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A Painful Reminder: Gold Isn't Bulletproof

By Steve Symington - Apr 15, 2013 at 9:46PM

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Despite the common perception of gold as a safe investment, the recent crash has served as a reminder that other things glitter, too.

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 (GOLD -2.92%) and Yamana Gold (AUY -2.43%) 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 (GLD -0.18%), 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 (WFC 3.35%), 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 (YUM 2.38%) 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.

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Stocks Mentioned

SPDR Gold Trust Stock Quote
SPDR Gold Trust
GLD
$172.76 (-0.18%) $0.32
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$45.60 (3.35%) $1.48
Barrick Gold Corporation Stock Quote
Barrick Gold Corporation
GOLD
$20.63 (-2.92%) $0.62
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$117.76 (2.38%) $2.74
Yamana Gold Inc. Stock Quote
Yamana Gold Inc.
AUY
$5.22 (-2.43%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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