Nary a day goes by when I’m not confronted with a radio or TV ad touting the merits of, and urgency to invest in gold and other precious metals. I can even buy it in my IRA. “Don’t delay, call now!” The message, often delivered by well-known celebrities, is similar each time. “Geo-political turmoil is de-stabilizing the world, the government is spending us into oblivion, the value of the dollar will plummet, and stocks are too risky. But, the one thing you can count on, the one thing that has endured for thousands of years, is gold.” Their argument is compelling. “Gold is a store of value. Gold is an inflation hedge. Gold cannot go to zero.” Unfortunately, those claims do not tell the whole story.
While beautiful to behold and pleasing to the touch, gold is an inert metal, albeit a precious metal. Gold produces nothing. It contributes nothing to the growth of the world’s economies. It does nothing to lift billions of people from poverty. It does not pay interest or dividends. The main beneficiaries from gold are those who mine and produce it and those who buy it wholesale and then sell it at retail prices to investors who believe it to be an effective inflation hedge.
Claiming that gold has outperformed inflation can be inaccurate or misleading and often depends on the time period being measured. As an example, the CPI (Consumer Price Index), a popular measure of inflation, has increased by approximately 400% from 1980 through mid-2024. If a basket of goods and services cost $1,000 in 1980, that same basket would now cost $4,000. On the other hand, gold, during the same period, increased about 300%. If someone invested $1,000 in gold in 1980, it would be worth about $3,000 by mid-2024. Gold has not been an effective inflation hedge when measured against the CPI over the past four and one-half decades.
Inflation represents the gradual, sometimes almost imperceptible increase in the cost of goods and services. What about the companies that produce and sell goods and services? Are they an effective inflation hedge? If publicly traded, they are referred to as common stocks and the entire collection of publicly traded companies is called the stock market. One of the most popular groups of common stocks is the S&P 500 index, a collection of 500 of the largest publicly traded companies, primarily domiciled in the United States. While you can’t invest directly in an index, you can invest in mutual funds and ETFs (exchange-traded funds) that invest in those same companies in an attempt to replicate the index. If you have enough money, you could construct your own broadly diversified portfolio of common stocks, a practice called direct indexing.
The S&P 500 index traded at 115 in January 1980 and by July 2024 it hit 5,667, an increase of 4,900%. If someone invested $1,000 in the S&P 500 in 1980 it would be worth $49,000 by 2024, excluding dividends. If dividends were reinvested, that $1,000 would be worth over $100,000. To beat inflation, you must own assets that increase in value at a rate greater than inflation. Two asset classes that fit that definition are real estate and common stocks. Afterall, companies that can raise prices resulting in increased revenue, earnings, and dividends and whose share value will most likely increase along with their earnings and dividends can’t help but out-pace inflation.
Ignore siren songs.
Sam Taylor, CIMA®, AIF®, CRPC®