Stop Going for the Gold

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When the market takes a nosedive, many people snatch their remaining dollars from the stock market, from fear of losing even more. Some then park the money in CDs at their bank. Others may start looking at real estate. And even others will flock to gold. 

After all, gold has a reputation of being a safe and effective place to invest. But over the long run, it hasn't been so great. A few years back, University of Pennsylvania finance professor Jeremy Siegel, in his seminal book Stocks for the Long Run, showed what a dollar invested in gold (and some other things) would have grown to, from 1802 to 2001. Amounts have been adjusted for inflation.

  • Stocks: $599,605
  • Bonds: $952
  • Bills: $304
  • Gold: $0.98

Yes, you are seeing what you think you're seeing. Sure, stocks go through slumps, just as they are now. But over a 200-year stretch, an investment in gold would have lost you money.

Historical returns
Of course, during certain periods, gold has surged and rewarded investors richly -- if their timing was good. Just look at recent history: In 2005, the price of gold per troy ounce was below $500. Early in 2008, it soared above $1,000, then dropped to around $700, and now sits at around $875. Someone who'd been excited by gold's ascent might have bought in at around $1,000, only to see the price plunge by some 30%. And if this person decided to bail out at around $700, he or she would have missed out on gold's recent jump. What headaches!

We've seen recently that the stock market can be volatile, but don't kid yourself -- gold is not free from volatility. Check out these closing spot prices for gold in years past:


Closing Spot Price of Gold
























See? Buying gold won't spare you from volatility. If you held gold from 1950 to 1980, you'd have increased your investment's value nearly 15-fold. That's great, but over 30 years, that amounts to 9% per year, on average. Between 1950 and 1970, you'd have lost money. If you'd held for the 20 years between 1988 and 2008, you'd have earned an annual average of about 4%.

The trick is to have perfect timing when investing in gold. But as with stocks, no one knows when the perfect time to buy and sell is, except in retrospect.

Stocks supreme
Let's wander back to Professor Siegel's data. Look at how much better the other investments did, especially stocks. Even though the data goes only through 2001 and misses the stock market's recent negative performance, it still emphasizes that over the very long term, the stock market has averaged a much better return than other assets, including gold.

Invest in a broad-market index fund, and you can earn the market's return for yourself. You might consider aiming higher by carefully choosing some managed mutual funds or individual stocks. For instance, you might look for companies you know and understand, and then research them well, to make sure they're healthy and growing and are priced attractively. It's true that most companies' short-term performances won't seem impressive -- Campbell Soup (NYSE: CPB  ) , for example, averaged a 4.7% gain over the past five years. But that's still some eight percentage points ahead of the S&P 500. It's all relative!

Let's look at some longer-term performances of some familiar names:


20-Year Average Annual Return

Campbell Soup


Kroger (NYSE: KR  )


Clorox (NYSE: CLX  )


Sherwin-Williams (NYSE: SHW  )


Nucor (NYSE: NUE  )


Harley-Davidson (NYSE: HOG  )


Nike (NYSE: NKE  )


S&P 500 (excluding dividends)




Data: Yahoo! Finance.

The results for steel company Nucor make me smile. I can't help thinking of Machiavelli, who said, "The unarmed rich man is the prize of the poor soldier." He thought iron more handy than gold. When it comes to iron stocks -- or stocks in general -- maybe you should, too.

Learn more:

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Sherwin-Williams is a Motley Fool Stock Advisor pick. Try our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.

Read/Post Comments (12) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 02, 2009, at 2:16 PM, jazzdrive3 wrote:

    This is pretty foolish, in the bad sense of the word. Of course gold isn't a good investment for wealth growth. It never was, unless you're betting on a vast reduction in the supply.

    Gold is simply meant for wealth preservation, and as your numbers how, it's perfect for that. You buy gold if you think your currency of choice is going to suffer extreme inflation. Once you think inflation is over with, you sell your gold. Holding gold should be a purely cyclical thing.

    Plus you ignore that the dollar you invested in 1802 could also be worthless now because the company doesn't exist anymore. Don't discount unknown risk.

    But who in their right mind would hold onto gold for almost 200 years unless it was some kind of collector's item?

  • Report this Comment On January 02, 2009, at 2:25 PM, XMFSinchiruna wrote:

    Thankfully, no one has found the fountain of youth quite yet, so we're able to look at time-frames slightly shorter than 200 years. :)

    Your article ignores the dollar peg to gold, and the international convertibility to gold (which persisted until 1971). Comparing gold's historical performance vis-a-vis the USD between periods of a dollar peg and a free-floating fiat currency is comparing apples to oranges. Our present experiment with a free-floating fiat currency, unbacked by any tangible asset, and instead backed only by debt and the exercise of power, is less than 40 years old. I believe a discussion of gold vs. the USD since that period is far more relevant under the circumstances.

    Certainly, gold is volatile, and the most recent correction must indeed have shaken a fair number of newcomers out of gold as their confidence was abruptly shattered. Credit disruptions, base metal weakness, and their leverage to gold prices have made the mining equities space even less forgiving. Those experiences notwithstanding, we have clearly identifiable macroeconomic drivers pointing to a resumption of the multi-year bull market in precious metals. It remains entirely prudent at this juncture for Fools to devote some allocation to precious metals as protection from a severely distressed dollar.

    And finally, although the volatility in gold and silver will continue to test the wills of many investors, the risk of missing a perfect top of the cycle is far outweighed by the risk of not having any protection in gold at all. :)

  • Report this Comment On January 02, 2009, at 2:32 PM, cmfhousel wrote:

    I agree with Selena, and I think jazzdrive3's comment only solidified her point, saying, "who in their right mind would hold onto gold for almost 200 years unless it was some kind of collector's item?"

    What jazz highlights is that (a) gold has absolutely no economic utility, save for the fact that it's universally transferable into *paper dollars* and (b) gold may very well explode in the next few years, but coming out of that trade alive means getting out at the right time. Every historical spike in gold prices has been followed by an equally impressive collapse. If you think you're capable of timing that correctly, have at it. For those of us who know beyond a shadow of a doubt that gold is, and will be, an inferior asset in the long-term, there are plenty of other good options right now. It all comes down to your timeframe. I think goldbugs are predominately short-term focused investors, which never, never, never bodes well.

  • Report this Comment On January 02, 2009, at 2:51 PM, XMFSinchiruna wrote:


    No economic utility? :)

    "Gold still represents the ultimate form of payment in the world". - Alan Greenspan, 1999

    There's still that pesky U.S. Constitution, too:

    Article 1 of the U.S. Constitution states: "No state shall make anything but gold and silver coin a tender in payment of debt".

    Happy New Year!

  • Report this Comment On January 02, 2009, at 3:04 PM, cmfhousel wrote:


    Many things have changed since the constitution was written. Whether the system changes is one thing, but gold is not currently a form of currency. Take a slab of bullion to your grocery store and see what happens. Like I said, the value lies in the fact that gold is transferable into paper money -- that's why its price is quoted in dollars. You can say that paper money is "just paper" which might be true, but gold is "just a shiny metal." Neither produces anything.

    I commend you quoting Greenspan, but I'd like to quote someone with a little more credibility, Warren Buffett:

    "[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

  • Report this Comment On January 02, 2009, at 4:02 PM, XMFSinchiruna wrote:

    So long as the central banks of the world continue to hold vast quantities of gold within their reserve holdings, it will remain effectively a form of money. When fiat currencies fail or are structurally compromised, which history has shown to be a very real tendency, gold remains the final arbiter of value.

    The dollar comes from trees grown in Canada, or someplace. We cut them down, press pulp into paper, and pay the Federal Reserve to print some numbers onto it. It has no intrinsic value. Anyone watching from Mars would be scratching their head.

    If Greenspan has lost all credibility, then indeed so has the financial system he conspired to build and promote. How quickly we forget the reverence with which the financial world hung upon his every word for nearly 20 years. I'm not defending his legacy by any means, but merely pointing out that his words might not be so easily ignored under the circumstances.

    If you prefer his earlier stuff:

    "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

    Alan Greenspan

    from page 101 of the book "Capitalism, the Unknown Ideal" by Ayn Rand with additional articles by Alan Greenspan – 1966

    "Neither paper currency nor deposits have value as commodities, intrinsically, a 'dollar' bill is just a piece of paper. Deposits are merely book entries."

    - Modern Money Mechanics Workbook, Federal Reserve Bank of Chicago, 1975

    We're straying from the central issue. Gold will continue much higher, and I don't consider participating in a 7-year bull market (so far) to represent short-term investing by any stretch of the imagination.

  • Report this Comment On January 02, 2009, at 4:15 PM, jazzdrive3 wrote:

    What I mentioned above that holding gold should be cyclical, I didn't mean we should collapse into short term thinking. Usually these cycles last 10+ years.

    And of course you don't want all your money in gold. In times prosperity, 5% is a good number to hedge against currency fluctuations. But in times of coming inflation and crises, you may want to up that to 30%.

  • Report this Comment On January 02, 2009, at 4:16 PM, XMFSinchiruna wrote:

    You're right, a lot has changed since the Constitution was penned. Specifically, much of what has transpired since the final termination of the gold peg was precisely that which the founding fathers attempted to protect us from.

    "unlimited emission of bank paper has banished all Britain's specie, and is now, by a depreciation, carrying her rapidly to bankruptcy, as it did France, as it did us, and will do us again, and every country permitting paper to be circulated."

    --- Thomas Jefferson

    " If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered."

    --- Thomas Jefferson

    "I place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt."

    --- Thomas Jefferson

    Some things never change. Paper is paper, and our paper will continue to lose value.

  • Report this Comment On January 02, 2009, at 4:24 PM, Takkakaw wrote:

    This is a ridiculous piece of analysis. How many people live and invest for 200 years? And you can't discount inflation as though it doesn't exist. The men who started the U.S. stock market in 1792 would have laughed at your paper money had you offered it to them for shares in their company. They only accepted gold and silver coin. Different investments do differently in different periods of time. There is no one superior "above all others investment". Look at gold over the last 4 years and compare to stocks. Who is the fool now?

  • Report this Comment On January 02, 2009, at 4:24 PM, cmfhousel wrote:

    Indeed, great points. However, I can't help but relate your Thomas Jefferson quotes to your own mention that, "Thankfully, no one has found the fountain of youth quite yet, so we're able to look at time-frames slightly shorter than 200 years. :)"

    Your points are well taken, though. We both agree the value of the dollar is bound to depreciate, we just disagree on best way to capitalize on it. If wealth preservation is your one and only goal, gold is second to none. If long-term wealth creation is what you're after, there're pleeenty of options today.

    Oh, and happy new year to you as well :)

  • Report this Comment On January 08, 2009, at 3:32 AM, krazycanuck wrote:

    In 1971, gold was valued at $35/Oz by the US government, who would sell gold to non-Americans for that amount of Federal Reserve Notes (fiat currency).

    In 2009, gold is valued at about $850 in Fed fiat.

    This represents about a 23-bagger to those smart enough and fortunate enough to buy gold for $35 per Oz. and hold it until today. In 1980, adjusting for inflation, it was far higher (a 1980 dollar purchases about three to four times what a 2008 dollar does).

    The real questions are:

    1) How has gold performed since 1971, relative to other assets?

    2) How much more (or less) can you buy with an ounce of gold today, compared with 1971?

    I have chosen 1971, because this was when the gold peg was abandoned, and the Federal Reserve fiat note was allowed to float against gold (and many other currencies). Remember, as long as there are trees, ink and printing presses, the supply of Fed fiat is infinite. The supply of gold is finite unless we are able to do one of the following:

    1) alchemy (turning base metals into gold)

    2) nuclear fission/fusion, with gold as a product (risky, and radioactive, if even possible)

    3) when the Earth's supply is completely mined, we will have to discover new supplies on other planets, satellites, asteroids...

    Both 2 and 3 are very expensive, and 1 is likely impossible. Furthermore, physical gold, while an asset to the owner, represents no liability, unlike those little green pieces of paper, mass-produced by the Federal Reserve, which are mere IOUs.

  • Report this Comment On May 20, 2009, at 11:41 AM, banana0121 wrote:

    Gold extraction from companies that irresponsibly operate at open air pits is very harmful to the environment, and in our times of global deterioration, its very wise to check the companies credentials before buying shares, there is a lot of information online on these dangerous practices, look up gold (or other metal) mining effects around the world.

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