By Michael Paulding Thomas

This question usually comes from people with one of two philosophies:

1. They think Armageddon is imminent and only gold is “safe”; or

2. They actually think it is a good investment.

To overcome the first belief is more difficult as it requires a shift in fundamental philosophy. If you don’t believe that the world will continue as it always has, and you don’t have faith in the future, there is nothing further I can say to persuade you otherwise. By the way, if civilization truly does end, gold won’t help either - no one is going want colored rock, they want canned food and water.

The second belief is what we will address today - whether gold is a good investment or not. And if not, what is a better alternative.

“Gold is colored rock which has no intrinsic value. Its value is arbitrary and derived from speculation ― whatever someone else is willing to buy, or sell it, for.

The only two things that actually make money are printing presses and the great companies of the world ― and the first is illegal.” ―Michael

The Persistent Illusion of Gold

The August 7, 2023 online edition of the Wall Street Journal contained a remarkable article titled “When Markets Get Scary, Mom and Pop Buy Gold.” In addition to being a fair sample of everything that’s wrong with financial journalism, it’s a common recitation of the perceived benefits of owning gold.

The statistic at the heart of the article is as follows:

“The percentage of Americans who believe gold is the best long-term investment jumped to 26% this year from 15% in 2022, according to a Gallup report from May. In contrast, those preferring stocks dropped to 18% from 24% last year, while those favoring bonds climbed to 7% from 4%.”

The illusion is not just that gold is an efficient inflation hedge but that it is somehow preferable to holding a broadly diversified portfolio of quality common stocks (ie, mutual funds) for the long term.

First, let’s get our terminology straight: gold is not an investment at all. That is, it does not produce anything. It just sits there. In fact, it costs money to store and to insure.

If you bought an ounce of gold nearly 44 years ago at $800, you now own an ounce of gold worth (as of Sep 2023) $1,965. It’s up about two and a half times, having produced neither dividends, nor interest, nor anything else. The Consumer Price Index in January 1980 stood at 78. In July of 2023 it was 306. It’s up just shy of four times. Which means that, just to have kept up with inflation, your $800 gold ounce would now have to be valued pretty close to $3,200. But it isn’t. Not even close.

Wait, it gets worse. The Standard & Poor’s 500 Stock Index at the end of January 1980 stood at 115. As of Sep 2023 it sits at 4,490. That’s right: while the price of gold was rising two and a half times, the S&P 500 went up 39 times, not counting dividends which — at the risk of repeating oneself — gold does not pay.

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” ―Warren Buffett

A Better Option: The Great Companies of the World

Ultimately, gold has money-market type returns with the volatility of the S&P 500.

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all, not some, of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?” ―Warren Buffett

“While businesses were reinvesting in more plants and new inventions came along, you would look into your safe deposit box, and you’d have your 300 ounces of gold. But it didn’t produce anything. It was never going to produce anything.” ―Warren Buffett

If you insist on investing in gold, I recommend finding a mutual fund that invests in companies that deal with gold, but never directly in gold itself.

“If gold is such a great investment and these gold-selling companies are telling you it’s is going to increase so much in value - why in the world would they sell it to you?! Wouldn’t they just hold onto this “great investment” for themselves?”

I invite you to book a casual 30-minute conversation with me to see if I can help you invest properly.

Further Research

• Read Warren Buffet on the Silliness of Gold

• Listen to Tim Ferriss interviews Peter Mallouk — Gold, Bitcoin, stock market

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Michael Paulding Thomas

• Celebrating 36 years in the industry

• Investment Advisor • Securities Principal

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