolio, gold can play an important role. But just as Tom Brady can’t win a Super Bowl all by himself, investing in gold will not, by itself, make you rich. It can however, play an important and valuable piece of your overall investing strategy.