Is Gold a Good Investment?

There has been a lot of debate lately as to whether or not gold is a good investment. I’ve heard several very is good a good investmentconflicting arguments, so I felt like it was time to know- is gold a good investment?

We need to approach this from a couple of different perspectives. First, we need to define the word “investment.” You can break this into a couple of different groups- short term or long term. We’re either using our gold for some quick cash, or we’re using to overcome inflation while saving for retirement. Before we dig in, let’s consider the investment value of gold throughout the years:

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Date Cost Per Ounce
January 1983 $510
February 1985 $282
December 1987 $500
February 1996 $414
September 1999 $253
December 2005 $515
September 2007 $700
August 2008 $879
September 2009 $1010
November 2010 $1402

usagold.com – reference.

The graph tells the whole story. Let’s go into a little more detail…

1. Is gold a good long term investment?: No. If you are looking to invest long term, you better consider something that consistently moves in the right direction. The average rate of return tracked as far back as history will go is a little better than 2%; in more recent years, the rate of return has been a little better- 4.4%. Yes, only just slightly better than inflation. If you were to have invested your money in a good index fund (i.e. S&P 500 or Dow Jones), you would have earned on average 12% in those same years! So, in other words, gold is a pretty lousy long term investment with a fairly mediocre track record. Though it’s doing very well right this second, don’t count on it.

2. Is gold a good short term investment?: Not right now; that is, if you don’t already have money in it. A common rule of thumb when it comes to investing is to NEVER buy high. And right now gold is plenty high. In fact, we haven’t seen gold on this level EVER. But, again, with its track record, I would be very careful about taking any chances. I don’t currently have much gold in my portfolio, but if a large portion of it was, this might be a good time to sell. Then again, maybe not… who can say?! Maybe it shoots up to $1,500 per ounce before it drops again.

You can see throughout the years all the many hard drops gold has taken. Consider this: if you would have invested in gold in 1983 and then held it for 20 years, you wouldn’t have made ANYTHING!

Another myth about gold is that if the economy were to ever completely crash, your best resource would be gold because of the way it will continue to hold its value. Like Dave Ramsey writes in The Total Money Makeover, “A skill, a pair of blue jeans, or a tank of gas becomes very valuable, but not gold coins or nuggets.” He later goes onto write, “Gold will, at best, play a minor role, and the gold investor will be left with the sick feeling that real estate, canned soup, or knowledge would have been a better hedge against a failed economy.”

Back to our question: Is gold a good investment?

Doubt it.

September 2009 Update:

By: Trevor Shipp | September 18, 2009

Gold has been just about the hottest investment since I had originally written this post. You see commercial after commercial on television from companies persuading you to send in your gold for a price.

Be careful. When an investment is peaking (or seems to be peaking), you may want to consider selling what you have. If you’ve made a bunch of money in gold, think about getting rid of it.

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November 2010 Update:

By: Trevor Shipp | November 9, 2010

Gold hasn’t exactly slowed, has it? As I mentioned in my last update, I still regularly hear advertisements from many companies offering to sell you gold because it is such a great investment. Gold is extremely expensive right now! I wouldn’t touch it.

It does, however, seem to be a solid short-term play when the economy is struggling, as evidenced by how it has performed during previous recessions (including this latest one).

16 Responses to “Is Gold a Good Investment?”

  1. Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  2. Thanks, Allen. Glad to have you here.

  3. You seem to forget the fact that those dollars back then were worth a heck of a lot more than they are now. You can’t just compare dollar values, you have to take inflation into account as well, especially since that’s the whole point for most gold investors – it’s a hedge against inflation.

  4. Jake:

    Sure. I can’t agree more with you. However, if the price for gold in 1983 was $510 per ounce (and that dollar was a lot stronger) and then in December of 2005 (20 yrs. later) the price was just $515 per ounce with a WEAKER dollar, what kind of hedge is that?! People would have lost a TON of money.

    Now, gold has improved since then and is extremely high; probably not a good time to invest, as gold has a pretty volatile history.

  5. I tend to agree. I invested in silver back around 1978 or 1979 and made quick (almost in 3-6 months) turnaround of almost 100%. That was great. I bought several troy ounces at $18 per ounce and sold them at $33. But – if I’d have kept them ounces for 28 years, I still would be losing money just on the face value. I’m glad I sold all that I bought. Occasionally precious metals go into a mad frenzy (i.e. the late 1970s and here recently) but not too often.

  6. @Steve: It’s true! The way gold has been climbing these last few months would indicate to me that there’s a good chance it will drop off soon. Be careful, all you gold investors out there!

  7. I am curious what you can say to all people who invested their retirement in the “good index funds” after the crash in October 2008…
    Gold was always a better investment than any other thing.

  8. It has been my experience that when a commodity is advertised as a great buy on every media outlet, Run for the exit. Gold is advertised far too much right now and I am certain that it is about to fall. You hardly heard a word about gold when it was going quietly from $250 to $950.

  9. August 2008
    DJIA: 11,120 Gold: $810

    April 2010
    DJIA: 11,120 Gold: $1160

    I guess the market is a great place to invest… If you don’t mind pathetic returns. Gold and silver are for those crazy people who like real returns.

  10. First of all, Gold isn’t a good or bad investment. It’s good to have some sure, simply for diversification, a store of value, a shiny collectible trinket that you proudly boast that you own. Gold is gold, it’s worth something somewhere, but the downside is overtime it doesn’t give me a warm and fuzzy that it will shoot up to astronomical prices and then grant me a nice net return. You have to figure that if you own gold in coins or bouillon it’s considered a collectible aswell and you can’t walk into a bank and say, “Hey I want a mortgage here’s several Kilos of gold.” The problem is there isn’t a get rich quick scheme lurking amidst this metal and I say this with speculation but also with some common sense. I mean c’mon, gold may be high in terms of market value but that’s because demand has pushed it up there for one. It’s a bubble waiting to happen…tisk tisk. Now if you recently bought gold at say $1,300 troy then I would recommend watching very carefully. Hold it…but be ready to sell if you have to. That is one thing to note as well. Why would you buy so high? You really think it will rise to $1,500,$2,000,or more? Predicting these things is impossible, and if you unscrupulously throw money at investments you know nothing about then you should expect to be disappointed. Another thing with gold is it doesn’t appreciate or pay dividends, or nor do you get capital gains, etc. from gold. It’s usually bought for hedging strategies or for jewelry and industrial purposes and again as a nice shiny trinket to proudly boast that you own. Ok, now I’m not trying to rain on anyone’s parade, to be honest this is all my opinion, and there may be an explosion in gold prices that have never been seen before, sort of like what’s going on now, but use caution. I am a skeptic and not maliciously pessimistic I must add. I believe that gold will meet a ceiling and come back down to reality. If you bought gold in 1999 or 2005 or whatever, sure you made out, but If you think holding on to gold for 15-20 years and expct your ship to sail in, sorry to say but that ship may as well be a ghost. If you had $5,000 or more to invest in gold and had no other investments why would you put all of your eggs in one basket sort off speak in the first place? There is much better alternatives and these things should come as no surprise, like real estate, stocks, short-term bonds, etc. Heck, if you want a collectible so bad go get yourself an old rare vehicle or something. The point is there’s better choices and these are just “my two cents to save you two cents.” Consult your financial advisor and see what would make the best sense for your current situation. If you have that much money to throw at gold, I’d say go to the casino or put it into something else like stocks or use it as a start up of a “House Fund” to either buy a home or to rennovate the one you currently own, or “Emergency Reserve.” Or drop it into an S&P 500 index fund, even a low-cap/mid-cap index fund may suit you better. My points are clear…be a wise owl not a mouse. There is much much better places to put that kind of money. Besides if you are an unexperienced investor this may not be the best starting point for such an endeavor. Ambitious as it may be, the odds are that gold is a very risky and volatile investment, if you like high high risk go for it. The returns are better with high risk but the losses are also greater. I hope this helps someone. Peace & Happiness…

  11. Thanks Steve K and the other contributors. I’ve been on the fence with gold and silver. I was about to jump in but the opinions here have brushed me back a bit. I am now in a wait and see mode. if gold goes down then I’ve held on to my money, great! If gold continues to climb, i’ve lost a small opportunity but the incrimental growth of gold appears to be in very small stages so I should be able to make a move if it looks like the right time. As someon on this thread said, when sellers of gold are hawking their wares non-stop on radio, something isn’t right. I mean if the sellers of gold truly believe gold is going to $3,000 +, wouldn’t they be less inclined to sell all of their inventory? Thanks again. Great topic and good reasoned logic.

  12. This is how my math works out. I lost a third of my retirement in stocks, my real estate has fallen 25% in value, my CD’s pay little to nothing, but my gold has increased in value by 50%. Maybe I should sell, but that was a good investment in my book.

  13. Steve,
    Thanks for the advice. I am in a very simular situation that you discribed. I bought $80k would of various gold coins at $890 an ounce back in 2008 from a company in california. Now that gold is at $1500 an ounce, I was looking to sell. But the company I bought from is telling me that my gold is worth $70k!! Go figure!! When I bought the coins, they charged me about 18% and they say that the mint, grade and type of coins I bought have not fully reached their potential. It is very upsetting to know that gold has almost doubled since I bought it but the company is saying that I have not made money yet. I called other companies that buy/sell gold but, since I did not buy from them, they all say that they will charge me the 18% that the initial company charge. Does anyone know how I can get a true estimate of what my gold is worth and how to sell it to maximize profits. So people have suggested I sell them independantly on line but, I can’t see getting full value that way. Any suggestions??? Darrell

  14. I’m in the same boat as Darrell. I bought $80k worth of gold
    coins and I’m not sure I’m going to get my money back on the investment. These were mostly pre 1933 gold coins. You just can’t sell these things. You can’t even sell them at a store that buys gold because they will melt it down. You have to find a collector and one that is really good and wants to buy the coins you have. The reason I bought the gold was for a hedge against inflation.
    Good luck everyone.

  15. John (May 27th)

    Coins are a bit of a doozy when investing in gold. Firstly, you are guaranteed to pay over spot premium for the actual metal content of the coin. Secondly, they tend to be harder to shift to buyers, whereas there is almost always a market for bars or digitally tradable gold.

    As far as this article goes, I am going to have to politely disagree. Measured against inflation, the performance of gold is outstanding. It is one of the only ways to protect your purchasing power.

    Saying gold is a bad investment is as foolish as saying that buying a house in Zimbabwe is a good one- sure, it might be worth trillions, but if you’re spending a few billion to buy yourself a week’s shopping you’re in trouble.

    Of course you should avoid putting all your eggs in one basket, but compared to the junk out there gold stands head and shoulders above the pack.

  16. Hi,

    thanks for your thoughts but the fact of the matter is that you are basing your assumptions on the past, not the future. The most dangerous time to invest in something is when there is an undeniable, incredibly long historical record that it’s going in the same direction. If you had modelled investments in the way you described in 1940, you would have avoided stocks – likewise in 1982. However, in fact these were some of the best times to invest! LIkewise for gold, the tumultuous land of the 7-11 year bull market seems to have been enough to get your attention, but not your confidence. In truth the method of valuation is contrary, and quite apart from the above analysis (not that I don’t appreciate it nevertheless of course). If I was you I would take a look at this guide to whether or not gold is a good investment. It has some very long-term charts that may be of use.

    Thanks,

    Ramesh.

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