Investors buy gold for any number of reasons. Some buy it to hedge against inflation or because they're worried about a stock market crash, while others buy it to store wealth or for pure speculation. 

That said, while those investment theses make sense on paper, they haven't always played out in real life. That's one of the many reasons you won't see us buying gold. 

big gold nugget and dollar bills.

Image source: Getty Images.

Gold doesn't live up to its own investment thesis

Travis Hoium: Gold is often perceived as a hedge against inflation and as a result a way to preserve wealth. But it's neither a good inflation hedge nor the best way to preserve wealth. 

The chart below shows the U.S. inflation rate and the price of gold since 1978. You can see that outside of a four-year window in the late '70s and early '80s there's no correlation between gold and inflation. In fact, over the past decade, gold has gone up while inflation has gone down. If it's inflation you're worried about, gold isn't the right hedge for investors. Treasury-protected government bonds would be a better choice. 

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts.

Gold also isn't the best place to store wealth long term. The chart below shows what the return on gold has been since the mid-1980s (as far back as this chart will go) compared to the total return of the S&P 500. Investing in 10-year treasuries since January of 1980 would have also crushed gold by returning 953%, according to a calculator at DQYDJ

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts.

Gold prices go up and they go down. But in the long term, they don't act as a real hedge to inflation and certainly aren't the best place to park money. That's why I'll never buy gold.

Why buy gold when this gold stock always outperforms?

Matt DiLallo (Franco-Nevada): As mentioned above, one of the allures of investing in gold is that it should enable investors to grow their wealth over time. However, as Travis pointed out, it hasn't been all that great at creating wealth for investors compared to other options. While that chronic underperformance could change if inflation spikes or geopolitical concerns emerge, investors are still better off avoiding gold. That's because there's an even better gold option out there than the physical metal: Franco-Nevada. As the following table shows, the precious metal royalty company has vastly outperformed gold, other gold stocks, and the overall market: 

Investment

1-Year CAGR

2-Year CAGR

5-Year CAGR

CAGR Since Franco-Nevada's Inception

Franco-Nevada (NYSE:FNV)

42%

32%

9%

20%

Gold Bullion ETF

8%

9%

(6%)

4%

VanEck Vectors Gold Miners ETF

8%

29%

(13%)

(6%)

S&P 500

23%

15%

16%

8%

Data source: Franco Nevada. As of Nov. 30, 2017. CAGR = compound annual growth rate. 

Franco-Nevada has achieved those stronger returns because of how it generates wealth for investors. First, thanks to a variety of contractual agreements, the company receives royalties on gold produced from several mines around the world. It gets a stream of cash flow from these contracts, which it uses to invest in more royalties to grow its earnings streams as well as to pay dividends. Meanwhile, it also benefits from rising gold prices because the cash flow it earns from its royalties rises alongside gold. In other words, Franco-Nevada profits twice from gold, which is why it should create far more wealth for investors over the long term than they could make from just buying the shiny metal.  

Gold bars next to a price chart.

Image source: Getty Images.

Space is the final frontier for gold mining

Rich Smith: A lot of smart folks have raised a lot of great arguments against investing in gold -- both here and in columns past. One thing no one has yet touched on, though, is this:

Gold isn't as precious a metal as you think it is -- nor as rare, either.

Oh, sure -- here on Earth it's hard to find gold. Thousands of years of people looking to strike it rich have most of the obvious places to look pretty much tapped out. But raise your horizons a bit, and in space you'll find hundreds, thousands, even millions of asteroids floating around that could be chock-full of gold.

Astrophysicist Neil deGrasse Tyson pointed this out to me last year, suggesting that the asteroid belt could be a literal gold mine, in which any rock you crack open might hold "1,000 pounds of precious metals inside." Right now, that gold floats out of reach. But in a decade or so, we could see asteroid-mining spaceships from Planetary Resources (a space start-up backed by 3D Systems, China's Tencent, and the Grand Duchy of Luxembourg) shuttling back and forth from the asteroid belt, and flooding the market with metric tons -- not ounces -- of pure gold.

How likely is this scenario to play out? Only time -- and survey ships -- will tell. But until I know the magnitude of the risk, I won't buy into a gold market that could soon be disrupted.

Matthew DiLallo owns shares of Tencent Holdings. Rich Smith has no position in any of the stocks mentioned. Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool has a disclosure policy.