I recently posted an article busting the myth that the stock market increase 12% per year. In fact, its return is between 1% to 2% per year when adjusted for inflation. I also showed evidence that the median home prices are fairly constant over time when adjusted for inflation. So, what about gold as an investment?
Gold is a horrible investment. The reason why is that the price is correlated with the value of the dollar. If the federal reserve pumps more money into the economy, the value of the dollar decreases, and the price of gold goes up. The reverse also holds true. Gold has retained the same purchasing power over time due to inflation.
Under the rule of the Roman Empire at the time of Christ (1st Century AD), one ounce of gold would have purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today two millennia later in the west, one ounce of gold will still buy a man a suit, a leather belt, and a pair of shoes. Nothing has changed.
Over the past 30 years, gold has a nominal return of 4.44% per year, which is only 0.43% per year when adjusted for inflation. It might have increased a little, but the inflation adjusted stock market is three times the inflation adjusted increase in the price of gold.
There has been hype about the increasing gold prices, and that they will increase even more. You probably heard the ads on the radio for you to buy gold coins or gold stocks. Did you ever think that those radio, television, and mailers cost a lot of advertising money? And to pay for those massive advertising expenses, the gold dealers must be making lots of money off of the gold they are selling (it’s called spread). They sell at a rate higher than the bullion gold price and they buy at a rate lower than that price. The consumer gets to pay for the commission to the gold dealer, which is typically a 20% to 30% spread. So, even if we do not take inflation into consideration, you still have to hold on the the gold for several years just to break even.
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Thats right, nothing has changed. An ounce of gold has not lost an iota of its purchasing power for over two thousand years. In 1930, when the dollar was still backed by gold, a $20 dollar note was fully interchangeable with the $20 gold piece (one ounce of gold). You could go to the bank, turn in your paper, and get an ounce of gold. Either would buy you a finely tailored mans suit, hand made belt and hand made shoes. Today, as we no longer have gold backing to our currency, one ounce of gold will still buy the same outfit, but a $20 bill won’t even pay the tax on the purchase. An ounce of gold has lost 0% over the last 80 years while currency has lost 90% of its value. Which would you have rather held?
Gold is measured in the form of Dollars, which indeed have lost over 90% of its value due to inflation. Because of the purchasing power of gold has not changed over time, it is a horrible investment. Because gold’s purchasing power will not change, people should not buy gold in hopes that it will increase in value. Rather if people were to buy gold, they should do so only as a hedge against inflation. Even then, there are still high transaction fees that can not be recovered.
Think about it as an insurance policy! You pay a fee for safety.
(Gold will NOT decline to pay you back/reimburse you, unlike some insurance companies after your house burnt down, for example). I keeps it’s value.
Of Course it keeps its value. Its buying power hasn’t changed one bit over time (as discussed in the article). The problem is that gold has absolutely no utility during an economic collapse, and therefore it has no safety.
If such collapse occurs, you won’t be able to sell or even buy goods with gold because no one will want the gold. It has absolutely no life sustaining properties. The things that will be more valuable than gold will be food, water, shelter, clothing, guns and ammo (for self-defense), and fuel.
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