Just How Solid is Gold?

Gold is the most malleable of all metals. One gram of gold can be pressed and formed into a sheet of 11 square feet. Gold can be flattened thin enough that it becomes semi-transparent. As a financial asset, gold has long been touted as a hedge against inflation, massive market downturns, and is one of the oldest investments out there. As we dive into the history of gold, we see it has been on the scene in societies since the beginning of recorded history. Gold doesn’t rust, corrode, or decay and doesn’t get used up. Compared to other commodities like oil or wheat, gold, once mined, doesn’t go away.

As we look at more recent history, the U.S. monetary system was backed by the gold standard up until the 1970s before the switch to our current system. During the 1970s, annual inflation in the U.S. was just under 9%. During that time, gold generated an annualized return of around 35%. This established gold as a hedge against inflation in the hearts and minds of many investors. Generations have been raised with this history engrained in each one. But gold’s track record since the 1980s has been a completely different story. In the first half of the 1980s, inflation ran around 6.5%, while gold dropped about 10% per year over the same period. The same was true during the second half of the 1980s and the start of the 1990s; inflation when up, and gold prices dropped. Even in today’s high-inflation environment, gold has stayed relatively flat.

From a pure investment standpoint, the stock market will outpace most other investments, given a long enough timeline. For example, if you bought gold in January, 1980, when inflation was around 13%, gold was at a high of $2,586.46 per ounce, adjusted for inflation. If you held it over the last 42 years, gold is now $1,636.78 per ounce, or a loss of 36.71%. At the same time, the S&P 500 index has grown over 3300% in that same period. But 42 years may be unrealistic for a practical example. So, let’s look at the last five years. From October, 2017, until October, 2022, gold has grown a little over 7%. In comparison, the S&P 500 index has risen 43.48% over that same period.

So, what are the benefits of holding gold as an investment? Gold historically has a very low correlation to the stock market and even the bond market, which adds diversification to your overall investment portfolio. The demand for gold has continued to grow at a pace of 12% in the first half of 2022. Gold also has a few easy options for ownership, from holding the physical asset, investing in ETF (Exchange-traded funds) that physically own gold for you, or owning the companies that process gold (i.e., mining and processing).

Gold, like any other investment, comes with risk, so having a good understanding of those will allow you to make a more informed decision regarding your investments. Holding gold physically comes with the security risk of storing it in a location that could be subject to theft, fire, or natural disaster. Another risk is the financial policies of countries. Since many countries’ finances are based on a fiat currency, their policies will affect the value of gold. 2022 has been an excellent example of how rising rates affect the value of gold.

Gold has been a fascination for centuries and will most likely continue to be in the future. While it can add diversification to an investment portfolio, understanding its limitations is essential to include in your overall plan. Having a well-rounded investment portfolio can allow you to have financial security in the future and peace of mind as you grow older. As followers of Christ, we can look forward to the day when the streets are paved with gold.