Let’s talk about gold…
One ounce now goes for approximately $3,300 as I write. At those levels, the commodity is at nominal and inflation-adjusted highs. It’s also up about 35% over the past year, outpacing the S&P 500 at about 18.6%.
That sort of moves tends to get investors’ attention. And it’s probably led a few subscribers to wonder if they should buy some (or buy more).
It’s your money. So, you absolutely can. But you probably won’t find the metal recommended here at Wide Moat Research.
Today, I’ll tell you why…
It all comes down to what gold is… and what it isn’t.
What Gold Is
Gold can be a store of value.
In 1980, the median American home cost approximately $64,600, according to the U.S. Department of Housing and Urban Development. That same year, gold fetched approximately $612 per ounce. In other words, it would have cost you roughly 105 ounces of gold to buy the average American home.
Today, Zillow – which has plenty of data on the topic – tells us the average American home costs $368,581. Gold now trades in the neighborhood of $3,300. So, the average home now costs 111 ounces of gold.
That relationship is not perfect, of course. Have a look at a historical chart of gold, and you’ll see that 1980 was a peak. The commodity would decline by about 50% over the next two decades, even as housing prices rose.
So, gold is not always a great store of value. But with time and patience, it can be one.
Gold is also a trade.
The numbers are what they are. If – over the past 12 months – you owned nothing but gold, you would have outperformed the S&P 500, the Nasdaq, and the Dow Jones. There can be months, even years, when gold will outperform the major averages. But, as I’ll show you in a minute, it never does over the very long term.
Gold can also be a macro-economic indicator.
My colleague Stephen Hester touched upon this last week. Gold is one of the assets investors flock to – rightly or wrongly – in times of macro uncertainty. It can “signal” big changes coming in the macroeconomic environment. So, it’s useful in that regard.
Gold can also be a collector’s item.
There are entire communities of numismatic coin collectors. They obsess over finding rare, vintage gold and silver coins to add to their collection. No shame in that. As I shared in a past issue, there’s nothing wrong with being a collector. So, more power to them.
That, in my view, is what gold is. And if you like those things, go right ahead and buy some gold.
But before you purchase a single ounce, you should probably know this…
What Gold Is Not
Gold is not an investment.
To some, that opinion is controversial, but the long-term data supports our stance.
An ounce of gold was worth $20.67 in 1925. Today, it’s worth roughly $3,400. That might seem like a great return, but it’s not. It represents a compound annual growth rate (“CAGR”) of roughly 5.2% over the 100-year time span… or a low-single-digit return when accounting for inflation over that same period.
Stocks, on the other hand, have done much better.
Assuming dividends were reinvested (which is something that we’re a big proponent of here at Wide Moat Research), the U.S. stock market has compounded at a roughly 10.5% annual rate throughout the last century.
Adjusted for inflation, we’re talking about a roughly 7% CAGR… which is more than twice as high as the returns “produced” by gold.
I put “produced” in quotes because gold doesn’t actually produce anything. It builds no products. It serves no customers. It compounds no cash flow. And it certainly doesn’t pay a dividend.
And that’s exactly why it underperforms stocks.
Warren Buffett has touched on this many times over the years.
During a 1998 speech at Harvard University, Buffett said:
Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
In a 2009 interview with CNBC, Buffett said:
I have no views as to where [gold] will be [in the next five years], but the one thing I can tell you is it won’t do anything between now and then except look at you.
Lastly, in his 2011 annual Berkshire Hathaway letter to shareholders, Buffett wrote:
Gold… has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
All of these comments boil down to one thing… gold doesn’t compound.
In fact, it doesn’t do anything, really.
It’s not a productive asset. And it’s not, in my humble opinion, an investment. Or, at the very least, it’s a terrible investment over the long term.
It’s simply a shiny piece of metal with interesting physical properties that human beings have been enamored with throughout history.
Gold can be a store of value.
But at Wide Moat Research, we’re not interested in retaining value. We want to help subscribers grow it far faster than the rate of inflation.
Gold can be a trade.
But we’re not interested in recommending you speculate on the herd’s emotions with your hard-earned capital.
If you want to collect coins, collect them. If you want to use gold as a macro-economic indicator, by all means.
But for your investment portfolio, you should probably stick with what works: Buy shares of companies that are consistently compounding their bottom lines and generously returning those profits to shareholders.
Don’t play the Greater Fool Theory with shiny chunks of metal. Take advantage of the powerful nature of compound interest.
That is why I seriously doubt you’ll ever see us formally recommend gold. There are just better options. Our goal is always to help investors sleep well at night. Growth, from fundamentals and dividends, is how we achieve that. And at the end of the day, gold doesn’t offer either. This is why it is not an investment, sorry to say.
Regards,
Nick Ward
Analyst, Wide Moat Research
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