Questions about investing in gold are almost always a tell. If someone is interested in investing in gold, chances are that person is worried. Over the years, gold has acquired a reputation as a go-to investment when geopolitical or market volatility spikes, but the truth is it has generally been a pretty poor long-term investment.

Gold

That gold hasn’t been a great investment shouldn’t be surprising. Unlike standard financial investments, it doesn’t represent a claim on an economic enterprise, so there is no expectation of any sort of income. The sole source of return is price appreciation, and that appreciation can be taxed at rates as high as 28% if the gold is owned as coins, which the IRS considers collectibles and thus taxes them at nearly twice the standard capital gains tax rate.

Beyond tax issues, the real issue is the inconsistency of price appreciation. Over the last 40 years, there have been two periods in which the price of gold rose rapidly, and in one of those periods, U.S. investors would have had difficulty investing. That was during the 1971 to 1975 timeframe, when the U.S. went off the gold standard and let the price float freely. Gold increased from $38 per ounce to over $120 per ounce, but ownership restrictions for U.S. citizens weren’t removed until 1975. From 1975 through the end of the 70s, gold still did well, but it underperformed the return on small cap stocks over that period, although volatility between the two assets is comparable.

Gold also performed well during the period from 2000 to 2011, returning over 12% during the period, while the S&P 500 actually lost value. Since that time, though, the spot price of gold has dropped by nearly 30% while the S&P 500 is up nearly 240%. Furthermore, from 1980 through 1999, gold would have tested the patience of even the most deliberate investor. Over that timeframe, gold lost 6.5% per year, and the real value of a dollar’s worth of gold declined to 26 cents.

Investors can and have made money on gold, but price movements are very unpredictable and periods of underperformance can last for a long time. The problem is that timing the market – gold or otherwise – is extremely difficult, as is remaining in an investment when underperformance stretches into decades. When safety is a primary concern, we prefer high credit quality bonds that have performed well in past downturns and – unlike gold – provide income. When it comes to gold as a longer-term investment, in addition to the concerns we’ve outlined above, we’d prefer to be owners of a productive asset as opposed to a speculative one. We’ll close with a quote from Warren Buffet explaining this viewpoint in a 2012 Fortune article:

Today, the world’s gold stock is about 170,000 tons. If it were all melded together, it would form a cube of about 68 feet per side (fitting within a baseball infield). At $1,750 per ounce, it would be worth $9.6 trillion.

With the same amount of money, you could buy all US cropland (400 million acres with output of $200 billion annually) plus 16 Exxon Mobils (the world’s most profitable company and one earning more than $40 billion annually), and still have about $1 trillion in cash.

Minerva Planning Group is a fee-only financial advisory firm based just outside Atlanta in Decatur. You can contact them here.