Gold – a Good Investment?

With gold prices hovering at $1300 an ounce, and an economy that seems ripe for a correction, the inevitable clamor of "investing in gold" will soon start to be heard again. There is no denying that gold is a valuable asset (an item of significant value) – but is it a good investment?

A Cautionary Tale

Back in 2011, with the economy not far removed from a major recession, and a nascent understanding that unchecked printing of government money had something to do with it, I made a series of “investments” in gold and silver – including coins, gold/silver pegged mutual funds, and a small IRA. Needless to say, my timing was immaculate; gold was trading around $1600 an ounce, and silver at $44 (for those who don’t track commodity prices, gold and silver currently trade for $1300 and $15 respectively).

I could end this article right now – and plead with you not to follow in my footsteps. But this cautionary tale is worth a closer look - because the economy again seems ripe for a correction – and the inevitable clamor of “investing in gold” is sure to follow. There is no denying that gold is an asset (an item of significant value) – but is it a good investment?

Gold as Stable Money, Not an Investment

As shown in the figure below, the price of gold has increased by 242% from 1986-2018; this is more than the official inflation* rates measured by the U.S. Government’s Consumer Price Index (CPI-U) - but far below the performance of the S&P 500 (1117%) and Nasdaq Composite Index (2088%).

Figure 1 – Cumulative Percentage Change in Asset Valuation – compared with the Big Mac and the CPI-U Index.

Also shown in figure 1 is the BigMac Index; in a prior post, I made the argument it is a more accurate indication of changing prices because the U.S. Government has altered the CPI-U methodology. If this argument is true, it means two things:

1. the U.S. dollar is depreciating more than is commonly reported, and
2. gold truly maintains its value over the long haul

Figure 2 – Cumulative Percentage Change in Asset Valuation (including linear trend) compared with the Big Mac Index.

Closing Thoughts

Over the long haul, gold is not a wonderful investment, but it is a stable asset; this makes it an excellent form of money. If and when gold is re-established as money, short-term fluctuations in its value will dampen as well. Governments may never revert to a gold-backed currency, but the private market (if allowed) can offer solutions.

TxGold provides a convenient way to hold and use gold-backed currency for everyday transactions.

*Note that I’m using the term “inflation” as it is commonly used today i.e. rising prices. Historically, inflation has been understood to be an increase in the money supply – with rising prices being the result of money inflation.