A Painful Reminder: Gold Isn't Bulletproof

All too often, I hear an investing conversation that goes something like this:

Person A: "I think I want to get into the stock market."

Person B: "No way. You should buy gold!"

Person A: "Why not stocks?"

Person B: "Gold is a bulletproof investment! It'll help you hedge against inflation, and when our government collapses and the dollar becomes worthless, gold can only go up in value ... right?"

Person A: "Hmm ... maybe you're right."

The painful reminder
Putting the "worthless dollar/government collapse" argument aside (sigh), what's the problem with gold? Despite its long-held status of being hailed as a superior safe-haven investment, people often forget gold can be just as prone to crashes as any other asset class in the market.

Image source: Wikimedia Commons 

Curiously enough, fellow Fool Matt Koppenheffer faced a deluge of negative comments after he bluntly stated that gold looked like a bubble just waiting to pop all the way back in September 2011.

To be sure, take a look at how prominent miners such as Barrick Gold (NYSE: ABX  ) and Yamana Gold (NYSE: AUY  ) have performed relative to the S&P 500 since then:

AUY Total Return Price Chart

AUY Total Return Price data by YCharts.

OK, so the miners didn't fare so well over the past year and a half, but what about the actual price of gold?

Well, check out the performance over the same period by the SPDR Gold Trust (NYSEMKT: GLD  ) , which is an ETF designed to mimic the price of one tenth of an ounce of gold:

GLD Total Return Price Chart

GLD Total Return Price data by YCharts

Ouch! That's 54% of raw underperformance by gold over a painfully long period of time.

Stocks: 1, Gold: 0
Now, don't get me wrong; I'm not trying to say gold is always a terrible investment completely unworthy of your money. To the contrary, gold can certainly find its place as just one of many parts of a well-diversified portfolio.

That said, like any other asset class, gold's extended streak of underperformance should serve as a somber reminder that we shouldn't be willing to blindly purchase any given investment at too high a price, no matter how strong the pre-existing bias of its perceived ability to weather downturns.

If you're searching for a hedge against inflation, then why not pick up shares of a dividend-paying stock like banking giant Wells Fargo (NYSE: WFC  ) , which currently trades at just 10.4 times trailing earnings and pays a 2.7% dividend? Think what you will about the banking sector as a whole, but when all things are considered, it's easy to see why Wells Fargo remains one of Warren Buffett's largest holdings.

Or maybe a global fast-food giant like Yum! Brands  (NYSE: YUM  ) could satisfy your hunger for stability. Though you'll pay a higher premium for its shares at around 20 times last year's earnings, it also offers a sustainable 2% dividend and is quickly expanding operations around the world -- particularly in emerging markets like China, where it plans to nearly triple its number of locations to 14,000.

Foolish final thoughts
In the end, while gold could very well rebound from here, one can only hope the recent drop will go a long way toward dispelling the notions of everyone's favorite metal as a risk-free investment.

From now on, just be sure to remember stocks can glitter, too.

More expert advice from The Motley Fool
Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.

Read/Post Comments (2) | Recommend This Article (1)

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 April 16, 2013, at 12:03 PM, BriAsh wrote:

    YUM! certainly is not the first stock I'd recommend. Sure YUM! is not a bubble now, but Gold might look good relative to YUM! lately.

    Sure they are still expanding in China, but vocal government criticism of publicly perceived poor meat quality do to chemicals in the meat, and add avian flu all drive this stock down. They have reduced the ire of Greenpeace as there paper supplier has pledged to be kinder on rainforests, but YUM still smells like tabacco sector rather than healthy food sector.

    Being so far down, maybe YUM! is now a value buy, but they are NOT as resource efficient as McD or P&G, as wholesome as wholefoods, nor as innovative and trendy as Apple. I'm so glad I didn't buy YUM! when I made a long term positive CAPS call.

  • Report this Comment On April 16, 2013, at 1:43 PM, TMFSymington wrote:

    @BriAsh, Thanks for your comment! Indeed you're right; Yum! Brands has been struggling in China of late, but I don't think it should be a problem over the longer-term...check out my thoughts on the topic at .

    That's not to say MCD or PG are bad companies -- I actually considered including MCD in the list as well.

    It's also funny you mention Apple and Whole Foods, both of which I added to my personal portfolio for the first time last week (grin):

    In any case, it goes to show there are always plenty of great choices available for stock investors.

    Fool on!

    Steve (TMFSymington)

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9/28/2016 4:00 PM
ABX $18.02 Up +0.42 +2.39%
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GLD $126.22 Down -0.40 -0.32%
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