I love talking about investing. A slow and steady plan that can enable almost anyone to ensure a comfortable future for themselves and their loved ones? Yes please, sign me up.
When I talk about investing, I speak exclusively of mutual funds, enclosed in an IRA or 401(k) (or equivalent). There are other ways to invest for the long term of course—real estate spring to mind, at least in some circumstances—but not many.
People can put their money in anything: baseball cards, some hot new startup, a cookie jar. But to my mind, one of the most popular options that draws people in is gold.
So, let’s talk about it. Is it worth looking into gold as part of your investment strategy?
Table of Contents
Let’s get elemental
Gold is a metal, an element. It’s #79 in the Periodic Table.
The Periodic Table is actually filled with metals, from the common ones like lead and aluminum, to the crazy ones like gallium, which can melt in your hand.
Some metals like gold and silver have been used by humans for thousands of years for useful purposes (tool-building) and non-useful purposes (jewelry). They have value in the same way that anything has value: because we give it value.
What is value?
That’s an interesting thought to ponder for a bit: what is money? Why does a dollar bill impart a certain amount of value? Why is that physical paper equal to a string of digits in your bank, both of them equaling $1? Where does value come from?
It’s interesting to think about, but only for a bit, and then it’s important to stop. Reason being, it’s one of those existential questions that keeps you in bed, and doesn’t actually get solved. Moreover, like most existential soliloquies, its eventual result is that you start to believe that nothing means anything.
Halt. Stop. Come back, Phaedrus.
Because if you don’t, you’ll start to think that gold is a good investment, because it’s more real than paper money and a reserve currency.
The problem is: gold isn’t real either.
“Gold is a hedge against inflation.”
People say this quote enough times that it makes me want to bang my head against a wall like I’m in an 80’s metal video.
If inflation starts to get out of control, then gold will insulate your money from this change in circumstances.
Case in point: inflation did get a little high in the 1970’s in the U.S. (though nothing like Germany in the 1930s or Zimbabwe more recently), and, according to Investopedia, an ounce of gold in the 1970’s ($35) could buy a nice suit, just like an ounce of gold today ($1,200) could buy a nice suit today. Good luck finding a suit for $35 today.
Sounds good right? Who doesn’t want a nice suit?
The problem is that if you had invested the same $35 dollars in an S&P 500 index fund (admittedly the idea didn’t exist back then, but still), you’d have over $3,000 today. (Check my work, please.)
Gold has low returns
And that’s one of the big problems with gold: the long term returns aren’t that great. While it depends on what time frame we’re talking about, over longer time scales we’re talking about returns slightly higher than inflation. Yes, over some periods of time gold has blasted the wider stock market out of the water, but we’re not trying to time the market here. We care about long term results.
And if you want a lower return product when compared to stocks, why not bonds?
Oh right, you’re worried the economy is going to collapse. I forgot. Why buy Treasury Inflation-Protected Securities (TIPS) if there isn’t going to be a Treasury soon?
Give me a break.
Let’s say the economy does collapse. Let’s say that my savings is totally wiped out because I invested everything in mutual funds. You, smart cookie that you are, are sitting on a Scrooge McDuck sized pool of gold.
What exactly are you going to be able to do with that?
Remember, you can’t eat gold, and you can’t build stuff with it. Money is only useful as a medium of exchange. If you can’t exchange it for anything, you’re sunk.
But seriously, can we all stop talking about civilization collapsing for a little while? If you want to prepare for that, learn some useful homesteading skills or something.
And while you’re doing that, invest in some mutual funds. Because at the end of the day, you need to prepare just as equally for what happens if civilization doesn’t collapse.
If you must deal with gold
If you want to buy some gold, I won’t argue with you, given a few criteria:
- You treat it like any other purchase (expense), like a new piece of electronic equipment.
- You can afford to lose the money entirely.
- You don’t count it as part of your investment portfolio.
- You don’t bother with it until you’re already investing at least 15% of your pay.
- You’re not in debt. At all.
Is that worth it? I don’t think so personally, but if you’ve got your other bases covered and have a solid financial plan without it, then go for it. Consider it play money, if you have that luxury.
For the rest of us, don’t bother.
But enough about me. Do you believe gold is a good investment?