Gold Investing - Insane? Or Surprisingly Successful?

Question

It seems pretty clear to me that members of BiggerPockets will generally understand the obvious long-term advantages of Real Estate and even passive index fund investing over hoarding gold.

The problem is that gold isn't so obviously awful as I originally assumed - this was shown to me while debating with a friend. Over a 30 year period, Stocks left gold in the dust:

Over the most recent 15 or ten year periods, this is not the case - and 15 years is still a reasonably long time frame! Check it out:

Now, I perceive gold to be a terrible investment, because when I think about things practically, gold is a rock. (I know, it's a metal, but come on). A rock has no value, produces nothing, and just kind of sits there and shines.

How would you go about disproving a gold enthusiast, and showing them how unwise it might be to bank their future on accumulated gold, vs businesses, land, debts, and other things that provide real value to the economy and human life?

How do you convince the gold investor he is unwise, when he throws this second 15-year chart in your face?

Curtis Bidwell · Answer

I don't view gold as an "investment" but rather a hedge against potential losses.  The value of gold doesn't really change much, just the amount of dollars it takes to own some which is more a reflection of the value of the currency than the value of the gold.

Michaela G. · Answer

Show him the study that shows that Hermes Birkin bags have had bigger increases than gold ;-)

https://baghunter.com/pages/hermes-birkin-values-research-study

Wayne Brooks · Answer

You can pick and choose specific timelines to "prove" any theory you want to.  Look at the last 5 years.....totally different conclusion.

Chris Martin · Answer

Regarding "How would you go about disproving a gold enthusiast, and showing them how unwise it might be to bank their future on accumulated gold, vs businesses, land, debts, and other things that provide real value to the economy and human life?" I'm not sure who you are talking about. I would assume someone with some wealth since gold isn't cheap. I'm also not sure why you want to 'disprove' someone's 'investment' enthusiasm. In your sentence above, change 'gold' to 'fine art' or 'classic car collector'. They all read funny to me. I also don't think many people "bank their future on accumulated gold", nor fine art.

From http://wealthmanagement.com/high-net-worth/look-inside-wealthiest-estate-plans-america regarding wealth Americans, "Taxpayers in the lowest bracket ($5 million - $10 million) have a higher percentage of their estate in personal residences, retirement plans and other real estate (defined as commercial property, undeveloped land, REITs and residences other than the primary). Yet, as decedents get wealthier, all three of these categories decline noticeably. ...On the other hand, as wealth level increases, so too does the relative value of art, closely held stock and other limited partnerships..."

For High Net Worth Individuals, alternative investments (gold, art, collectibles, etc.) ranks right there at the bottom with real estate. So I'm not inclined to prove or disprove wealthy people's asset allocation choices.

Sources:http://www.statista.com/statistics/300495/high-net-worth-individuals-asset-allocation/http://therealdeal.com/2014/09/18/investable-wealth-of-high-net-worth-individual-reaches-56t/ http://wealthmanagement.com/high-net-worth/look-inside-wealthiest-estate-plans-america

Trevor Ewen · Answer

@Scott Trench

The big critique of gold as an investment vehicle is that it does not produce income. I think it can be a minority part of a portfolio (3% or less), but primarily as a hedge like @Curtis Bidwell suggested.

Most people obsessed with gold are trying to prove a point about the government, inflation, or the nearing apocalypse.

Real estate investors tend to operate with a notion of adding value to their properties and the communities in which they exist.

People who invest in companies, either privately or on exchanges (stocks) are also adding value. They are providing money to domestic or international business to produce value for employees, customers, their local economy, and share holders.

Even people who buy treasury bonds are adding value. Assuming the money is used to benefit the country with things like infrastructural spending and responsible civic projects.

Buying and holding physical shares of a precious metal does not add value. It does not create new opportunities or innovation. It does not produce any aggregate public good. It does very little for the community. At a fundamental level, this is the issue with gold as an investment.

Frank Jiang · Answer

Chasing returns is low level investment thinking.  The true goal is to maximize your ratio of return to the risk placed into the investment.  You can then lever up (or possibly down) the portfolio so that the standard deviation of the portfolio matches your personal risk tolerance, thus maximizing your return for the same amount of risk.  This means that any asset can be a good investment as long as that asset is adequately uncorrelated with the other assets in your portfolio.

Gold can be a great asset to hold depending on whatever else you own.  However,  these days gold and other metals are trading on ETFs and in most recent years has started sharing more covariance with the stock market as a whole, making it far less attractive to your average investor.

Mike Cumbie · Answer

Hi @Scott Trench,

I'm not invested in gold, but I can see the reasons one would. I mean it has been the symbol of royalty since back before time was recorded. I don't see that changing in the near future. I mean pick any stock and have them pull an Enron tomorrow. Have them go under investigation for  having child slave labor in Florida and a huge lawsuit to follow...Everything gone. With gold though you at least have something as long as someone wants gold teeth, rings, necklaces etc.

Scott Trench · Answer

Oh, and my data can be found here:

https://www.biggerpockets.com/files/user/ScottTrench/file/gold-vs-stocks-vs-cash

Gold Investing - Insane? Or Surprisingly Successful?

Most Popular Reply