Ebenezer Scrooge’s famous catchphrase nicely sums up my enthusiasm for gold as an investment. Bah! Humbug!
I have heard every argument peddled by those who favor the yellow metal. None, however, are convincing to me. There are plenty investment options I would consider before purchasing gold.
Sure, there are periods where gold shines, not just in luster but in returns, too. For instance, when President Richard Nixon ended the ability for foreign governments to trade U.S. dollars for gold in 1971, the price of gold spiked. When that decision was made, gold sold for around $42 per ounce. By January 1980, the price of gold surpassed $840 per ounce.
But I could also point to extended periods when gold was a dud, too, just as with any investment.
The real problem I have with gold is that it is an unproductive asset. It doesn’t do anything. It cannot create more of itself. As a result, the only way to make a return on an investment in gold is to find someone willing to pay more for it than you did.
When are people willing to pay more for gold? When they are fearful.
In those times, as people rush to buy gold, the swelling demand pushes the price higher and higher. As the price of gold goes up, it generates more buzz and more buying enthusiasm. Infomercials and ads flood the airwaves and Internet. People pile into the craze, believing the price gains will continue. Alas, they never do.
By the time the informercials are hogging late-night television, the real money has already been made. What’s left are the suckers who get stuck holding the bag. A bag of gold, sure. But a bag of gold bought at sky-high prices is still a bag you don’t want to hold.
Now, if rubbing two gold coins together would cause a third to appear, my enthusiasm for gold would certainly change. But unlike stocks, gold does not kick off dividends. And unlike bonds, it does not yield interest. Gold just sits there.
The best explanation I have heard about the merits of investing in gold was written by Warren Buffett, a living legend in the investment world. Here is how he summed up gold as an investment.
If you gathered up all the gold in the world and melted it into one big cube, it would weigh about 426 million pounds. To put that into perspective, the gold cube would cover the area of a football field, including the end zones, and would stand about six feet tall.
At today’s prices, that cube would be worth $9.4 trillion.
To assess the merits of owning that cube of gold, we would have to determine what else we could buy with a similar amount of money. If we had $9.4 trillion, what could we buy?
Well, for starters, we could buy all the cropland in the United States – about 391 million acres. Every year, we would reap the rewards of the crops produced by the land, about $200 billion a year.
But that would soak up only $1.7 trillion of our $9.4 trillion total.
So what else could we buy? Well, at Friday’s closing values, we could also purchase the 11 largest publicly traded companies in the United States – in whole. That means in addition to our cropland, we could own Apple, Microsoft, Amazon.com, Facebook, Google, JPMorgan Chase, Johnson & Johnson, Walmart, VISA, Bank of America, and Procter & Gamble. We would also get the dividends they throw off each year.
Even after that buying spree, we would be left with about $800 billion. A little spare cash never hurts to have around, I suppose.
Framed in that manner, which would you rather have? Option A: One big block of gold that you can pet and polish every day. Or Option B: All of the cropland in the U.S., the 11 largest publicly traded companies, and $800 billion to spare.
I am confident Option B offers a much better chance of increasing personal wealth. Productive assets such as cropland and stocks are likely to outperform gold over any meaningful period of time.
But what about a doomsday scenario? Wouldn’t it be prudent to hold some gold if the worst came to pass? Trust me, if the world comes crashing down, a brick or two of the yellow stuff won’t make your life much better. Even the happiest soul in Hell is miserable.
Hold some gold if you want. It’s not the worst investment out there. But better options are available.