Many Reasons to Like Gold, Just Maybe Not in Your Portfolio
When it comes to different investment options, few lead to a broader discussion than precious metals and gold in particular. Gold has held a special place in human history for more than 7,000 years, dating back to the Egyptians. The Egyptians used gold to make jewelry. Gold jewelry was a status symbol, a mark of wealth and extravagance. Fast forward roughly 4,000 years and gold had become the preferred metal used to mint coins. In today’s world, gold continues to remain a mark of wealth, although it is no longer widely used to mint coins but is an important component in electronics and computers.
When uncertainty saturates everyday life as it did in the first half of 2020, investors begin looking for places to park their wealth that will, at a minimum, maintain its value. Government-backed bonds and government-insured bank accounts are probably the first things investors think of, but this line of thinking can often go one step further – to gold. Perhaps it’s a primitive instinct or something we learn from in history books, but gold has been widely viewed as a parking place for wealth in most of history’s uncertain times.
Over very long periods of time – hundreds or thousands of years, gold has acted as a safe asset that maintains its purchasing power. The same can’t be said when looked at over shorter periods of time – years and decades. The chart below looks at gold prices and inflation over the last 50 years. As can be seen in the chart, gold prices are far more volatile than the rise in inflation. It’s also worth noting that between 1980 and 2005 the value of gold actually decreased while inflation trended higher.
From an investment perspective, gold has not been great at maintaining an investor’s original purchasing power. Counter to what some believe, over the short-term years and decades, stocks have proved a better investment in terms of maintaining purchasing power against the erosion that is inflation. As inflation rises, companies that sell goods and services can often pass increased costs to the consumer. When these increased costs are successfully passed along to the end buyer, it causes the company’s revenue to grow faster than originally thought. Assuming the company can maintain its margins through a period of inflation, not only would the revenue grow more quickly than it did before, but now earnings would also see a similar increase. The increase in growth on the top and bottom lines would likely lead to the stock price moving higher.
Equity investors know that its never a perfectly smooth ride, but over those decades of investing, stocks have proven to be one of the best hedges against inflation. Gold may have a place in some investor portfolios, but it’s important to know the likely characteristics of the asset being purchased.