I wish I had a nickel, make that a gold American Eagle coin, for every time I’ve been asked over the last 30 years if a client should own some gold. I usually follow their question with one of my own, “Why do you want to own gold?”
It’s a good investment. Let’s examine that for a minute. According to Investopedia, in the past 30 years gold has returned a total return of 335%. During that same period the Dow Jones Industrial Average has returned a total return of 1255% and the Barclay’s U.S. Aggregate Bond Index returned 308.25%. I may not be the sharpest knife in the drawer, but the DJIA has returned almost 3.75 times what gold did and bonds provided a return roughly equal to gold with less volatility. Another thing I don’t like about gold as an investment is that it pays no dividends or interest. The only way you make money on gold is to sell it for more than what you paid for it.
It’s a store of value. This is the Armageddon argument for owning gold. The stupid, chubby kid running North Korea lights up a nuke, we light up ours, China and Russia light up theirs. Currencies won’t be worth the paper they are printed on, but you could always buy stuff with gold. Just what do you think will be left worth buying? A more arguable scenario is a terrorist setting off a dirty bomb in the center of New York that knocks our banking system off the grid. ATM’s don’t work. Credit and debit cards can’t be used. Banks are closed. Gold would be a good thing to have in this case, right? Maybe. But try taking your $25.00 American Eagle 1 ounce coin to Safeway to buy some groceries. You know the coin is worth about $1,200 today but the checker sees the $25.00 value on the coin and hands you back $23.00 in change for the $2.00 loaf of bread you bought. Is that a good store of value? If you’re worried about going back to a barter society, load up on bullets. They’ll be better to barter with than gold.
It goes up when the stock market goes down. This is an argument that I can almost buy. Correlations go from +1 to -1. Plus one means the two assets are exactly correlated; they behave the same way. Minus one means the two assets are negatively correlated; they behave exactly opposite of each other. A zero (0) correlation means just that; there is no correlation. They behave independently of each other. They could go up at the same time, down at the same time, one up and one down, or one down with the other remaining where it was. No correlation. According to Meera Shawn, Market Realist, published on 12/2/2015, the correlation between gold and the S&P 500 since 2005 is .14, close to zero. For me to buy the argument that gold goes up when the stock market goes down, I would need to see a correlation number closer to -1.
If it makes you sleep better having some gold stashed in your safe, or if you like pulling it out and looking at it, buy it. But don’t buy it because it’s the best place to invest your money or because it’s a hedge against the stock market going down.
What about silver? Everything I just said about gold, only double.
1http://www.investopedia.com/ask/answers/020915/has-gold-been-good-investment-over-long-term.asp
2 http://marketrealist.com/2015/12/novembers-manufacturing-data-impact-gold-prices/
These are the opinions of Mike Berry and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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