Is Gold a Good Investment?
Friend: “What do you think about Gold?”
Kaki: Do you mean for an investment?
Friend: “Yes – does it make a good investment?”
Gold has been around for a VERY long time. It’s shiny, rare, and tangible. I tend to have more women ask about gold; I think women have heard their mothers talk about gold.
Gold History. First, let’s do a history lesson. In 1834, the United States fixed the price of gold at $20.67 per ounce, as part of pegging the US Dollar to gold, “the Gold Standard”. The Bretton Woods Agreement came on the scene in 1944 and the price of gold increased to $35, where the price stayed until 1970. If you love to google historical charts, now you understand why the gold prices didn’t move much pre-1970.
Then, in 1971, the US put an end to the Gold Standard, meaning the United States was no longer holding the price steady, and gold pricing responded! From 1971 to 1980 gold went crazy – from $38 to $674, that’s over 37% annual compound interest, huge!
But it wasn’t all good news. The next 20 years, from 1980 to 2001, the price of gold fell from $674 down to $272 per ounce. For people that bought gold near the top in 1980, it took 28 years (investors would wait until 2008) before gold returned to the highs seen in 1980.
From 2001 through 2023, gold went on another big upward run from $280 to $1,950 an ounce.
So, how do we think about gold as an investment today? We need to acknowledge that the past is not necessarily an indicator of future results. There are lots of things that impact the price of gold including: general supply and demand, global political tensions, the cost of mining gold, and general economic conditions including inflation. Because gold prices are impacted by so many factors, I believe gold will continue to experience volatility in the future. We should expect big price swings up and down.
Pros and cons. One of the possible advantages of using gold inside a portfolio is for added diversification. Stock market crashes are part of normal economic cycles, and they occur on average once a decade. Here are some examples: 1973/1974, 1987, 2000 - 2002, 2008, 2022 – the stock market returns sucked in each of these years, but gold did well. If gold prices move differently than the stocks and/or bonds, then adding some gold could help further diversify a portfolio against huge shocks in the stock market.
A possible disadvantage of gold is the volatility. Do you have the stomach to sit on gold if the price falls for 5 years? How about for 10 years? Will you continue to hold gold as a counterweight against major stock market declines? If yes, then allocating a small portion of your total portfolio to gold might be reasonable. If no, then you can still compile a diversified portfolio without adding gold.
How do you buy gold? You can buy gold bars, coins, or jewelry, but it might be expensive to store, and tangible gold is subject to being stolen. You could also invest in gold with stocks of gold mines. The stock prices will be correlated to the price of gold without the hassle of owning gold. There are also gold mutual funds and ETFs that invest in a basket of gold-related companies.
If you have additional questions about whether adding gold to your portfolio would help your financial goals, Look Both Ways Financial can help!
About Kaki – Kaki is a Certified Public Accountant and Certified Financial Planner TM . Although Kaki is a CPA, Look Both Ways Financial is not a CPA firm.
