With what appears to be endless fiscal stimulus and rising volatility in the stock market, many investors are asking themselves if they should be investing in gold. The precious metal is often seen as a safe-haven from economic downturns; however, the basis for that argument is merely because it is a widely held belief. Like cash without the erosion of inflation, gold ownership is thought to be a way to store economic value.
On the other hand, gold has few industrial uses beyond its use in jewelry. Jewelry purchases, and more generally discretionary spending, tends to slow in recessionary times. The same can be said of industrial production, making it difficult to understand why gold prices increase as economies slow.
The biggest disadvantage in gold ownership, relative to other investments, is its lack of cash flow. Like other commodities, gold has no earnings beyond price appreciation and pays no dividend without relinquishing ownership. This makes it difficult to determine what gold is truly worth. You are left purchasing based on the idea you will find someone willing to pay more than you did when you are ready to sell, a concept referred to as “the bigger fool” theory in financial circles. This presumption is not the basis for a sound investment in our minds, more a speculation on the rising price of an almost useless commodity.
In observing longer period returns, absent the 20-year period, you see stocks have outperformed gold by a wide margin. The annualized returns may be deceptive to one not accustomed to the impact of compounding of returns. Much of that difference can be attributed to the dividends paid on stocks. The current annual dividend paid on Dow Jones Industrial Average stocks is 1.92% on average with the longer-term average being closer to 2.60%.
A theoretical $1,000 investment would have grown to:
|
Asset
|
40 Years
|
30 Years
|
20 Years
|
10 Years
|
|
Gold
|
$3,018
|
$4,933
|
$7,019
|
$1,369
|
|
Dow
|
$107,970
|
$24,794
|
$4,782
|
$3,563
|
|
Inflation
|
$3,088
|
$1,956
|
$1,502
|
$1,191
|
Returns as of 12/31/20.
The percentages (annualized):
|
Asset
|
40 Years
|
30 Years
|
20 Years
|
10 Years
|
|
Gold
|
2.79%
|
5.44%
|
10.18%
|
3.16%
|
|
Dow
|
12.356%
|
11.25%
|
8.10%
|
13.42%
|
|
Inflation
|
2.84%
|
2.25%
|
2.04$
|
1.75%
|
Returns as of 12/31/20
We know companies have changed, becoming more efficient. Information is dispersed more quickly and efficiently. However, the same inter-related economic factors remain in effect today as have been for at least the past 40 years. On that basis, we believe the long-term performance of all of the assets presented here are likely to hold over the years to come.
If you have additional questions or would like more information on commodities, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166