Should you invest in gold?
Investopoly
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Investopoly
Should you invest in gold?
Dec 07, 2022 Episode 238
Stuart Wemyss

I was interested to watch this YouTube video produced by ETF manager, BetaShares which compared the differing views of Warren Buffett and billionaire fund manager, Ray Dalio. 

Both men have been some of the most successful investors over the past 50+ years, yet they have opposing views regarding investing in gold, which I find very interesting. 

How well has gold done? 

As depicted in the chart below, the (USD) gold price has appreciated by 7.66% p.a. since 1970. However, between 1980 and mid-2002, the price of gold fell by an average of 4% p.a. Between mid-2002 and mid-2011, the price of gold appreciated at an extraordinary rate of over 20% p.a. Since then, gold is relatively unchanged i.e., its currently trading at 2011 levels, so there’s been no (nominal) growth over the past 11 years. 

Whilst the very long-term returns (i.e., 5 decades) are quite healthy, it’s clear that gold can experience (10 to 20 year) cycles where it can deliver poor returns. 

The upshot is that if you are going to invest in gold, you better get your timing right (buy after a long period of poor returns e.g., 2002) and/or be prepared to hold it for a very, very long time.  

Why do people invest in gold?

Firstly, gold is seen as a defensive investment. That is, when investors become concerned about the future returns that growth assets (shares and property) might offer, they seek safer investments, one of which is gold. It is seen as a way of preserving wealth because gold is a scarce metal and as such, is expected to retain its value (as demand always exceeds tight/finite supply). 

Secondly, gold can be seen as a better storage of value than currency, as the value of a country’s currency can be volatile. There are many factors that can affect the value of a country’s currency including interest rates, economic stability, inflation rate, current account balance, monetary policy such as quantitative easing and so forth. 

Why aren’t I attracted to investing in gold? 

Firstly, gold doesn’t produce any income, unlike other defensive assets such as bonds. Therefore, to generate an investment return, the value of gold must continue to rise over time. However, there have be

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