Dylan Lewis: Hi, I'm fool.com deputy managing editor Dylan Lewis, and on this FAQ, we're
going to be tackling a question we get all the time online: is gold a good investment?
There's a huge portion of the financial media that fixates on gold. The most common argument
you'll see is that gold is a hedge for an economic collapse. Gold's seen as a safe place
to store money because it's been used as a currency for thousands of years. That history,
plus gold's global appeal and limited supply, sells a lot of people on the value of gold
as an investment. But is it actually a good idea?
As an investor, you're looking to buy something that will be worth more in the future than
it is today. To measure that, a lot of people will look at intrinsic value, or the inherent
worth of a company, property, or asset. Most of this analysis will look at the money the
potential investment over time might generate. In the case of a business, you look at the
expected profits the company could generate over time. As a shareholder, you're a part
owner of the business, and so your stock entitles you to a sliver of those earnings. For a business
that grows over time, earnings should also go up, and the value of your piece of ownership should follow.
What's tricky about gold is that as an asset,
it doesn't actually generate cash. The piece of gold you own today will be the same piece
of gold five years from now -- no more, no less. If you buy a house, you can decide to
rent it out. Over time, the rental payments you receive could provide a steady flow of cash.
Alternatively, you can live in the house, and instead of paying rent month after month,
you'd be making mortgage payments and building equity over time in an asset that is capable
of creating cash flows. On its own, gold can't generate cash, which makes it a little
bit harder to value. The value of gold is really tied to its scarcity. It gives it value
in the jewelry market and it makes it useful as a store of value and means of exchange.
Some of you probably heard that and thought, "What the heck does that mean?" Globally, gold is
recognized as a precious metal. The worldwide recognition there means it can be readily
exchange across borders and cultures, which is part of the reason why major institutions
like central banks maintain gold reserves. It's also why some investors want in on gold.
They view it as a hedge against economic instability and inflation. Paper dollars, like the U.S. dollar,
are fiat currency, meaning they have value because we say they have value.
Sounds familiar? So, if events unfold that lead people to question the value of a fiat currency,
or the government takes actions to change the value of the currency -- like printing
way too many bills and giving them out to people -- the currency can lose value.
If a currency loses value, the relative value of gold as expressed in that currency will
shoot up, allowing investors in gold to profit. Some people keep money in gold because it's
less tied to any one government and isn't as impacted by inflation or an economic collapse
in any one country. But, its merit as an investment really depends on the timeline that you're looking at.
From September 2008 to August of 2011, the price of gold went up over 100%,
while stocks in the U.S. eked out a 1% gain on a total return basis. There's money to
be made in investing in gold, but it comes down to being right about gold at the right time,
because gold tends to surge in value when major financial systems are struggling.
Since September of 2011, stocks have returned over 180% on a total return basis, while the
price of gold has fallen nearly 30%. The returns of the S&P 500 trounce gold on a one, three,
five, and 10-year basis. For people with a very long time horizon, since 1990, the S&P
has posted 1,400% gains on a total return basis. Over the same nearly 30-year period,
gold has returned 220%. If you're worried about an economic downturn,
it may make sense to have a small portion of your portfolio in gold, but it certainly
shouldn't be your main investing strategy. And for many time periods, you'd be better
off being in all stocks. Thanks for watching, guys! If you have thoughts
on gold, drop them in the comments section below. If you have any ideas for us to do
a future video, please let us know. If you enjoyed this video, give us a thumbs up,
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