12/23/2015

IsGoldaGoodInvestment?

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Is gold a good
investment?

Make Rs 1 crore by
investing only Rs

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Is Gold a Good Investment?

The Motley Fool
John Maxfield
7 hours ago

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As a general rule, gold is not a good investment.

It doesn't earn income. And because it doesn't earn
income, it doesn't benefit from the law of
compounding returns what Albert Einstein once
called the "eighth wonder of the world."
The magic of compounding returns

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Returns that compound are an investor's biggest ally.

They transform ordinary gains into spectacular ones.

Let's assume, for instance, that Jack spends $100 to

buy one share of Rob Harrison, a fictional company that earns and distributes $10 per share
a year selling banana smoothies.
If Jack uses the $10 annual dividend to buy accessories for his 1994 Ford Explorer as
opposed to reinvesting the money and allowing it to compound he'll earn $300 over 30
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IsGoldaGoodInvestment?

years.
That equates to a 300% return.
This isn't horrible, but it pales in comparison to the 1,654% return earned by Jack's brother,
Henry, who reinvests the annual dividends into additional shares of Rob Harrison,

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Chart by author.
By harnessing past earnings to generate future earnings, Henry has engaged the power of
compounding, which increases the size of his return each year.
After three decades, Henry will own 17.5 shares that generate $175 in annual dividends. By
contrast, his brother, Jack, will still own only one share earning the same $10 a year.
The problem with gold, in turn, is that it doesn't allow investors to benefit from this magic.
As a nonproductive asset one that doesn't produce income even a prudent and patient
investor like Henry can't use it to tap into the law of compounding returns.
SEE SLIDESHOW: 25 Amazing Facts About Gold

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IsGoldaGoodInvestment?

1/25 SLIDES Bloomberg

1. The world's largest known gold nugget was found near Moliagul in Central Victoria, Australia in 1869 weighing 2316 troy
ounces. It was called the 'Welcome Stranger.'
Source: World Gold Council

The siren song of gold

To be fair, there are times when gold outperforms incomegenerating assets such as stocks
and bonds.
In the late 1970s, rapid inflation increased the demand for gold, which is believed to be an
effective store of value. This fueled a rise in gold prices from $400 an ounce in 1976 up to
$1,500 an ounce four years later.
The same thing happened during the financial crisis of 200809, during which investors fled
stocks in favor of gold and other, presumably safer types of investments. The added
demand caused the price of gold to increase from less than $400 an ounce in 2000 to more
than $1,600 an ounce 10 years later.

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IsGoldaGoodInvestment?

Provided by Fool G

Data source: Federal Reserve Bank of St. Louis. Chart by author.

But the problem in both of these cases is that the price of gold soon dropped as quickly as
it had formerly climbed.
It was less than $600 an ounce by 1985. And since peaking in 2011, gold has lost more than
a third of its value.
To benefit from these fluctuations, then, an investor would have to time the market
something we know to be dangerous, if not impossible, for the average investor to do
successfully.

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