The Many Advantages of Investing in Gold

If you’ve ever read mainstream financial advice, you’ll notice that gold is hardly ever mentioned as an investment asset. At best, you might find some advisers who recommend holding 4-5% of a portfolio in gold, or more likely in a gold ETF or gold index fund. Most advisers look down their noses at gold, repeating the old saying that gold is just a barbarous relic. Investors who don’t know better follow the advice of those “experts” and miss out on the many advantages that investing in gold can bring.

Gold’s Rate of Return

Many critics of gold like to say that gold doesn’t grow, that it just sits there doing nothing. That’s not really true. Just because gold isn’t subject to the wild swings that occur in the stock market doesn’t mean that it isn’t growing in value. It’s just that gold’s appreciation is slow and steady, constantly keeping pace with markets rather than trying to outrace them. Gold’s ability to retain its value in the face of inflation is what makes it so appealing to so many investors. Gold just “sitting there” is actively protecting your assets and defending your wealth against inflation.

Gold’s rate of return, the increase in the dollar value of each ounce of gold, is a reflection of the amount of money creation the Federal Reserve engages in. Since President Nixon closed the gold window on August 15, 1971, and removed any last semblance of a commodity-backed dollar, inflation has run rampant. Without any check on money creation, the Fed has been able to create money ad infinitum, no longer constrained by a gold window at which foreign governments could redeem their dollars for gold. The result has been an extraordinary increase in prices that never seems to stop.

And what about gold? The closing of the gold window was supposed to be the last gasp for gold, the final severing of the barbarous relic that would thenceforth be consigned to the dustbin of history. But since August of 1971, gold’s price has risen an average of 7.8% per year. Compare that to the S&P 500, which has gained 7.3% per year in that same time span, or the Dow Jones Industrial Average, which has gained 7.2% per year. Yes, you read that right – gold has outperformed stock markets since the gold window was closed. But you’d never know that from reading the anti-gold propaganda in the financial press.

Let’s look at those figures in a context that makes more sense to the average investor. Half a percentage point may not seem like very much, but over years and decades that adds up to a lot of money. Someone who put $100,000 in gold in August of 1971 would have a portfolio worth $3.16 million today. Someone who put that money in a portfolio matching the S&P 500 would have $2.5 million today. And someone who put that money in investments matching the Dow Jones would have $2.47 million today.

That means that someone who invested in stocks rather than gold would be $600,000-700,000 poorer today. Not only is that a significant difference, those figures for stock investments also take into account the huge increases in stock prices that have occurred over the past 18 months. Take those away and gold’s relative performance becomes even greater.

If these same returns hold up over the next 30 years then someone putting $100,000 into gold today would end up with $950,000 in 30 years, 17% more than someone matching the Dow Jones and 16% more than someone matching the S&P 500. That’s a pretty significant difference in return, and would come without all the stock picking and financial research that goes into equity investing.

Defense Against Financial Crisis

Gold has served as a safe haven for investors for centuries, protecting them against the effects of banking and financial crises. In the days of gold-backed paper money, a loss of confidence that the paper currency was adequately backed by gold had investors and ordinary savers rushing to redeem their paper money for gold. During hyperinflationary crises such as the one that befell Weimar Germany, those who owned gold or held foreign currency that was known to be backed by gold fared better than those who trusted the central bank.

Gold continues to play that protective function today. We can illustrate that with another little numbers game. Imagine two identical portfolios, each worth $300,000 on October 9, 2007, the stock market’s peak before the financial crisis. One portfolio is invested in securities that seek to match the S&P 500. The other is invested 70% in securities matching the S&P 500 and 30% in gold. Which portfolio is worth more today? If you really want to have some fun, ask your financial adviser this question too.

It’s almost certain that 99% of investors, financial advisers, and financial pundits would answer that the portfolio that’s 100% invested in the S&P 500 would be worth more today. After all, “everyone” knows that stocks outperform gold. And in this instance, everyone would be wrong. The 100% S&P portfolio would be worth $475,000 today, while the 70/30 S&P and gold portfolio would be worth $495,000 today, almost ten years later. Not only that, but at the worst part of the financial crisis, when stocks bottomed out, the 70/30 portfolio would have been worth 56% more than the 100% stock portfolio, protecting its investor from the worst effects of the financial crisis.

Protection of Wealth

That protection of wealth during a financial crisis and continuation of gains afterwards highlights the dual role that gold plays in an investment portfolio. Gold protects wealth better than any other asset. It has been in demand for millennia and will continue to be in demand for millennia to come. As a tangible commodity, gold will always have a market value that ephemeral financial assets lack.

With the development of gold IRAs, investing in gold is easier than ever. Investing in a gold IRA isn’t difficult, and you can use the same pre-tax funds that you use to invest in a traditional IRA. That allows you to benefit from investing in gold, with its wealth protection and inflation hedging, while still enjoying the tax advantages that traditional IRAs enjoy. If you think that a financial crisis is around the corner, or even if you don’t and just want to diversify your portfolio, there’s no better time than now to invest in gold.