Do you subscribe to a newspaper? Do you read it? If so, chances are you've seen the same ad I've seen, which pops up every so often and commands that you go out and buy some gold right now.
It sure sounds like a good idea. After all, gold has been on a tear lately, rising nearly 50% over the past two years. And the advertisement makes some pretty compelling arguments for why it remains a good investment -- if only they were true. So consider this a public service announcement, folks. Because if you've seen the ad (from an outfit called "United States Gold Distribution Center. Not Affiliated With the U.S. Government"), and if you're tempted to buy some of the shiny stuff, here's the myth-debunking you need to read, in three easy parts.
Myth No. 1: Gold is predicted to go to $1,800 an ounce
Whenever you're reading an investment advertisement, here's your first clue that it's a set-up: Unsourced predictions and unfounded assertions, stated as fact. Unsourced, because the advertisement never says who exactly is predicting that gold will go to $1,800. And unfounded because, like the identity of the prediction-maker himself (herself?), the ad never explains the rationale for why gold should "go to $1,800" -- or when, precisely, it's supposed to reach that lofty price.
Similarly, the ad's assertion that "10% to 20% of your net worth should be in gold according to most money managers" -- Google any combination of words from that statement you like, and I challenge you to come up with a single reputable money manager who recommends anything of the sort. I tried, and the closest thing I found was not a confirmation, but a refutation -- a quote from Fortune magazine stating that "even bullish gold pros caution the average investor to put no more than 5% of a total portfolio into gold-related holdings ... " [Emphasis added.]
Myth No. 2: Gold has gained 3,500% in value
This statement from the ad is better-based in fact. With gold now selling in the neighborhood of $650 an ounce, a $20 gold piece issued in 1926 has appreciated roughly 3,150%. Factual in nature, this statement is less a myth than a red herring. The authors of the gold ad hope to dazzle you with the big number "3,500%," and hope you won't do the math to figure out what it means.
But what does it mean? Simply put, it means that over the past 80-some years, gold has appreciated in value at an annual rate of 4.5%. Doesn't sound as impressive when you put it that way, does it? More like something you'd expect out of a government savings bond or perhaps a generous money market account. Moreover, common stocks outperformed gold over that same period by better than a full percentage point (which may not sound like much, but works out to a 7,500% increase in value, more than twice the return on gold -- and that's before you count the dividends).
That's right. Regardless of what the gold bugs would have you believe, over the past 80 years, you'd have done more than twice as well investing in such staid old companies as Coca-Cola
Myth No. 3: Gold is forever
But the ad's most disingenuous statement has to be its assertion that "gold will retain its intrinsic value unlike the paper that is in the ... stock market."
Au contraire, mon frere! The difference between gold and stocks is not, as these hawkers of Gold American Eagle coins would have you believe, that gold is eternal and stocks, ephemeral. The difference is that gold is constantly being dug out of the ground, increasing its supply and diminishing the value of existing gold -- whereas stocks increase in supply and value over time. As University of Pennsylvania Professor Jeremy Siegel describes in his book Stocks for the Long Run, over the course of the last two centuries (from 1802 to 2001) the value of $1 invested in gold has declined 2% as its supply increased. Meanwhile, $1 invested in stocks 200 years ago has increased in value nearly 600,000 times.
Why? Because gold is a dead metal. While it has "intrinsic value," it cannot create more value. In contrast, stocks are more than just paper. A stock is evidence of ownership of a share in a living, growing business -- a business that has not only an intrinsic value today, but an ability to grow that value over time. To illustrate, a lump of gold cannot create a company, but companies such as BarrickGold
And another difference
There is one key difference between gold and stock, though. As elements go, gold is gold -- one hunk of 18k is the same as any other. Stocks, though -- while they outperform gold on average -- differ very much from one another. To illustrate yet again, over the past two years, the price of "gold" per se has increased roughly 50%. Meanwhile, the price of Barrick stock has risen 31%, AngloAshanti is up 34%, and Newmont 7% -- which shows that you can do better in stocks by finding better companies.
While these three companies have lagged the performance of their stock in trade, other gold miners have wildly outperformed it. In fact, at Motley Fool Hidden Gems, we uncovered one such stock a couple years back -- a company that has turned in a five-bagger performance over the past three years. Even better, we at the Fool recently had the chance to speak with the CEO of this "tiny gem." If you'd like to learn who it is and hear what the CEO has to say about his firm and its prospects, taking a free trial is your only price of admission.
Fool contributor Rich Smith has no position in any of the companies mentioned in this article. If he did, The Motley Fool would require him to tell you so. We're sticklers about things like that. Coke is an Inside Value recommendation.