Gold. Arguably one of the most controversial investments out there. The phrase “you should buy gold” definitely gives off some apocalypse-preparation vibes.
It seems odd that some shiny yellow metal could work up such strong emotions in investors but I think the chart of its price over time can help make sense of some of those feelings:
Imagine being an investor at the start of the 1980s. Someone told you to buy gold and you did. Always a believer who doesn’t want to quit, you hold on to your gold for thirty long years. Because, that’s basically how long it took to do anything productive price-wise.
If you think about gold versus stocks from 1980 to 2010, there is really no comparison. Even with the tech bubble and financial crisis, getting into the stock market in 1980 was like hitting the jackpot. And not a jackpot of do-nothing gold but like a jackpot of real return. For anyone who had gold instead of stocks during that time, I can definitely imagine some serious regret.
For reasons like this (and many others), people can get really territorial about their investments and are sometimes all in or all out on certain asset classes. One does not have to only hate or only love gold, choosing one side or the other. It turns out, you can invest in more than one thing at a time! I’m not here to say buy gold. I’m just saying, give gold a chance!
Gold is important because it is a unique asset class. And, it’s important to understand as many different asset classes as possible because non-correlated assets offer diversification benefits (e.g. look at how gold rose during the financial crisis due to its perception as a safe-haven asset). We can’t capture those diversification benefits if we don't give other assets a chance.
So, hopefully with a little more knowledge about the history of gold we can better understand it. Because of it’s unique properties, gold can actually be useful for a portfolio of investments despite having less return over the long run compared to stocks. The simple answer for why is diversification and I’ll be sure to cover the underlying mechanics in more detailed posts down the road.