“I’m worried about the markets. To reduce the risk in my portfolio, should I be invested in gold?” As financial advisors, this is a common question we are asked about our investment strategy. People like the idea of investing in gold because it’s something that they know and understand. Gold is something you can feel, touch, and hold as opposed to owning company stocks which can seem complicated and intangible.
Over time gold historically has increased in value along with cotton, shoes, bacon, movie tickets, medicine and the like. In general, most everything increases in value over time due to inflation and gold is no exception.
The value of gold is also highly dependent on supply and demand. While over time the price tends to rise with inflation, in the short-term, it’s susceptible to the daily swings of what someone else is willing to pay for it.
Stocks increase in value over time because companies grow. They create new and more productive products year after year. Technology allows people to become more efficient and allows us to produce more goods, at lower prices. Throughout history, from the oxen to the tractor, the typewriter to the computer, we create things that make our lives better.
When you invest in the stock market you’re not investing in letters on a computer screen. You’re buying pieces of real companies, with real people, that produce real products and services. The stock market grows over time because when companies have profits they either invest it in the company to grow or pay it out to their shareholders in the form of a dividend.
Gold doesn’t think. It doesn’t breathe. It will never come up with the next big business idea. It doesn’t pay dividends. It just sits there and looks shiny. It’s also highly susceptible to supply and demand. Long term investors are better off avoiding gold as part of their investment strategy and instead favoring investments in productive assets like company stocks.