In this episode of the Ready for Retirement podcast, James discusses gold and whether it is a good investment or not. He begins by giving an update on the current price, reminding listeners that this is a unique environment and conclusions should be drawn from historical data only.
After giving a disclaimer about his experience, he explores whether gold has a history of holding value. Prior to 1971, the gold standard kept the price of gold artificially low. This can skew the data, so the question is not whether it held its value, but what are the alternatives? Most notably, can you compound your money by investing in companies instead?
Next, James discusses whether gold is an inflation hedge and finds that the real return (earnings minus inflation) during this period falls at just 1.3%. By using the standard deviation to determine risk, James concludes that the stock market actually exhibited less risk over time. Gold hedged against inflation, but at a significant cost because fluctuations and swings were dramatic.
To conclude, James studies whether gold is good for portfolio diversification. The way he looks at it, gold is not an investment because it can’t generate earnings. So is it a good investment? It depends on the decade.
By looking at the growth of gold compared to the S&P 500, it is clear that gold’s growth mostly came in the period following the end of the gold standard. Not only did it have more down years than companies, but it also had more down years of large percentages. In short, James determines, gold is not the best investment given the alternatives.
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