Gold has been making headlines lately for its plummeting value. What does that mean for us?
The answer is not much. Most individual investors don’t own gold beyond what’s found in their jewelry box.
Gold is what’s known as a “fear trade.” Its price climbs when investors lose confidence in the traditional stock market. This is particularly evident when we look at historical gold prices. Gold hit an all time high of $1,900 an ounce during the market turmoil that followed a downgrade to the U.S. government’s credit rating in September of 2011. As a general trend, when the market falters, gold shines bright.
The good news is that I believe that the falling price of gold means that people are gaining confidence in the stock market. Gold is seen as a safe investment when the markets are not doing well—it’s a hedge against a declining stock market and inflation. Gold’s recent slump could mean rising stock prices.
Do you think gold is a good investment?
I do not believe gold is ever a safe investment because you can’t time when it is going to do well. For example, from March 1987 through May 2005, gold returned 0%—yes, ZERO for nearly two decades. Over that same period, the S&P 500 boasted an annualized return of over 10%.
Of course, there are other periods when gold has far outperformed the market, but it’s virtually impossible to guess when that will happen. Over the long-term, I think the stock market is a much safer and more practical investment. For one thing, shares of stock represent actual businesses that are creating value—be it products or services—whereas gold is just a hunk of metal that sits there. Unlike a business, gold won’t pay interest or dividends, and it won’t grow earnings. Even as a metal it doesn’t add much value—it’s primarily decorative, with 52% of its use in jewelry, 34% in investments and 12% industrial.