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investing in gold

Actors can be convincing! That’s why gold sellers use veteran actors to look like trusted advisors who pitch gold as a great way to protect your future from inflation, financial collapse, and as a good investment.

The pitch sounds compelling. After all, with a cheap money policy and low-interest rates, and a government who seems to bring us to the brink of a shutdown every so often, one can make a an argument that inflation will be rampant and the world is falling apart.

A single dollar invested in stock in 1802 grows to more than $669,000 after inflation by June 30, 2012. (1)

Whereas a dollar in Treasury bonds grows to $1, 633, (2) and a dollar in Treasury bills to only $284.” (3)

And gold?

“A nugget of gold bought in 1802 and put in a vault to be opened 210 years later would have soared all the way to $4.35, representing a gain of less than 1% per year.” (4)

To sum it up, the values of these assets if invested in 1802 are:

Assets Amount
Gold $4.35
T-Bills $284
T-Bonds $1,633
Stocks $669,000

Gold has other shortcomings as an investment. If you want real physical gold, you can buy coins or bullion but will likely pay storage costs for bullion. If you choose to buy coins to keep at home, it’s at risk for theft, so you’ll likely need a safe. Or you can pay to rent a safe deposit box at the bank.

You can also buy gold funds and ETFs to help track the price of gold which is not a bad way to participate if you want a security to track the price of gold. But keep in mind if you’re buying gold as a safe haven, you still don’t have physical gold and still have to liquidate a security.

Given what we know, if gold doesn’t seem to be a very good investment, then why do we hear so much about it?

Partly because gold can be a good fear trade, and gold sellers prey on this fact to scare people into buying, and use selective time frames to demonstrate gold’s value.

For example, after the financial crisis between October 2008 and September 2011 the price of gold almost tripled from $681 to $1,920 per ounce as people drove up the price in fear and in anticipation of higher inflation and a growing national debt. (5)

This period of appreciation is frequently used by gold’s pitch men who tell us that an investment in gold would have done better than the “risky stocks” you owned.

While the 210 years in Jeremy Siegel’s analysis may not be meaningful, well how about a longer, yet more reasonable period – like 25 years?

1n 1980 gold was valued at approximately $400 per ounce. 25 years later in 2005, gold was priced at the same $400 per ounce! Yes, you read that correctly.

Gold prices hovered around $400 per ounce for 25 years during which time it paid no dividends, you likely incurred annual storage costs, and you had nothing to show for your investment 25 year later! (2)

Keep this in mind the next time you hear gold is great long-term investment.

Jeremy Siegel Nov 2012 as part of a symposium on investment. Figures measured after inflation. Taxes are not taken into account.

(1) Stocks. William Schwert – historical stock price series dating back to 1802-1870.. Period of 1871 -1925, the Cowles Foundation. Period of 1926-present, S&P 500 stock index. Figures display what one dollar invested in various asset classes in 1802 would have accumulated to and referred to as total return indexes which assume all cash flows, interest, dividends, capital gains are continually reinvested in the relevant asset.

(2) Long-term bonds-. Sidney Homer presented a series of long-term government yields in his classic work, A History of Interest Rates that uses the minimum yield on Treasury bonds and high-grade municipal bond yields from 1800 to 1865 and high-grade municipal yields from 1865 to 1917. This is the high-grade bond series depicted.

(3) Short Term Bonds- Siegel constructed a synthetic short-term government series that removes risk premium on commercial paper using the relation between short and long-term interest rates that prevailed in Britain during the 19th century. The U.S. series assumes that the term structure of high-grade interest rates was the same over concurrent five-year periods in the U.S. and in the U.K. Figure C shows the short-term, risk-free series, along with other available short-term rates.

(4) Gold – The gold series represents the value of gold measured at the market price. Until the mid-1960s, this price was controlled by the government; furthermore, U.S. citizens were not allowed to hold gold in monetary form between 1933 and 1970. Value of one dollar of gold bullion purchased in 1802.

(5) Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results.

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by Sagepoint. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.

Investments in commodities may be affected by the overall market movements, changes in interest rates and other factors such as weather, disease, embargoes and international economic and political developments. Commodities are volatile investments and should form only a small part of a diversified portfolio. The use of derivative instruments may add additional risk. An investment in commodities may not be suitable for all investors.

Investment in stocks will fluctuate with changes in market conditions.

Government bonds and treasury bills are guaranteed by the U.S. Government and, if held to maturity, all bonds offer both a fixed rate of return and fixed principal value.

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