Is gold or silver assets something you should invest in? Many people think so, though I’ve never been convinced. I’m not alone. Warren Buffet, one of the world’s foremost investors doesn’t think so either. Those who do – people like George Soros – don’t invest. They speculate.
Gold doesn’t do anything, and for me there lies the problem. We extract it from deep underground – refine it and turn it into ingots or coins. Then we put back underground and employ expensive security to keep it there. It’s not something you can store in your loft and hope a burglar won’t notice. You buy it, tuck it away, and hope someone will pay more for it in the future. Silver at least serves some purpose as it’s used in electronics and is probably more scarce than gold. That doesn’t make we want to go out and buy it though
Fear or greed drives the price of gold and silver – rather than a quantifiable measure such as how much income it will produce. By comparison, investments like property, shares and bonds generally provide income alongside an inherent capital value. Gold and silver simply sits there looking shiny.
What I look for in an investment is its utility value – how useful is it? Property generates rent. Companies give me a share in any profits through dividends. If I lend money to governments and companies they promise to pay me back, with interest. These things are measurable, providing a quantifiable reason to invest other than emotion.
This lack of income from gold and silver is a problem. I can look at the price of gold and silver, but over the long term I don’t see a convincing argument to invest. Especially when compared to shares in companies , as I’ll demonstrate below.
If we go back to 10th April 1962, which was when the Financial Times All Share Index (FTSE ALL-share) was launched. It had a starting value of 100 (which for argument’s sake we’ll equate to £100). It’s a diverse index, so I’m not stock-picking in order to skew the results. It represents approximately 98% of the market value of all UK shares on the Stock Exchange.
At the end of 2012 (almost 51 years later) our original £100 had risen to £3,093 – equivalent to an average annual return of 7.1% which is pretty good, but the index doesn’t include the dividends. Dividends add (on average) a further 4.3% making the annual return 11.4%.
So, at 11.4% per year, £100 turns £22,000 – that’s far more impressive.
Now, what would have happened if we invested our £100 into gold instead? For a start you would have needed to convert pounds into dollars, because gold is valued in dollars. The official exchange rate on the day the FTSE All-share launched would have given $281 for your £100.
The average price of gold in 1962 was $35.23 per ounce, so $281 would have bought almost 8 ounces of gold. By the end of December 2012 gold had risen to $1,657.50 per ounce. Eight ounces of gold would have been worth $13,260 – equivalent to nearly 8% per year. It’s good. Better even than the 7.1% rise in the FTSE All-share index. But that’s it; there are no dividends to consider.
Actually there is something else to consider because you’ll want to convert your $13,260 back into pounds. At prevailing exchange rate in December 2012 you would have got back £8,202.
£8,202 from a £100 investment is an even better return, equivalent to approximately 9.1% per year. But what this tells us is that part of the return to investors hasn’t actually come from gold, but from the difference in exchange rates between the UK and the US.
So, £22,000 or c£8,202 – it’s a big difference? Oh, and the spread of risk across all the different industries represented on the Stock Exchange. With gold or silver you’re putting all your eggs in the same basket. But the real kicker is the income, the capital value of the FTSE All-share almost kept pace with gold – but gold doesn’t pay dividends, it just sits there looking shiny.
Remember, investing isn’t gambling. It’s getting the reward you deserve for the risk you are prepared to take over the longer term. The stock markets will crash at some point, it nearly always does and usually rebounds very quickly. Risk and return are inseparable; there is no such thing as risk free investments. Investing is also not about market timing or stock selection, none of that will make any difference.
Acknowledgements. Dennis Hall @YellowtailFP
