In general, investing in gold is supposed to be a great way to hedge against uncertainty, since precious metals often go up in value when the market falls. Many investors also buy gold because they think it will go up more than stocks. And in short periods of time, both of these things can prove to be true.
But there's a big catch: It has been nearly impossible to predict what stocks or gold will do in the short term. There are far too many unknowable things that can affect the market for both, making it little better than a coin flip for most people. On the other hand, there's a lot of history that supports stocks as being far better investments than gold. Don't believe me? The S&P 500 has outperformed gold in total returns over the past one-, three-, five-, and 10-year periods.
For this reason (among others), three of The Motley Fool's top investing contributors think you're better off investing in Wheaton Precious Metals Corp. (NYSE:WPM), Waste Management, Inc. (NYSE:WM), and Brookfield Infrastructure Partners L.P. (NYSE:BIP). These three companies have proved to be far better investments than gold in the past, while also offering the stability that gold investors often look for in times of uncertainty. Keep reading for details that can help you decide where your investing dollars should go instead of gold.
A history of outperformance
Matt DiLallo (Wheaton Precious Metals): Over the past decade, gold has delivered more than a 100% average total return for its investors. However, as good as gold has been, its performance pales in comparison with gold and silver streaming company Wheaton Precious Metals, which has delivered a nearly 250% total average return over that same time frame. In fact, Wheaton Precious Metals has outperformed gold in every period measured since 2005, which is why your money is better off in that stock than in gold.
Unlike investing in gold, where investors make money on its rising price, Wheaton Precious Metals makes money by signing streaming contracts with mining companies, which exchanges an up-front fee to help them develop a mine for a percentage of future output at a low fixed cost. As a result, Silver Wheaton buys gold at a significant discount and then flips it for a hefty profit. For example, in 2017 the company bought gold for an average of $393 an ounce, and sold it for a profit $857 an ounce, pocketing more than $370 million in the process.
However, the real magic of Wheaton's success is what it does with that excess cash, with it currently reinvesting about three-quarters of it into new streaming contracts. That enables the company to compound shareholder value, which has fueled its significant outperformance in the past and will probably continue doing so in the years to come, given that it has substantial growth on the horizon as new mines come online. That significant upside even if gold doesn't rise is why investors who want to buy gold should consider Wheaton instead.
Turn trash into stock market gold
Tyler Crowe (Waste Management): If you're thinking about investing in gold, chances are you're doing so because you want to protect yourself from the times the market declines. That's an admirable sentiment, but gold isn't a productive asset that throws off cash or grows over time. If you want the benefit of owning productive assets like but still want the emotional security blanket, then Waste Management is a stock worth considering.
Waste Management is the kind of business that isn't swayed by much. We're pretty good at creating waste no matter the condition of the economy, and Waste Management has an unparalleled network of waste collection vehicles and facilities that take refuse and recycling and turns them into an incredibly steady revenue and cash flow stream.
The business of waste collection and disposal isn't a high-growth business, but management has ways of transforming modest revenue growth into high rates of return for its investors. Over the past decade, the company has thrown off about $1 billion annually in free cash flow to pay dividends and buy back 13% of all shares outstanding, which translates into a return on equity in excess of 20%.
I can't say Waste Management's stock is completely immune to stock price drops, but the business is one of the must-have services for society that doesn't face many interruptions and will continue to do well in almost any environment. Also, its management team has a great track record of being good stewards of investor capital that should give investors some sense of security in a market crash. If you're considering gold as a defensive position in your portfolio, then Waste Management is a suitable replacement.
Something that will be far more important than gold
Jason Hall (Brookfield Infrastructure Partners): One of the risks with owning gold is that its value can swing wildly and unpredictably, in large part because the price of gold is as much driven by investor and trader speculation as it is by gold's actual economic value and commercial demand. In other words, only a fraction of the gold market is companies that use gold for industrial purposes, or jewelry makers who create consumer products with it. This reality has been a major reason gold prices are down nearly one-third from the 2011 peak.
A better way to make money is to invest in Brookfield Infrastructure, which owns assets that have not only grown in value but are also productive and cash-flow producing. And considering the trajectory for global population growth -- more than 1 billion more people living in cities over the next couple of decades -- Brookfield Infrastructure's telecommunications, water, and energy infrastructure holdings are only going to be more important in the years ahead.
With a great management team making the capital allocation decisions, Brookfield Infrastructure has been a far better investment than gold since its IPO:
It has also been a better investment than gold over the past one-, three- and five-year periods, and I think investors should expect Brookfield Infrastructure to outpace gold for decades to come. And just to top things off, it pays a dividend yielding 4% at recent prices and has increased the payout every year since going public. You'll never get a dividend stream from a stake in gold, much less be able to count on seeing it grow every year.
Jason Hall owns shares of Brookfield Infrastructure Partners. Matthew DiLallo owns shares of Brookfield Infrastructure Partners. Tyler Crowe owns shares of Waste Management. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.