Have you ever seen these TV commercials:
“Governments are trillions of dollars in debt and are printing paper money at record pace. So, don’t invest your retirement in paper money. Transfer your IRA to a Gold IRA at XYZ Capital. Call now for your free IRA transfer kit.”
I have to cringe every time I see or hear that. What deceptive marketing! Our financial assets (equity ETFs and Mutual Funds mostly) are not invested in paper money, they are merely denominated in paper money. In fact, if people are so troubled by measuring their equity portfolio in USD paper money, they are free to measure it any way they want: ounces of gold, metric tons of copper, bushels of wheat, gummy bears, the choices are endless. And by the way, don’t forget that gold is denominated in paper money USD as well!
Corporations are not just a pile of paper money (though they may keep some cash on the balance sheet). Instead, they own land, structures, equipment, intellectual property, etc. and all these non-paper assets generate a steady flow of income, called corporate profits and worth trillions of dollars every year. They are paid out as dividends and/or reinvested in productive assets again. Gold is just sitting there. It doesn’t produce income, it doesn’t pay dividends and gold molecules don’t reproduce last time I checked. Hence, the Warren Buffett quote:
“Gold gets dug out of the ground […]. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Example: $1.00 invested in 1871 (not a typo, 145 years ago), should be worth this much today (in inflation adjusted dollars) if invested in…
- Paper money under your mattress: $0.05. Yup, inflation ate 95% of your paper money!
- Silver: $0.59. Not a typo, silver appreciated by less than the CPI index
- Gold: $3.06. Gold grew by less than 1% p.a. over inflation for a measly 206% compounded real return over 145 years.
- S&P500: about $11,000 with dividends reinvested. And, yes, that’s inflation-adjusted. In nominal dollars that would have been around $200,000!
So, gold and silver handily beat the paper money under the mattress (a very, very low bar, indeed) but equities left everything else in the dust thanks to generating actual income. Equities are a far superior long-term investment. These deceptive TV commercials prey on the fears of uneducated people and the fact that we keep seeing these commercials means that there must be a steady flow of victims for this nonsense.
But for the record, before we get hate mail from the gold-bugs, let’s state this:
- Gold and silver coins are pretty to look at and have potentially great sentimental value and historical relevance. Check out the coin collector blog of J Money (the guy behind Budgets are Sexy and Rockstar Finance). If collecting coins is your hobby great for you. But don’t call it an investment and don’t waste the limited space in your IRA on gold coins.
- Since we are responsible and frugal with our money, we are the first to admit that we are troubled by too much government spending and debt. We absolutely agree that the government should be more careful with
itsour money. In fact, if a presidential candidate could commit to making Mr. Money Mustache the Treasury Secretary (or some other role to cut wasteful spending), he or she would have our vote. But too much government debt is no reason to sell stocks and invest in gold coins. - Nominal bonds and money market accounts are paper money with pretty measly interest rates right now, so we share the concern about those forms of paper money. Hence, we are not very optimistic on bonds and like to keep the share of money market, cash holdings and emergency funds to an absolute minimum and rather invest in productive assets, such as equities.