From Glen’s Desk - August

CBS News, J.P. Morgan, Reuters, Forbes, and other major financial publications have published recent articles proclaiming the new record highs set by gold prices. They claim that gold appreciates while the dollar depreciates and laud gold as a “safe haven for investors.”¹ Gold, according to these articles and many others, is considered a more reliable investment than the stock market, which is currently experiencing a period of turmoil.  

Many people believe that gold is an effective hedge against inflation. There is a persistent illusion in the minds of the American public that gold is preferable to long-term investments in a diversified stock portfolio. But gold is not, in any sense of the word, an investment. Once purchased, it just sits there. It does not produce anything. Aside from being used in jewelry, gold only serves one financial purpose: acting as an inflation hedge. And how is that working?

The price of gold was fixed at $35 per ounce from the end of the second World War to August 1971, when President Nixon took the United States off the gold standard. Nine years later, in 1980, gold had soared to $800 per ounce.  

To put this in perspective, consider this chart:

If you had bought an ounce of gold nearly half a century ago, in 1980, that ounce of gold would now be worth approximately $2,484. Its value would have increased slightly more than three times. In the meantime, it did not produce anything – no interest and no dividends.

As compared to gold’s value, the Consumer Price Index (CPI) has increased approximately four times its value since 1980. To keep up with that rate of inflation, the same ounce of gold purchased in 1980 would need to be worth $3,200. Its value is not close to that.

Most notably, this chart shows us that the value of the S&P 500 Index has increased forty-nine times from its value in 1980. While the value of gold has increased a mere two and a half times, the S&P 500 increased at an exponentially higher rate. This value does not include dividends, so the value of S&P 500 investments is likely even higher than estimated.

If you had reinvested dividends and left your $800 in the S&P 500 Index from 1980 to today, your investment would be worth almost $117,000. Compare this to the $2,484 that gold purchased in 1980 is worth today.  

Now, let’s consider the commonly held notion that gold is an effective inflation hedge. To merely have kept pace with inflation – to say nothing of hedging against it – an ounce of gold would have to be selling at $3,200/ounce. It is at a “record high,” as all the mainstream financial publications remind us, and yet it is still over $700 shy of keeping pace with inflation.

Considering these statistics, it seems to me that there is a clear answer to the question of whether gold is the best investment an individual can make. The most effective long-term inflation hedge, which has been proven time and again, is broadly diversified equity. The S&P 500 is a clear example of this.

If you have questions about your investments or the changing markets, contact our office at (469) 212-8072 or visit www.gdswealth.com. Our team members would be happy to address your questions and concerns.

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¹ Economics Observatory, 2024