While all eyes are on the stock market’s inexplicable rise during a severe economic recession, another investment option has provided a very entertaining ride. The price of gold broke its all-time record value, rising almost 30% in value this year while breaching the $2,000-an-ounce barrier. Then, abruptly and unexpectedly, gold suffered the biggest daily decline in more than seven years.
What’s going on? Gold has long been considered, by some investors, to be a hedge against uncertainty—a store of value when other assets are subject to downward pressures, and as a last resort if there is a total societal collapse and fiat currencies like the dollar lose value or become worthless. The less you trust the stability of the economic system, the more of a lure there is to invest more of your money in something tangible with a gleaming luster. You can simply put your net worth in a very strongly reinforced pocket and rule the apocalypse—although, of course, almost all investors simply buy gold through funds or ETFs, which would theoretically collapse in that same disastrous scenario.
More commonly, gold is expected to rise if we experience high inflation, or in periods when the U.S. dollar is losing value, or when the government is running high federal deficits (and thereby cheapening the value of the dollar), or when the global economy is ravaged by something like the coronavirus. Gold is subject to market whims; its price fell 45% in the benign economic climate between 2011 and 2015. And market strategists point out that gold has actually been a lousy inflation hedge. In January of 1980, the precious metal closed at a then-record $850 an ounce. In today’s dollars, that would represent about $2,800 an ounce—well above today’s sub-$2,000 price—which means, of course, that after-inflation people who invested in the last high lost their shirts.
That same $850, in January 1980, would have been enough to purchase seven shares of an S&P 500 index fund. Today, those seven shares would be worth more than $22,000.
These statistics show why we prefer to invest in shares of companies through index funds as opposed to investing in precious metals. As history has shown, this strategy pays off in the long-run.
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