Gold, Shiny and Useless?

Gold – the world’s most useless metal. It doesn’t conduct electricity, make for sound structural engineering or chemically compound to good use like many of the earth’s resources. And yet, humans have had a fascination with gold throughout millennia since it was first used for coins in around 560 BC.

Gold is simply a commodity and the value of it is purely driven by supply and demand at any given point in time – it is not a long-term strategy for ultimate wealth creation.

A brief history should explain why investing in gold is a fool’s errand.

In 1934, it was made illegal for Americans to own gold. The government confiscated all private ownership of gold for the sum of $27 per ounce immediately revaluing it at $35 per ounce. This remained the case until President Nixon unlocked the chains on gold trading in 1971, with the subsequent price of gold steadily rising to $197 per ounce in 1974, before declining back to $100 per ounce by 1976.

By contrast, the same $27 invested in the S&P500 (considered a proxy for the global stock market) in 1934 would have been worth approximately $540 in 1976, even taking into account temporary market declines of some 47% across 1973 and 1974, in percentage terms, the average rise in the price of gold over this 42-year period was approximately 3.16% per annum, whilst the S&P500 yielded an average return of approximately 7.39% compound. I know which of these I would consider as a ‘safe-haven’ for the purchasing power of my money. Money can only be considered future purchasing power.

Over the subsequent 42-year period since 1976, the S&P500 (The Great Companies of America) has continued to roar to the tune of 9.28% average annual returns, with gold left languishing in its wake. That ounce of gold bought for $100 back in 1976 would now be worth $1,224 as at November 2018. That same $100 invested in the Great Companies of America, would now be worth approximately $4,150.

You would now have almost 3.5x as much money as your gold investing neighbour, without agonising over the daily price fluctuations driven solely by human supply and demand for a material that is useless beyond wedding rings and hits from the 1980s, it is a great song. That’s without even mentioning the eye-watering costs to store gold for any significant period of time. Currently, it would cost approximately $490 to store one ounce of gold for the next 10 years. That’s 40% of its market value! Could you imagine your Financial Adviser recommending a long-term investment strategy estimated to cost 40% in fees over the next 10 years? Ludicrous, right?

No inherent return for owning gold

Gold ‘investing’ is pandering to your emotions and not an intelligent strategy to build considerable wealth over a meaningful period of time. You’re not rewarded in any way for owning gold, there’s no inherent income stream due to the owners, we therefore consider it a gamble and not an investment.

A story Warren Buffett recently shared

$10k would have bought you 300 ounces of gold back in March 1942, when Warren Buffett made his first investment. Today your 300 ounce of inert metal be worth approximately $400k. Now, consider that the same $10k invested in the S&P500 index back in 1942, this would now be worth a staggering $51 million if simply left alone over that period – 127x more than gold! The best part is that it would be around 100x cheaper to store and wouldn’t take up any room in your basement.

If you are seeking to build, retain and grow the purchasing power of your wealth, which is the only real objective, you must avoid the gold rush. Be warned however, as there are those who will tell you that gold is a good hedge against high levels of inflation – and this may even be the case in extreme circumstances. It’s very hard with foresight to predict when this perfect storm of high inflation will be upon us and for you to have moved (before the price spikes) a portion of your assets into gold. I therefore urge you to see gold as nothing more than another distraction to your long-term wealth creation strategy. We invest in what has always worked over meaningful periods of time – not what has sometimes worked but has been ultimately disastrous in the long-run.

“For every dollar you could have made in American Business, you’d have less than a penny of gain by buying into a store of value which people tell you to run to every time you get scared by the headlines.”
— Warren Buffett