Should You Buy Gold?

One of the most common questions I am asked is, “what do you think about buying gold?” It almost feels like a loaded question. There are some very strongly held beliefs about gold’s value as an investment and several ways you can go about investing in it. So, let’s look at the different ways gold is thought of and what it means for investors.  

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Gold as a commodity

Gold, as a pure investment, is classified as a commodity. The metal is traded on international exchanges and is quoted as currency per ounce (oz). For the US market, the quote is $/oz. As of writing, the price of gold is $3,650 per ounce. Over the last 10 years, the price of gold has increased 198% compared to large US companies in the S&P 500 at 221% with most of the growth coming in the last year. Consumers commonly buy it in coinage that they can store at home or in a bank.  

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GOLD MINING STOCKS

Another way of investing in the price of gold is through buying stock (or equity) in the companies that physically mine it. These gold miners have fared well in the past two years but if we zoom out, the business of mining gold simply has not kept up with the market price. If we look at the VanEck Gold Miner ETF since 2007 vs the price of gold in dollars, the shape of the charts or correlation is strong, but there has been a large disconnect in return dating back to 2008.

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gold as a store of value

Are there reasons to invest in gold beyond simple price appreciation? Gold is sometimes referred to as a store of value. If we look at the data today, this may still be true. In the chart below we compare the M0, a measure of the US Money Supply against the price of gold and the S&P 500 stock index. Two things stand out to me:  

1) The dramatic increase in the US monetary supply has been good for assets prices generally.  

2)The total return of gold and the increase of M0 supply are strongly linked. Gold prices over the long run reflect the total amount of currency in the system.

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Gold & Inflation

If gold is a good store of value, does it then “hedge against inflation” as some proponents claim?

Inflation is simply the increase in prices of goods and services over time. The result of increased inflation is reduced purchasing power of currency for goods and services. Would investing your dollars in gold have hedged you against inflation over the long term?  

It depends on what goods and services you are looking at. A widely circulated chart made by Visual Capitalist shows the change of consumer prices by different categories from 2000-2022.  

You can see there is a stark contrast between consumer goods, services and housing since the beginning of the century. You would not have needed a hedge to afford a better TV, cell phone, or clothes over the last 20 years. However, if you needed to send a child to college or buy a house, some kind of growth asset, gold or equities, would have been critical in keeping up with the rising prices.  

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Housing & REAL-world Costs

For most people, a home is the largest purchase they will ever make. People save and invest for years to be able to purchase a home. Would gold have helped hedge against rising housing prices? The short answer is no.  

If we divide the average price of a home in the US by the price of gold in dollars (blue line), one ounce of gold today buys you less than it did 20 years ago. Even investing in the S&P 500 would not have been a substantial hedge against the dramatic rise of home prices (red line) on its own.

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One Asset Among Many

From all the data above we can see that gold is a commodity, that appreciates in value. It outperforms the companies that mine it. And it can hedge some inflation but not in a meaningful way relative to people’s largest purchases.  

Gold is simply one asset among many that you can invest in. Historically it has had periods where it lagged and then caught up with equity markets but along the way had the same volatility and lack of a reliable valuation framework as many other commodities. If the question is “should I buy gold?” the answer, like with many other investments, should be “if you think the price will go up.”  

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