Over the past year, we have encouraged clients to avoid investments in gold; however during that time, we have seen gold rise 13.5%. With the shiny metal outpacing the S&P 500 Index over that time, many investors continue to be drawn to the commodity.
We remain steadfast in our belief that gold prices are too high, at $1,279 a troy ounce on Thursday, Sept. 16, 2010. Looking at the historic price movements of gold relative to the S&P 500 Index and Consumer Price Index (CPI) to measure inflation, the last 10 years have rewarded gold investors well relative to stock investments. But, we will warn you not to be too short-sighted. A similar situation occurred in the high inflation economic environment of the 1970s with gold gaining 31.71% annually while the S&P 500 appreciated 8.47% annually as the chart below shows.
However, buying gold after that amazing run could have been detrimental to a portfolio as gold sold below its 1980 price for the next 20 years. As shown below, gold fell at a pace of 3.79% annually, and was unable to keep pace with inflation.
Looking back, gold appears to be a good investment during the only known 10-year period when the S&P 500 was negative. However, this was also a period where the economy and stock market experienced the burst of two asset bubbles and the U.S. Government stimulated the economy to the point that many investors have come to expect inflation is right around the corner.
Gold has been heralded as a hedge against inflation, and we feel recent gold prices reflects that notion. While we recommend dollar-cost-averaging and do not time the market, we feel it imperative to point out historic asset price movements. Looking at the assets over a longer period to include the 1970s through the last inflation index update of July 30, 2010, the S&P 500 is the better performing index. The chart below is the proof.
One of the major points investors should not miss is the difference made by dividend. While gold pays no dividend, the S&P 500 Index dividend accounts for a great portion of its total return. The S&P 500 has a price appreciation of 1,095.44% versus the total return of 4,040.28%.
Of course, looking at past price is not our preferred method of determining the worth of assets. We would rather look at the underlying earnings, book value and debt ratios among many other factors; however, gold has none of these. With no fundamentals, it is nearly impossible to determine what the price of gold should be. Additionally, gold also has no income producing properties. The only income from an investment in gold is at the sale of the asset, assuming an investor can sell it at a higher price than he paid for it. We refer to this as the “bigger fool” theory. We feel that gold is not an investment, but a speculation.
We remain committed to our belief that investing in companies with definable worth is preferable to commodity investments. If you insist on investing in gold, we have reviewed some exchange-traded funds (ETF) and recommend buying SPDR Gold Trust (symbol: GLD). The ETF owns gold, and its price tracks the market price of gold. The ETF also has the potential to pay a distribution in actual gold, though it has not.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
