DO YOU FEEL YOU NEED TO BUY GOLD?
Why Do People Care About Gold? For thousand of years, gold has been used as a means of exchange and a store of value. In 1933, the United States banned private ownership of gold, a prohibition that was not lifted until 1974. Since 1971, the United States has had a pure flat money system. Today, central banks around the world still hold 18% of all the gold ever mined, though no currency is tied to it.
Considering gold purely as an investment, comparable to other commodities on the market, what are its advantages and disadvantages?
Gold Prices since 2011. The price of gold peaked in 2011 at $1,813.50 an ounce, only to rapidly decline throughout 2013, and steadily decrease afterward. By the end of 2015, its price had fallen to $1060.00, a mere 58.4% of its previous value. If an investor bought gold in 2011, the five year effective rate of return would be -5.5% - a heavy loss. As a long-term investment these are far from encouraging numbers.
Buying and holding gold is typically a way of dealing with uncertainty. Gold is seen as a "safe," a store of value that can ride out inflation and easily be sold off. It is an easy defense against economic woes. But the economy has continued to recover since 2011, albeit more slowly than usual.
Gold has " bubbles" like any other commodity, with sharp and unexpected declines. The data for the last 35 years show that, even with its recent drops, the price of gold is up compared to pre-recession levels.
However, if we consider the last five years alone, gold has done rather poorly. Suppose an individual made a $100 per month contribution to an investment account from January 2014 to December 2015, for a cumulative total of $2400; losses would have been as follows.
1. A stock index fund would have lost a mere $15, for an annual rate of return of -0.61%.
2. Gold in the form of shares(exchange-traded funds) sold on the NYSE (GLD) would have lost $168, for an annual rate of return of -7.0%.
3. A gold mining fund (MIDSX) would have lost the most, $76, for a annual rate of return of -38.5%.
While clearly none of these investments have done well, gold did worse than the typical stock index fund, which essentially broke even.
Conclusion. This may very well be a "buy low" moment for gold, or gold may continue to follow the trends of the past 5 years. The moral of the story, though, is that gold should not be treated as investment that will always outperform other investments, as many people are inclined to assume.