The results of the 22nd Winter Olympiad are in with the home team Russia winning the most medals at 33 with 13 of them being gold in color. (The United States came in second with 28 total and nine gold.)
In 1896, at the first modern Olympic Games, winners did not receive gold medals, just silver medals and olive branches and diplomas, according to Olympic.org. It wasn’t until St. Louis in 1904 that athletes received solid-gold, silver and bronze medals, but solid-gold medals were not produced after the 1912 games.
Of course, the value of an Olympic gold medal is far greater than its intrinsic value, even if it were solid 14-carat gold. In the same way, purchasing pure gold coins faces the same poor comparison when matched against the value of owning a globally diversified portfolio. Let’s explain.
If faced with this choice, which would you prefer?
To own all of the extracted gold on the planet,
or stock of equal value in the world’s single largest company?
According to an estimate cited in a March 2013 BBC News Magazine article, the total amount of gold in the world is 171,300 tons. That dollar value based on a price per ounce of $1,350 would be about $7.4 trillion. A tempting choice.
However, with that huge amount of money, you could buy SIXTEEN Apples. Apple, Inc. is currently the most valuable company on Earth. The question begged is simply this: Which of these two investment options will provide the most growth and income (aka “total return”) over the rest of your lifetime?
Of course, prudent investors should not put all of their money in one basket — even if that basket is full of Apples. (Obviously, you would have to buy more than just Apple stock with $7.4 trillion, but we’ll keep it simple for illustration purposes.)
When put like this, the answer is obvious. Gold just is. What, pray tell, does it do? A gold coin looks nice and has claims to “security” in so-called bad economic environments, but what does it produce that leads to greater prosperity? How can it be profitable when it doesn’t create a profit?
The price of gold can change dramatically in both directions as one can see on charts of almost any time period. Investors turning to gold to protect them from inflation may be disappointed, as gold can go through long stretches where it does not keep up with inflation. For example, from 1981 to 2000, gold had a real return of –4.8 percent.
Stocks, on the other hand, represent companies that have the potential for a variety of outcomes. Some of the stocks in a diversified portfolio will be the next Apple, while some will be the next Enron. It is this range of outcomes that makes investing in stocks risky. However, one of the key principles of finance is that risk and expected return are related. If you are willing to take the risk of investing in stocks, you are rewarded with higher expected returns.
Could there be a place for a basket of commodities, including precious metals, in a properly diversified portfolio? The short answer is yes. The more nuanced answer to this question is important, and space eludes us to have the discussion here. But the main consideration is that just as an Olympic gold medal is worth only a fraction of the priceless achievement it represents, even real gold’s non-producing value pales in comparison to the expected return of owning stock of companies around the world.
To coin a phrase, investors seeking growth in their portfolio are better served “going for the gold medal” with stocks in their portfolio than meddling with gold coins.
The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2014, The BAM ALLIANCE