A Discussion About Gold

This morning we had an interesting discussion about gold in the office.  Gold has been a hot topic for a few years now so this may be a bit after the fact, but good to discuss none the less.

It is often said that gold has intrinsic value versus our "paper" money (and things denominated it in like stocks).  It is somehow implied that these assets will lose their value, but since gold is a hard asset it will retain it's value.  But, what are you buying when you buy stocks?  Is it just a piece of paper, or an electronic entry in some corporate database?  Or is it something more?  We'd argue that it's much more.  When you buy stock you are buying equity, or ownership, in the companies that produce the goods and services that make the world economy run.  And as owners of that, part of the profits come back to us, the owners of those firms.  The value of stock investments are determined by the market's view of how valueable and or profitable it is to own a slice of the world's economic markets.  When the economic outlook is doom and gloom, stock values fall, and when the outlook brightens, markets tend to rise.  Over the course of human history, the long term direction has been up.

In contrast, what do you get when you buy gold.  Well, you get ownership of a physical commmodity, or input (like sand, steel, cotton, oil, or any other commodity).  [Gold is unique in that it has been used for many many years as a form of money, but sea shells have also served that purpose].  Gold does not make a profit, and it's physical uses are limited.  (True, there is demand for gold to produce things like electronics and jewelry obviously).  In the direst of circumstances you can't eat it, drink it, or burn it for heat.  That being said, gold is often sought after in turbulent economic times as it's viewed as a safe haven.  Gold certainly has had a run in the past few years, but as long term investors it's important to take the long view.  It is not uncommon for commodities to have wild fluctuations in price.  Does anyone remember oil prices in the late 2000s?

The link below is a good comparision between stocks, bonds, and gold.
http://www.investorsfriend.com/asset_performance.htm

There have certainly been stretches of time when gold outperformed, just like there have been periods when bonds have done better than stocks. But if you take the long view there is a compelling case for stocks.  The only other fault I have with this article is that their only comparision to gold for stocks is "large company stocks". This is a very narrow look at stocks.  A truly diversified stock portfolio would have returned much more, and held stocks in the US, abroad, and of all sizes.  A further thing to note is that as a commodity gold can be just as, if not more, volatile than stocks.  We were just checking yahoo finance today, and an investment in GLD is down about 8%  from it's high in 2011, while stock investments in many categories are up double digits.