Golden rule: metal's a dud over long haul
With gold streaking toward $1,000 (U.S.) an ounce, now may seem like an odd time to come out and say this.
But somebody has to, so here goes: Gold is a lousy investment. In fact, it may be one of the worst investments you could ever make.
Now, before you fill my in-box with hate mail, let's look at the facts: Although gold has its moments in the sun, like now, over long periods – we're talking really long periods – it's a total dud.
But don't take my word for it.
In his book, Stocks for the Long Run, Wharton Finance Professor Jeremy Siegel compared the real (inflation-adjusted) returns of stocks, bonds, gold and other asset classes from 1802 through 2006.
Result: Stocks won, hands-down. Over the 204-year period studied, $1 invested in the stock market grew to $755,163, including reinvested dividends. That's the real return, remember. If you don't adjust for inflation, the $1 would have grown to a staggering $12.7-million.
Now, let's look at gold. If you get squeamish at the sight of truly horrific investment returns, now would be a good time to turn away.
If you'd put that same $1 into gold, your investment would have grown to … ready? … $1.95. Without adjusting for inflation, your $1 would be worth a whole $32.84. In other words, in exchange for waiting more than two centuries, you'd almost have enough money for an entire month of basic cable.
Except for one problem: You'd be dead.
“In the long run, gold offers investors protection against inflation, but little else,” Mr. Siegel concluded.
“Whatever hedging property precious metals possess, holding these assets will exert a considerable drag on the return of a long-term investor's portfolio.”
Still not convinced gold is a bad deal? Let's look at how it's fared more recently.
In a report last month, two Merrill Lynch investment strategists compared the performance of 10 asset classes over rolling one-, three-, five- and 10-year periods from 1970 to 2007.
Care to guess which asset class came in last? Hint: It rhymes with mould.
“With the exception of gold, investors had little chance of losing money in our selected asset classes over 10-year time periods. Of the asset classes studied, none (except gold) generated a negative return over 10-year periods,” wrote Richard Bernstein and Kari Pinkernell.
But, you say, the period Merrill studied included the huge runup – and subsequent collapse – of gold prices in the 1980s, so of course gold will look bad.
Okay, so let's look at the period from 1990 to 2007. Same thing: “Gold offered the worst risk-reward potential,” the Merrill strategists concluded.
There was one silver lining for gold: During the 1970s, it was the superior investment, beating real estate, growth stocks, value stocks, small stocks, bonds, you name it.
Something else to keep in mind about gold is that, for all the talk about it hitting a record, it's still miles away from its all-time high if you take into account inflation. In today's dollars, the 1980 peak of $850 an ounce works out to about $2,200 – more than double yesterday's close of $984.20 Give it a few more years, and then we can start talking about records.
One more thing about gold: Unlike a lot of stocks, it doesn't pay a dividend. So not only are you making zero income now, but if gold ever falls off a cliff again, you won't be getting any cheques in the mail to soothe your pain.
So should you invest in gold? That's your choice. You could make a killing if the momentum stays on your side. Or you could lose a bundle if the party suddenly stops.
But if history means anything, the longer you hold gold, the worse off you'll be.