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Is Gold A Good Investment

Is Gold a Good Investment?

Is Gold a Good Investment? Recently, I wrote an article on alternative investments for another blog. One of the investments that I wrote about was gold. Gold has been in the news more recently since inflation is higher and trending up in 2021 after a long period where inflation was below 2%. The CPI started rising in February 2021 and is now over 5% annually. Much of this is due to shortages and logistics delays rather than excessive demand. In any case, when inflation rises, investors often look to gold for inflation protection and diversification. But is gold a good investment? I would argue that it is not for most people.

Source: Bureau of Labor Statistics
Is Gold A Good Investment
Is Gold A Good Investment

Statistics on Gold as an Investment

Gold’s value comes from difficulty to acquire, and thus gold has become a precious metal. In the US, reportedly, only about 10.8% of people between 18 and 64 own gold. Most of this is in 14 ct and 22 ct jewelry and few own gold bars or gold coins. This level of ownership is a very low percentage compared to Americans that own stocks which have ranged from 53% – 63% in the past 20-years. 

India is the country where consumers own the most gold at more than an estimated 850 million ounces. An amount over approximately $1.5 trillion at the current spot price of gold of $1,761. It has been estimated that Indians invest about 8% of their annual income in gold. Gold is highly valued and viewed as a store of wealth. It is evident that Indians think that gold is a good investment. Today, consumers in China and India are the leaders in buying gold jewelry, followed by the US and Germany.

The US central bank is the largest owner of gold in the world. It owns over 261 million troy ounces at the end of Q3 2021 as gold reserves at various locations around the country. Fort Knox has the most significant holdings at over 147 million troy ounces. By a 1973 law, the price is set at $42.222, resulting in a book value of over $11 billion. However, the US Government’s gold reserves are valued at over $460 billion at the current spot price. As a result, the US central bank owns more gold than the following three central banks combined. In order, the largest gold reserves by country are:

CountryGold Reserves (metric tons)
United States8,133.53
Germany3,359.14
Italy2,451.86
France2,436.34
Russia2,292.33
China1,948.32
Switzerland1,040.01
Japan845.98
Turkey712.38
India703.71
Source: Statista

In addition, the International Monetary Fund (IMF) has owned 2,814 metric tons since 2011. Central banks continue to be net buyers of gold and annually added hundreds of metric tons to their reserves in the past 11 years. The central banks are net buyers despite no country requiring its money to be backed by gold. However, countries add to their reserves as a safeguard against inflation, recession, and economic surprises.

Reasons Why Gold Is a Good Investment

There are several reasons why investors think that gold is a good investment. First, gold has been a store of value for thousands of years. This is especially true during periods of inflation, deflation, recessions, and geopolitical uncertainty.

Investors generally think that during times of rising inflation, the price of gold goes up as the cost of living rises. This is because fiat currencies lose their purchasing power during inflationary times. Thus, rather than holding dollars or other currencies, investors often buy gold driving its price higher. Along these lines, when the US dollar weakens against other currencies, investors tend to buy more gold. The data supports this viewpoint. In 1970, the price of gold was $35 per ounce. The spot price is now $1,761 per ounce, an increase of almost 5,000%. Over the same period, $100 in 1970 is $723.72 today, increasing 623% according to the CPI inflation calculator.

Gold also protects against deflation when prices are dropping, like during the Great Depression. People tend to hoard gold to protect against deflation since gold holds its value. Since gold maintains its value, it is often bought during times of economic and geopolitical uncertainty. For example, gold’s price rose to a record during the initial outbreak of 2020. Gold also rose post 9/11, and during the sub-prime mortgage crisis.

Demand for gold has grown due to strong cultural reasons in some countries. In addition, as citizens of many countries become wealthier, they are buying more gold leading to higher prices over the past decade. Higher demand combined with low supply supports gold prices.

Gold is also often uncorrelated to stocks and bonds, permitting investors to diversify their portfolios. Today, gold is also easier to own through ETFs backed by gold driving up demand. Investors can also invest in ETFs that invest in gold mining companies. ETFs are more straightforward to trade and more liquid than physical gold.

Reasons Why Gold Is Not a Good Investment

Cash, stocks, and bonds are more liquid than physical hold. While gold holds its value, it is more difficult to trade. In addition, cash is king when it comes to paying bills and making purchases. Gold does not serve well for those purposes. During times of economic uncertainty, investors often flock to cash too. Demand for short-term US Treasury bills tends to rise during recessions.

Gold has also experienced significant price volatility in the short term, as seen in the chart from Stock Rover*. For instance, gold was priced at about $1,000 per ounce in March 2008 and plunged to ~$700 per ounce in November 2008, followed by a steep rise to $1,900 per ounce by August 2011. Most investors cannot stomach this type of volatility, and hence this is a significant reason why gold is not a good investment. Volatility is also a reason why gold should never be a significant position in your portfolio.

Source: Stock Rover*

Gold does not pay a dividend or interest and thus does not provide income to investors. Therefore, a retiree may own gold but not receive a passive income stream, unlike dividend growth stocks or bonds. For stocks, the total return equals price appreciation or depreciation + dividend yield + price-to-earnings (P/E) ratio expansion or contraction. On the other hand, the total return for gold is only from price appreciation or depreciation. The lack of a passive income stream is why I think that gold is not a good investment for most retirees.

Gold can underperform for decades. Gold’s history goes back thousands of years. But the recent history of gold is more volatile. The price of gold peaked in 1980 and did not reach that price again until 2000. Between 1989 and 1999, when global economies and the stock markets were performing well fell by (-27%).

Gold does not produce wealth. When an investor buys a stock or bond, the underlying asset produces wealth. Companies or governments use the proceeds from the bond for capital infrastructure that has economic benefits. Buying stock has economic benefits as it is often of a company selling products or services consumers need. The company also employs hundreds to thousands of workers. Profits are returned to investors as dividends, who in turn buy more goods and services. None of this happens with gold.

Final Thoughts on Is Gold a Good Investment

Gold had positive returns in 2019 and 2020 but the asset is down in 2021. Gold is not for most investors but it has a place some portfolios for diversification. Most of us don’t want to buy and hold gold bars or coins due to the headache. Other ways to buy gold are mutual funds and ETFs backed by gold holdings and gold mining companies. However, in general, I do not feel that gold is a good investment for most investors and retirees over the long term, even for diversification. There are safer assets that act as an inflation hedge like US Treasury Inflation-Protected Securities (TIPS).


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Chart or Table of the Week

Today I highlight McCormick & Co (MKC). The company was a beneficiary of the eat-at-home trend in 2020. However, 2021 is a more challenging year as workers return to the office and children return to schools. The company recently reported excellent Q3 2021 earnings, but the stock price dropped due to inflationary pressures. The stock price was below when the pandemic started, but earnings are higher. The P/E ratio is the lowest since the nadir of the COVID-19 bear market. Investors may want to take a look at this Dividend Aristocrat with 35 years of dividend growth.

The screenshot below is from Stock Rover*.

Source: Stock Rover*

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at the end of September 2021. The number of companies on the list has risen to 531. We are well over 10% of companies that pay dividends, having cut or suspended them since the start of the COVID-19 pandemic.

There was one new company added to the list this past month. The company was Capstead Mortgage (CMO).

Market Indices

Dow Jones Industrial Averages (DJIA): 34,379 (-1.20%)

NASDAQ: 14,567 (-3.20%)

S&P 500: 4,362 (-2.10%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 34.0X, and the Schiller P/E Ratio is at about 37.6X. These two metrics were down the past three weeks

. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I view anything over 30X as overvalued based on historical data. The S&P 500’s valuation came down as companies in the Index reported solid earnings lapping a Q2 2020 that had depressed earnings.

S&P 500 PE Ratio History

Source: multpl.com

Shiller PE Ratio History

Source: multpl.com

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was up 3.5 points this past week to 21.15. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. The Index is now in Fear at a value of 27. The Index is down five points this past week. This Index is a tool to track market sentiment. There are seven indicators in the Index that are measured on a scale of 0 to 100. The Index is calculated by taking the equally-weighted average of each indicator.

These seven indicators in the Index are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Junk Bond Demand indicates Extreme Greed.

Market Volatility is set at Neutral.

Stock Price Breadth indicates Extreme Fear.

Market Momentum indicates Extreme Fear.

Put and Call Options are signaling Extreme Fear. 

Stock Price Strength is signaling Extreme Fear.

Safe Haven Demand is in Extreme Fear.

Source: CNN Business

Economic News

The Conference Board’s Consumer Confidence Index declined to a seven-month low of 109.3 and followed revised 115.2 for August. Even though the measure has dropped 19.6 points from its peak of 128.9 reported in June, consumer confidence is still high by historical standards. The Present Situation Index, based on consumers’ sentiment of current business conditions and the labor market, declined to 143.4, down from 148.9 in August. The proportion of consumers planning to purchase homes, automobiles, and major appliances all showed cooling. Finally, the Expectations Index, which measures consumers’ short-term outlook for income, business, and the job market, dropped to 86.6 compared to last month’s 92.8. This is the lowest reading since January.

Federal Reserve Chairman Jerome Powell, in his remarks to the Senate Banking Committee, cautioned that inflation would likely remain high in the coming months.  “Inflation is elevated and will likely remain so in coming months before moderating,” Powell said.  With the economy continuing to strengthen against the headwinds of rising COVID-19 cases and disrupted supply chains, the Fed Chair remarked – “As the economy continues to reopen and spending rebounds, we are seeing upward pressure on prices, particularly due to supply bottlenecks in some sectors. These effects have been larger and longer-lasting than anticipated, but they will abate, and as they do, inflation is expected to drop back toward our longer-run 2 percent goal.”

The Bureau of Economic Analysis’ third and final estimate on second-quarter gross domestic product (GDP) growth reported an economy expanding at an annual rate of 6.7%, up from its previous estimate of 6.6%, accelerating past Q1’s 6.3% annual rate. In addition, consumer spending, which accounts for some 70% of economic activity, grew at a 12.0% annual rate in Q2.

Thanks for reading Is Gold a Good Investment – Week in Review!


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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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