Gold hits $1,000: Should I Invest In Gold?

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By Pinyo, on March 18, 2008

On March 13, 2008, gold hits $1,000 per ounce for the first time in history, the dollar fell below 100 yen, and crude oil price is setting new records. With the sub par stock market performance over the past few months, it’s hard not to second guess yourself, and dream up all kinds of thoughts:

Historic prices of gold versus the stock market

Even my wife is telling me that I should have bought gold when it was cheaper. Well, that’s easy to say when gold is doing so well doesn’t it. To understand this better, I compared historic gold prices against historic stock prices, and ended up with the following table.

historical gold and stock market prices

Okay, let me walk you through this chart.

The Basics

  • Column B is the annual growth rate of the S&P500 index
  • Column C is the gold prices for each year
  • Column D is the annual growth rate of gold

Scenario One — 30 years

  • If you invested $1,000 in the stock market in 1977 and let it grows, you would have $36,180 after 30 years (column E).
  • Alternatively, if you bought $1,000 of gold in 1977, you would have 6.21 ounces of gold. In 2007, your gold would be worth $5,192 (column F). Clearly, investing in the stock market wins.

Scenario Two — 20 years

  • Stock market: $9,193
  • Gold: $1,719

Scenario Three — 10 years

  • Stock market: $1,825
  • Gold: $2,914

What does this all means?

Beside the last 10 years where gold outperformed the stock market, it’s clear that gold cannot compete with the stock market on a longer term basis. So this means that you shouldn’t jump on the bandwagon and start buying gold. For all you know, you could be chasing performance — i.e., the next big thing. However, I think gold would make good supplemental investment for any portfolio.

Benefits of investing in precious metals

I believe these are some of the key benefits of investing in precious metal such as gold and silver:

  • It’s real tangible object. Companies can go out of business, but it’s hard to imagine gold becoming worthless.
  • Offers protection against inflation.
  • Offers protection against currency devaluation. It’s no coincidence that the value of U.S. dollar fell and gold went up.
  • Offers protection against social, political, and economic instability.
  • Universally valuable. Gold is gold no matter where you go…unless somebody figures out a way to turn lead into gold…
  • Low correlation to the stock market, which could smooth out your portfolio overall performance (see chart below where the performance of gold (gold bars) does not track with the performance of the stock market (green bars)).

gold and stock market correlation

Different ways of investing in precious metals

Buying gold bullion is not the only thing you can do. There are several options that I can think of.

  • Gold bullions
  • Gold coins
  • Gold jewelries
  • Gold mutual funds and ETFs
  • Stock of companies that deal with gold — e.g., mining, manufacturer, etc.

So what do you think? Are you going to buy some gold?

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Pinyo
Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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12 Comments

  1. gravatar
    FourPillars
    March 18, 2008, 6:53

    Interesting post – I think that buying gold now is chasing returns and should be avoided. Also – the expected real rate of return for gold is zero which isn’t that good. It may serve to lower volatility in your portfolio but I personally have no interest in buying it at any price.

    turn lead into gold

    Maybe you should buy some lead as well for diversification purposes? (just in case). :)

    Thanks for the link,
    Mike

  2. gravatar
    eden
    March 18, 2008, 7:21

    I hope no one would be foolish enough to jump in and buy gold now! Sure, if someone was smart enough (lucky) to see it at a relatively low price 10 years ago and buy they would have done better than stocks, but that is a rare occasion and I highly doubt that one year from now that will still be the case.

    And I really have a hard time considering gold bullions, coins, jewelry, etc as investments since they have no real liquidity or market- unless you count pawn shops. :)

  3. gravatar
    Minimum Wage
    March 18, 2008, 7:30

    I would have bought gold at $300, now is a good time to sell. I did buy some silver coins back when silver was around $7 an ounce, but I had to sell a few months ago and wasn’t able to get as much of the gain as if I had held longer.

  4. gravatar
    The Happy Rock
    March 18, 2008, 10:52

    Historically, I think the return on gold has been ~4% a year, and the stock market is ~10%, not much of a comparison there.

    Also I would think in real instability, the barter system would take over. Gold wouldn’t be very valuable then.

  5. gravatar
    Aaron Stroud
    March 18, 2008, 12:30

    @Eden, you’re exactly right. Someone would have had to have been lucky enough 10 years ago.

    William Bernstein has some excellent information on using gold and precious metals in his book The Four Pillars of Investing. However, the information isn’t for the casual reader or investor. Effectively including gold and precious metals in one’s asset allocation is difficult.

  6. gravatar
    7million7years
    March 18, 2008, 14:43

    I had the great pleasure of buying 5 oz of gold when I was in college … but, I had to sell it in a hurry when my new car arrived … I lost $50 in the transaction. Of course, gold jumped to $800 an oz – starting about a week afterwards … so I think I am the only person in history to have lost money in the last gold boom.

    Needless to say I learned a lot about selling an investment to buy a depreciating item … and, I’m happy to say, I generally learn from my mistakes!

  7. gravatar
    Adfecto
    March 18, 2008, 14:52

    Commodities have a place in most portfolios in SMALL amounts. A diversified holding of precious metals should be a part of that. Keep it small and realize that it is to hedge against inflation and reduce volitility and NOT to provide an outsized return. Most of the runup in gold has been due to inflation and the falling dollar rather than true scarcity. It is important to note that if you were to simply hold assets that are denominate in a currency other than US dollars you would have done rather well. Instead of gold, I’d recommend foreign bonds (denominated in the local currency) because they will fight the falling dollar and have a real return (as opposed to gold’s 0% real return).

  8. gravatar
    Pinyo
    March 18, 2008, 16:05

    @Mike — I have plenty of lead in my walls…don’t need anymore :-P

    @Eden — I am certainly not planning to, aside from what I already have in term of jewelries.

    @THR — I guess when things get really bad, even gold wouldn’t matter much.

    @Adfecto — Good add.

  9. gravatar
    David
    March 19, 2008, 0:35

    If you had bought $10,000 in gold in January 1980, you would just now be breaking even and it would be worth $10,600 today. However, $10,000 invested in the S&P 500 in January 1980 would be worth $279,000 today.

    And that is why I stay away from gold. Not that it isn’t fun to hold, but still…

    Oh and thanks to Money Magazine for them stats!

  10. gravatar
    Llama Money
    March 25, 2008, 15:21

    I don’t think gold is a good buy-and-hold play, as this chart demonstrates clearly. Rather, it’s something you buy when you think the dollar is on a downturn, or when you think inflation is going to rear it’s ugly head in a big way. Though the rise of gold has been huge, I think it’s got quite a lot of upward movement left.

    The only problem, like stocks, is to figure out when you’re at the top, and when to sell.

  11. gravatar
    Andy
    February 10, 2009, 11:14

    I know this artilcle is a bit old, but it is very relevant and now could be an excellent time to invest in gold. I recently looked at investing in gold my self and after being anti-gold for a long time, have started to warm to it. However, I still see it is a hedging strategy in case stock markets start to tumble even more, rather than a pure play, long term investment

  12. gravatar
    Pinyo
    February 11, 2009, 17:20

    @Andy – Everything is low right now. But instead of just pure gold play, I have been thinking about commodities index fund or ETF.

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