Should I Invest in Gold?

May 24, 2022 Author: Tess Downing, MBA, CFP®, Complete View Financial

With geopolitical conflicts and inflation, it is natural for investors to search for safe investment havens. Some advocates for gold believe investors should allocate a significant portion of their portfolio to the asset citing the benefits of strong long-term returns and inflation protection. However, if you look at the evidence, you may start to doubt the role of gold in your portfolio.

History of Gold's Returns

A little history, from January 1970 – December 2021, gold had an annualized return of 7.89%. However, gold’s price appreciation has largely been driven by isolated, unpredictable episodes of high demand. Between 1971 – 1974, US investors were unable to directly own gold because of government restrictions. In this period, gold had an annualized return of 48.89%. Since these restrictions were lifted, gold’s annualized return between 1975 – 2021 decreased to 5.00%.

Gold does not pay dividends or interest to investors. Its only source of return is price appreciation caused by shifting supply and demand which makes gold a speculative asset. If you put gold in a vault and wait for decades, it will not produce anything and its value when you take it out of the safe will simply reflect the current spot market price. In addition, holding physical gold may incur negative cash flows because of storage, insurance, and other costs. In contrast, a stock reflects ownership in a business enterprise that seeks to generate profits and create wealth. Investors who put their capital to work in the economy expect a potential return from cash flows and appreciation.

Gold's Volatility

Many investors think of gold as a hedge against inflation, but the volatility of gold tends to swamp the volatility of inflation. Gold has been ~14x more volatile than inflation with an annualized standard deviation of 19.11% compared to inflation’s annualized standard deviation of 1.29%.

The decision to purchase gold is often motivated by an emotional response to current events. When investing for your retirement, you will need assets that generate income or are reasonably expected to appreciate over time. Unfortunately, gold cannot reliably do either.