Dylan Lewis: Hi, I’m fool.com deputy managing
editor Dylan Lewis, and on this FAQ, we’re going to be tackling a question we get all
the time online: is gold a good investment? There’s a huge portion of the financial media
that fixates on gold. The most common argument you’ll see is that gold is a hedge for an
economic collapse. Gold’s seen as a safe place to store money because it’s been used as a
currency for thousands of years. That history, plus gold’s global appeal and limited supply,
sells a lot of people on the value of gold as an investment.
But is it actually a good idea? As an investor, you’re looking to buy something
that will be worth more in the future than it is today. To measure that, a lot of people
will look at intrinsic value, or the inherent worth of a company, property, or asset.
Most of this analysis will look at the money the potential investment over time might generate.
In the case of a business, you look at the expected profits the company could generate
over time. As a shareholder, you’re a part owner of the business, and so your stock entitles
you to a sliver of those earnings. For a business that grows over time, earnings should also go up,
and the value of your piece of ownership should follow. What’s tricky about gold
is that as an asset, it doesn’t actually generate cash. The piece
of gold you own today will be the same piece of gold five years from now — no more, no less.
If you buy a house, you can decide to rent it out. Over time, the rental payments
you receive could provide a steady flow of cash. Alternatively, you can live in the house,
and instead of paying rent month after month, you’d be making mortgage payments and building
equity over time in an asset that is capable of creating cash flows. On its own, gold
can’t generate cash, which makes it a little bit harder to value. The value of gold is
really tied to its scarcity. It gives it value in the jewelry market and it makes it useful
as a store of value and means of exchange. Some of you probably heard that and thought,
“What the heck does that mean?” Globally, gold is recognized as a precious metal. The worldwide
recognition there means it can be readily exchange across borders and cultures, which
is part of the reason why major institutions like central banks maintain gold reserves.
It’s also why some investors want in on gold. They view it as a hedge against economic instability
and inflation. Paper dollars, like the U.S. dollar, are fiat currency, meaning they have
value because we say they have value. Sounds familiar? So, if events unfold that lead people
to question the value of a fiat currency, or the government takes actions to change
the value of the currency — like printing way too many bills and giving them out to
people — the currency can lose value. If a currency loses value, the relative value
of gold as expressed in that currency will shoot up, allowing investors in gold to profit.
Some people keep money in gold because it’s less tied to any one government and isn’t
as impacted by inflation or an economic collapse in any one country. But, its merit as an investment
really depends on the timeline that you’re looking at. From September 2008 to August of 2011,
the price of gold went up over 100%, while stocks in the U.S. eked out a 1% gain
on a total return basis. There’s money to be made in investing in gold, but it comes
down to being right about gold at the right time, because gold tends to surge in value
when major financial systems are struggling. Since September of 2011, stocks have returned
over 180% on a total return basis, while the price of gold has fallen nearly 30%. The returns
of the S&P 500 trounce gold on a one, three, five, and 10-year basis. For people with a
very long time horizon, since 1990, the S&P has posted 1,400% gains on a total return
basis. Over the same nearly 30-year period, gold has returned 220%.
If you’re worried about an economic downturn, it may make sense to have a small portion
of your portfolio in gold, but it certainly shouldn’t be your main investing strategy.
And for many time periods, you’d be better off being in all stocks.
Thanks for watching, guys! If you have thoughts on gold, drop them in the comments section
below. If you have any ideas for us to do a future video, please let us know. If you
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