I recently posted an article busting the myth that the stock market increase 12% per year. In fact, its return is between 1% to 2% per year when adjusted for inflation. I also showed evidence that the median home prices are fairly constant over time when adjusted for inflation. So, what about gold as an investment?
Gold is a horrible investment. The reason why is that the price is correlated with the value of the dollar. If the federal reserve pumps more money into the economy, the value of the dollar decreases, and the price of gold goes up. The reverse also holds true. Gold has retained the same purchasing power over time due to inflation.
Under the rule of the Roman Empire at the time of Christ (1st Century AD), one ounce of gold would have purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today two millennia later in the west, one ounce of gold will still buy a man a suit, a leather belt, and a pair of shoes. Nothing has changed.
Over the past 30 years, gold has a nominal return of 4.44% per year, which is only 0.43% per year when adjusted for inflation. It might have increased a little, but the inflation adjusted stock market is three times the inflation adjusted increase in the price of gold.
There has been hype about the increasing gold prices, and that they will increase even more. You probably heard the ads on the radio for you to buy gold coins or gold stocks. Did you ever think that those radio, television, and mailers cost a lot of advertising money? And to pay for those massive advertising expenses, the gold dealers must be making lots of money off of the gold they are selling (it’s called spread). They sell at a rate higher than the bullion gold price and they buy at a rate lower than that price. The consumer gets to pay for the commission to the gold dealer, which is typically a 20% to 30% spread. So, even if we do not take inflation into consideration, you still have to hold on the the gold for several years just to break even.
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