Is The Time To Invest in Gold Now?

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In the first week of August, gold was trading above $2,000 for the first time in history. Citi economists predict that gold could reach $2,300 in next six to twelve months, while Bank of America predicts the gold could reach $3,000 over the next 18 months! According to this CNBC article, the negative real yield may be one of the  reasons for the recent rise in gold price. In addition, the fear of a rise in inflation due to an economic stimulus injection around the world amid the Pandemic may also motivate investors to buy gold. So is the time to invest in gold now?

Bit of History

Gold has been around for centuries. In 560 BC, the Greeks introduced the first gold coins followed by the Middle East. Fast forward to the 20th century, and the US was practicing Gold Standard, linking currency to gold reserves. A country practicing the gold standard, cannot increase the money circulation without increasing the gold reserves at the same time. So in theory, it keeps government spending in control and also helps control the inflation rate. 

However, the US has been off the gold standard since 1933. President Franklin D. Roosevelt broke US dollar ties to the gold standard to increase money supply in the economy during the Great Depression. Then, In 1971, President Nixon ended the convertibility of the US dollar to gold to combat inflation.

Why do people buy gold?

Unlike equity investments, gold is a tangible asset and can be used as a hedge to protect against fragile currency. For example, in Venezuela, the prices are doubling every month (Reuters report). In India, the “demonetization” initiative created a cash crisis(Times report). These types of experiences may motivate people to buy gold.

As Benjamin Graham stated in The Intelligent Investor, 

The standard policy of people all over the world who mistrust their currency has been to buy and hold gold.

Benjamin Graham

Gold also offers protection against deflation and has historically held its value or increased in value during geopolitical uncertainty. 

The other reason people buy gold is the culture! For example, India is the largest gold consuming nation in the world. In India, gold is bought in the form of jewelry, specifically during the wedding season. Also, in some Asian countries gold bars are a large part of savings.

Ways to Invest in Gold

There are multiple investment vehicles to buy gold. You can purchase physical gold in terms of a troy ounce or coins or bullion. The other ways to buy into gold are the gold mining companies stocks such as Newmont or exchange traded funds (ETFS) focused on investing in gold stocks such as SPDR Gold Trust (GLD). 

If you consider investing in gold securities such as mining stock and/or ETF, keep in mind that the stock price may move up or down with the overall stock market. In addition, the price of a stock or an ETF will be based on the financial health of the particular company or list of companies in the ETF, not on the price of gold.

Generally, the gold price does not correlate with the equity market. In fact, gold prices may rise during financial crises or during recession. However, you have to find a place to safely store your physical gold, and selling physical gold at the time of need may take longer than selling a gold ETF or stock.

The Comparison: Gold vs. S&P 500

The year-to-date (YTD) return of gold (35.7%) is quite impressive in 2020 compared to S&P 500 YTD return of 3.6%. But what about the long-term, over the last 30 years?

Before we dig into the data, remember our goal of investment is two fold:

  • Capital appreciation
  • Generating income (in terms of dividends and/or interest).

Well, gold may appreciate in value, but it does not generate any income. Even the appreciation of gold over the last 30 years (1990-2019) is not that great compared to appreciation in the equity market. The table compares annualized return of gold prices and S&P 500 index over the last 30 years (1990-2019).

Gold Price per Troy OunceS&P 500 Index
CAGR, Compounded Annual Growth Return (%)4.55%7.84% (without Divided)
10.00% (with dividend reinvested)

The comparison of $10,000 investment in gold vs. S&P 500 from 1990 to 2019 clearly indicates the value of your investment in S&P 500 is significantly higher. It is 2.5 times more than gold (without dividend reinvestment) and 4.6 times more than gold (with dividend reinvestment).

In addition, you also have to consider inflation risk with your investments. According to the Bureau of Labor Statistics Consumer Price Index, an average inflation rate was 2.34% per year during 1990 to 2019. The gold investment return is mere 2.2% above the average inflation rate. While S&P 500 investment return is significantly above average inflation rate.

So clearly, gold is not a good hedge to mitigate inflation risk in the long term, at least based on the last 30 years of data. At the same time, physical gold may provide short-term gain during financial crisis, recession, or geopolitical uncertainty.

Is The Time To Invest in Gold Now?

Now the ultimate question: Is the time to invest in gold now?

Will the past 30 years of performance of gold and S&P 500 continue? Nobody knows for sure. In addition, nobody can accurately predict the move on interest rates from central banks or the rate of inflation going forward or the value of currency. 

One thing is for certain though, if you invest in equity, your money is working for you 24/7, generating income. This is not the case with physical gold investment. However, in times like  2020, gold has fantastically outperformed (35.7% YTD gain) S&P 500 (3.6% YTD gain). So, if you are worried about inflation or currency devaluation, consider investing a small percentage of your portfolio in gold for diversification. The common advice from most financial advisors is to invest 2% to 5% of a portfolio in precious metals.

What do you think? Do you invest in gold coins or bullion or gold ETF? If so, what percentage of your portfolio is invested in gold?


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