Investing in Gold vs. Investing in Stocks: Which one you choose?
You might read stories about the prices of gold continues to climbs up while stocks plunge. Does this imply that gold is a better investment than stocks?Lets examine with data. Below is the price of gold over a period of 5 years:
And these are the 20 year trend:
Source: Historical gold prices
Now lets examine the trend of S&P 500 (overall representative of stocks performance for the top 500 companies). Below is the trend of stocks over the period of 5 years:
And this is the 20 year chart:
Observation:
1.) Its not safe to assume that Gold will never fall below its current price. It is because the price of Gold once go down in the year 1998 to 2000. This means Gold like all investments carries some risk when the price falls.
2.) Both Gold and S&P 500 generally have increased value after 20 years. Although Gold values increases too rapidly and less affected by volatility.
3.) S&P 500 is much more predictable and natural because it experiences both low and high index prices.
Analysis:
Gold is a natural resource. Currently the demand for gold are the following:
a.) Manufacturing- they are used as excellent electrical conductors. They are very popular in the semiconductor industry.
b.) Jewellery – rings, pendants, etc.
c.) Currency – gold bullions.
The good thing is that those 3 demands will further increase as the population of Earth will further increase. Its because the higher the population, the higher will be the demand and sales of semiconductor products. There are only very few substitute of gold as excellent conductor. People will never stop wearing jewelries as well as government will never replace gold in their storage. The end result is a never ending increase of Gold price. It may fall a little but the price will continue to increase. Gold cannot be created artificially. Another demand of gold is a safe investment. A lot of investors today buys a lot of gold in exchange of cash, thus driving the price of gold further up. The following are the disadvantages of investing in Gold:
a.) Once you buy Gold, it does not pay interest unlike in stocks and bonds where you could be receiving a monthly or annual returns.
b.) Its susceptible to a very sharp dive (because massive amounts of gold are held by government and other parties, if they decide to release these amount of gold to the market it will drive the market down) thus if you convert ALL of your monetary asset to gold, your asset should also fall very sharply.
c.) Its hard to liquidate, you cannot easily purchase things in gold except in massive recession where money is of no value any more.
The following are the disadvantages of owning a stock:
a.) Its very risky indeed. The probability of having a stock price going down over long term is very high compared to gold. As discussed previously there are lot of uses and demands of gold compared to any stock on this planet.
b.) Like gold, over performing stocks can experience sudden dive and if you do not apply sound money management, then your entire financial asset will be affected.
c.) Its difficult to pick-up stocks compared to just buying natural gold. For example, its relatively easier to buy a 24 carat gold in certified jewellery stores compared to selecting the right and perfect stocks.
Recommendations: The best solution is diversification. You put some of your eggs in stocks and some in gold. This will ensure the best result. About the percentage, I would definitely put higher percent of my asset in a relatively inflation safe investment such as gold.
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