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Does it Make Sense to Invest in Gold?

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A Brief History of Gold

Of all the precious metals, this one is the most popular. And it has been for ages. Gold’s history began in 3000 B.C. when the ancient Egyptians started producing jewellery. The Egyptians also produced gold maps – some of which survive to this day. These maps described where to find mines and various deposits around the Egyptian kingdom.

They also produced the first known currency exchange ratio which mandated the correct ratio of gold to silver: one piece of gold is equal to two and a half parts of silver.

Much later, in 560 B.C., people started using gold as a currency. It was a standardized and easily transferable form of money that would simplify trade.

The United Kingdom and the United States

Great Britain developed its own metals-based currency in 1066. The British pound (symbolizing a pound of sterling silver), shillings and pence were all based on the amount of gold (or silver) that it represented.

The world’s first hallmarking system, scrutinising and guaranteeing the quality of precious metal, is established at Goldsmith’s Hall in London. That was around 1300.

The U.S. government also developed its own system by establishing a bimetallic standard in 1792. One U.S. dollar was the equivalent of 24.75 grains of gold. Therefore the coins that were used as money represented the gold that was effectively deposited at the bank.

The United States and Gold

It was in the 20th century that all started to change in the currency and gold world. In 1913, the Federal Reserve was created and started issuing promissory notes (early version of paper money). Furthermore, it could be redeemed in gold on demand.

The Gold Reserve Act of 1934 made the trade and possession of gold a criminal offence for the citizens of the United States. Only the U.S. Treasury could own gold. It was not until 1975 that Americans could again trade or own gold.

In 1944, after decades of war and conflict, world leaders came together under the Bretton Woods Agreements. This system created a gold exchange standard where the price of gold was fixed to the U.S. dollar ($35 per ounce).

The final step in substituting gold for paper money was made in 1971. In the early 1970s, another war – the Vietnam War – caused the gold exchange standard to collapse. America’s budget was in ruin. Therefore the U.S. abandoned the gold standard. In essence, the money ceased to be backed directly by gold.

So Why Invest or Hold Gold Now?

So let’s see how gold is performing as an asset.

First I will consider investing indirectly in Gold, through an ETF:  SPDR Gold Shares (GLD). Then I’ll compare it with stocks: SPDR S&P 500 Index (SPY).

Now I’ll insert in a table returns and volatility considering different periods of time.

How do you think GLD performed?

Find out here:

Should Anyone Invest in Gold?

How has GLD Performed

Immediately one can draw some conclusions, such as:

  • GLD has been a recent poor performer. In the last 3 years and investor would have a return of 6.6%. That’s 2.2% per year. Far less than stocks. And with similar volatility. And the more recent is the period of analysis, the poorer are the results.
  • 10 years and not a lot of results to show. 10 years is a lot of time. If one has invested in GLD, the return is 3.8%. Barely keeps up with the inflation. Again, with similar volatility when compared with stocks.
  • If you count with a full bear market, things change. The results from 2004 are really different from the short and medium past results. If you consider the full bear market of 2007-2009, you would have a total return of 171.2%. So if you divide 171.2% with 13.5 (roughly the number of years since 11-2004), you’ll get a past return per year of around 12.7%. With the same volatility of stocks. Therefore still inferior to the return of the SPY, but with a much better image than the recent past.

How is this Possible?

Simple answer: When the bear market hit stocks in full force (2008), investors fled to other assets, such as…you guess it: Gold. Will it happen again? No one knows. Should you do it? Don’t know, nothing on this blog and post if financial advice. The only purpose of this post is discussion and information.

The US bear market of 2007–2009 was a 17-month bear market that lasted from October 9th, 2007 to March 9th, 2009, during the financial crisis. The S&P 500 lost approximately 50% of its value, but the duration of this bear market was just below average due to extraordinary interventions by governments and central banks to prop up the stock market.

Gold vs SP500 Bear Market 2008 #investing

During this period, GLD had a positive return of 23.9%.

Will it shine again in future bear markets?

Will you invest in it?

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Should Anyone Invest in Gold? #Investing

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About GTRetire

GTRetire is the founder of GrowtoRetire, a blog about financial independence and early retirement. Click here to learn more about starting a blog! Also, this post may contain affiliate links, please read the disclaimer for more info.

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