All That Glitters

Way back in 1993 I purchased 3 gold coins. I had a cash windfall and decided that was a good investment. I paid $350 each for the 1 ounce coins.

Today the price of gold is $4228/ounce, so you might think it was a fantastic investment. Since the IRR function in Excel tells me I averaged 8.1% per year, it seems that I did very well. Sure beats CD rates for the last decade or two.

But suppose instead I had put the $350 into an S and P 500 index fund and reinvested all the dividends. That same $350 would have grown to $9,600. Gold had an internal rate of return of 8.1% over those 32 years, while the S and P did 10.9%. That 2.8% difference produces a return over twice as large for the stocks. Einstein called compound interest ‘the 8th wonder of the world’, and this is an example.

If you select different starting years you can get different results, but for most periods of 10 years or more the returns are similar. Stocks beat gold, and by a significant amount.

Gold is pretty, and the coins feel solid in your hand. Paper money goes down in value every year, with long run inflation in the 3% area, unless Covid spending spikes up the money supply and PQ=MV takes effect. So given the choice between greenbacks and gold coins over a decade, I’ll take the metal.

But that isn’t the choice. I’m glad my brief flirtation with bullion was limited to those three pieces of lucre.

Gold prices have doubled over the last 2 years. That has got some people excited and lots of promoters taking to talk radio and cable tv networks to hype gold investing and earn high fees and commissions. Costco made headlines when they offered 1 ounce coins to their members, and they sold out quickly. As the price went up and made the coins more expensive, they sold out even quicker.

Rising prices that increase demand for something don’t really make sense, except for the rare ‘inferior goods’ or even rarer ‘Giffen’ goods (I don’t want anyone to think I slept through microeconomics). I never thought of gold as a Giffen good, but maybe it can be if FOMO is strong enough. Dutch tulips anyone?