Yes, the price of this shinny yellow metal has been going almost straight up since 1999. Yet we coach our loyal clients to “stay away.” Why would we be doing this? It’s simple: gold, like all other commodities, is speculative. It provides no income and minimal inflation hedge. And when the price begins to fall, and it will, you can only set yourself up for losses by purchasing now.
The last time the price of gold peaked was in 1980. I remember it clearly. The evening news broadcast stories of people lining up to plunk down hard-earned cash to buy gold. “The price was going to the moon.” Well, since 1980, when gold hit a high price of $850 an ounce, gold’s price drifted downward to a low of $250 in 1999. There never was a follow-up news story about those poor souls who lined up to buy gold in 1980.
At a recent price of $1,500 an ounce, gold has once again caught the attention of average Canadians. But the reality is that even at current prices, gold has not kept pace with a 3% inflation rate. At 3% inflation you must have 2.5 times your initial investment after 30 years just to maintain your purchasing power. Well, to keep pace with 3% inflation since 1980, gold would have to be worth $2,150 an ounce today. It isn’t there yet.
There will be those who argue that on a short-term basis, over the past eleven years or so, that gold has significantly outperformed the rate of inflation and provided a noteworthy return on investment. We don’t dispute this fact. If you had placed your money into gold investments eleven years ago, then you certainly have done well. All we are saying is that now may not be the most prudent time to be looking at gold as a good long-term investment.
Now let’s look at another investment, the S&P index. We choose this index as it is the most diversified index of actively managed businesses in the world. It has gone from approximately 125 in 1980 to approximately 1,350 today. This is many times the rate of inflation. On a short-term basis, over the past eleven years or so, this index has not provided any return at all and is being shunned by many investors.
So which do you feel is a good long-term investment right now? Gold, which has increased many times over the past ten years, or well managed businesses, many of which pay annual dividends but have provided little to no growth in value over the past ten years?
If you, like many, are considering plunking down your hard-earned cash to purchase gold, we ask that you remember these three words: “Don’t do it.” It may be detrimental to your long-term financial health.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.