Why Gold Makes an Awesome Investment

Picture a knight in shining armor. Now picture him in gold armor. He just became 10 times more awesome, right? He probably even has super powers, beyond the typical majestic wielding of an equally golden sword.

In fact, I know that this particular knight is one of the few who regularly battles a particular dragon -- a terrible beast known as Inflatiator. This crafty creature creeps around each night, feeding on any money it can find. Innocent townspeople wake in the morning with no idea what's happened, knowing only that they can no longer afford a loaf of bread with yesterday's wages.

Except, of course, for those who've put their faith in our golden knight. Each morning, he swings his sword overhead, and with a bolt of lightning from the heavens, he grows larger and larger, seldom shrinking back. He's able to protect the townspeople's cash gallantly, even against Inflatiator's expensive appetite.

Now, back to reality
It might be cheesy, but I think the above fairy-tale metaphor is a good way to think about gold in today's economy. Stocks are still volatile, and as far as commodities go, oil is dirty, and silver is common. But gold remains the heroic standard.

Until recently, I'd never really paid much attention to commodities. They seemed like a very old-school way to invest, and where's the fun in that? But they are a promising prospect right now, especially gold.

The price of gold has gone up 350% in the last 10 years. It's true that over longer periods of time, gold averages a pretty slow growth rate of about 1%. But that just proves that investors really should want to get in on this boom while it's still happening.

Let's get back to that 350% for a moment. That number is insane, and honestly, when I see it, I don't know what to do with it. Pat it on the back? Stare at its luster?

I mean, yes, it proves that gold has done much better than most stocks over the past decade. But to really push me over the edge and make me want gold, I need a number that I can still be a part of.

So I also like that gold has gone up 8% in 2011 alone. I like that it hit multiple record highs this year, dropped 2% in May, and is currently back on the rise -- making now a great time to buy. ETFs provide a particularly easy way to invest in gold as a commodity, and both the SPDR Gold Trust ETF (NYSE: GLD  ) and ETFS Gold Trust (NYSE: SGOL  ) are currently outperforming the S&P 500 by more than 5.5% over the past year.

With all the talk out there about another recession, high unemployment rates, and the inevitable bite of inflation, it really does look like gold could be the safe-haven savior investment that many are projecting it to be.

And honestly, who doesn't want a dragonslayer in their portfolio? That's just awesome.

Amanda Buchanan slayed, like, five dragons before breakfast this morning, but she holds no financial position in any gold-related investments, including those mentioned above. The Fool's disclosure policy once survived a battle with Trogdor the Burninator. 


Read/Post Comments (10) | Recommend This Article (19)

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  • Report this Comment On June 10, 2011, at 3:41 PM, TMFHousel wrote:

    Thanks for writing Amanda,

    <<"The price of gold has gone up 350% in the last 10 years. It's true that over longer periods of time, gold averages a pretty slow growth rate of about 1%. But that just proves that investors really should want to get in on this boom while it's still happening.">>

    To be fair, I think it proves that they should have really wanted to have gotten in 10 years ago.

    Also, is it fair to say gold "seldom shrinks back?" It lost 87% of its purchasing power from the early '80s to early 2000s.

    Fool on!

    Morgan

  • Report this Comment On June 10, 2011, at 4:39 PM, TMFCheesehead wrote:

    Great metaphor Amanda, very fun to read

  • Report this Comment On June 10, 2011, at 4:53 PM, TheDumbMoney wrote:

    !Si, creo que veo Inflatiators alla!

    !Venga, Sancho, venga conmigo!

  • Report this Comment On June 10, 2011, at 5:20 PM, LegendofDavis wrote:

    Great article Amanda! Well written and fun to read!

    In response to the first comment, I think it should noted that just because the benefits of investing in gold 10 years ago would have been enormous doesn't mean that there aren't still benefits in doing so now.

    Also, regardless of a period of decline in gold's purchasing power, your statement about how gold seldom shrinks back is reinforced when compared to the relative "staying power" of other forms of currency. Investments WILL fluctuate, but one can make an effort to invest in items that have shown a certain level of stability. Seldom means "rarely," not "never," and is nothing more than a relative term.

  • Report this Comment On June 10, 2011, at 5:57 PM, TMFHousel wrote:

    (And Amanda, your article was quite clever. Well done.)

    Legendof Davis -- thanks for your response.

    I tend to disagree about past performance not having negative implications on future returns, particularly for an asset like gold. As Fool Alex Dumortier has shown, real gold prices tend to be mean-reverting over time.

    http://www.fool.com/investing/general/2011/04/29/gold-is-now...

    Matt Koppenheffer also put together some interesting work on the stability of gold's purchasing power over time:

    http://www.fool.com/investing/general/2010/10/14/is-it-time-...

    Further, I agree that most currencies have lost value over time. But, the discussion is over gold as an investment. :) And seldom does indeed mean rarely, not never, but gold has *always* fallen (hard) after a surge similar to the recent one. The chart in Alex's article backs this up.

    Thanks again!

    Morgan

  • Report this Comment On June 10, 2011, at 8:23 PM, PeyDaFool wrote:

    "I like that it hit multiple record highs this year, dropped 2% in May, and is currently back on the rise -- making now a great time to buy."

    That's a bold statement, Amanda. For everyone out there holding gold or Gold Trust ETFs, I sure hope you're right.

    Is it just me or does hearing gold has historically returned 1% but recently did 350% worry you a bit? Sounds similar to saying the housing market generally returned 3% but did 100% over the past three years, so let's buy!

    There are many reasons I do not invest heavily in gold, but the fact it's risen so much recently is certainly my top reason.

  • Report this Comment On June 10, 2011, at 8:43 PM, TheDumbMoney wrote:

    ?PeyDaFool, que es la problema? ?No te veas a mi armadura de oro?

    !No te preocupes, hombre! !Me voy a montar a mi caballo grande, el Rocinante, en mi armadura de oro, y me voy a inclinar a los inflatiando molinos de viento a matalos!

    (I need a vacation.)

  • Report this Comment On June 10, 2011, at 9:00 PM, TMFAmandaBee wrote:

    Morgan,

    Man, you're one of those lucky guys who got in on APPL early, huh? ;)

    Gold is definitely a controversial topic, so I appreciate your (and other Fools') points of view here! Thanks for sharing! :)

    I agree that there are definitely reasons and valid arguments as to why one should be weary and skeptical of gold. And if we were steadily on our way to economic recovery right now, then I'd probably be right there with you.

    But as I mentioned at the end of the article, there is still a lot of talk out there about a double dip recession and all that comes with it. Because of that, I think rising gold prices will continue, and investors could still stand to make a decent profit from it.

    Glad you enjoyed the article, thanks again for your feedback! :)

    Fool on!

  • Report this Comment On June 11, 2011, at 12:46 PM, PeyDaFool wrote:

    This does not refer to Morgan's comment whqtsoever, but I just came to the realization that saying "Fool on!" after a mean comment is the equivalent of saying "but he's a nice person" after an insult. Doesn't it make everything better? :)

    "You're insane to think stocks will continue going up. I wouldn't use you as my advisor even if you paid me commission! Fool on!"

    "That guy has no clue. He couldn't return positive alpha even if he had a time machine - but he's a nice person!"

    Haha.

  • Report this Comment On June 14, 2011, at 4:29 AM, geoslv wrote:

    Unfortunately, market patterns don't apply any more.

    http://www.theundergroundinvestor.com/2011/05/history-repeat...

    By trading paper futures among themselves in a planned manner, they will set the prices where they want them.

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