Gold News

Does Gold Investing Pay?

Gold Investing yields no income. But does it make life cheaper in future...?
 

WHAT'S THE POINT of investing?

Plenty of people below 50 today – and a good many older – might well wonder, says Adrian Ash at BullionVault.

Two stock market crashes, two recessions and a global house-price slump make the last decade a worse advert for investing than One Direction are for clean-living youth. Yes, silver and Gold Investing stand out in contrast, but they don't actually yield any interest. Nor do cash, bonds, Treasuries or stocks anymore.

But while the point of investing might be hard to see today, its purpose is plain:

"Investing [is] the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future."

So says Warren Buffett, grand old sage of stock-market investing, defending his methods (and attacking Gold Investing despite its 10-year outperformance of everything else but silver) in his recent letter to shareholders. Put another way, investing aims to make life cheaper in future, in terms of what you've already amassed today.

Put in $10 and get $20 back – with inflation failing to eat all your gains – and you're ahead. Like Buffett says, it's real purchasing power that matters. So here's what US citizens have been up against over the last 55 years.

In the raw, this chart says you now need $2.30 to enjoy the quantity of goods and services you got for 25¢ back in 1957.

Few people keep their spending cash under the mattress, however, and time was banks paid interest. So here's how holding cash in the bank has performed as a way of beating the cost of living. The chart also shows how Gold Investing compared, too.

As you can see, putting cash in the bank has helped defeat inflation over the long term, even after you've paid tax on the income. But it hasn't stopped the cost of living from rising in between, and it hasn't worked anywhere near as well as Gold Investing instead – again, with tax deducted from the nominal gains, just as Warren Buffett reminds us (and applied at the current 28% rate across time to keep things simple).

Of course, the official Consumer Price Index is subject to doubt. The methodology has mutated so much, it's hardly the same index today as it was in the late '90s, let alone six decades ago. So here's how the same two investments – cash on deposit and gold, both after tax – have helped cut the cost of commodities, as measured by the CRB Continuous Commodity Index.

Yes, the CCI index has also been subject to change, but the raw inputs remain the most heavily used natural resources (crude oil, copper, wheat etc) and the computational changes are tiny next to the mutation of the official Consumer Price Index.

As you can see, Gold Investing has indeed paid off over the long run. It's also beaten cash-in-the-bank, too. But not always. Gold has lost purchasing power – the purpose of investing, remember – when cash has gained it. Gold has become more valuable in terms of "stuff" when cash has lost value.

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Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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