Fool's gold

Gold prices recently hit a record-high spot price of $2,500 per troy ounce. That means a standard gold bar weighing 400 ounces is now worth, wait for it... about a million dollars!

This fun fact, combined with a 20% jump in price this year, has the gold bugs buzzing. Long scorned by conventional investors and their “paper profits,” gold enthusiasts are finally feeling some redemption. They own what they consider to be a long-term store of value and a dependable hedge against inflation.

But do they?

I’m fond of telling the story about my mother buying me a gold class ring to celebrate my graduation from college in 1980, right around the time the price of gold was peaking at $800 an ounce. I cherish that ring today, not so much for the academic achievement it symbolizes as for the memory of the woman who bought it for me when we both knew she couldn’t afford it.

I certainly believe my education was a good investment. But the class ring? Not so much.

Over the ensuing four and a half decades, the price of an ounce of gold has more than tripled from $800 to $2,500. But over that same span of time, the cost-of-living in the United States has roughly quadrupled. Had it simply kept pace with inflation since 1980, gold would be selling at around $3,500 an ounce today. So much for its reputation as a natural-born inflation killer.

In the time it took for gold to go from $800 to $2,500 an ounce, a hypothetical $800 investment in the S&P 500 would have grown to nearly $40,000. And that doesn’t count the dividends you would have received along the way, which are up more than 12-fold since 1980.

Gold doesn’t pay dividends or interest, and I’m not sure you can use it to buy groceries these days. Gold pretty much just sits there doing nothing. But not just anywhere – you don’t just leave a shiny million-dollar gold bar weighing more than 27 pounds lying around the house unattended. So not only does gold not do anything productive while you own it, you actually have to pay someone else to keep it safe.

These arguments fall on deaf ears, however, when it comes to late-night-cable-TV fear mongers warning us that unless the next presidential election goes the right way, worldwide economic collapse is sure to follow. And when that happens, stocks and paper money will be worthless, food will be scarce, and desperate neighbors will be at your door with torches and pitchforks. (At which point you have to wonder what your starving neighbors would do with a bar of gold.)

In the meantime, those of us still operating under the assumption that the end of the world is not near will not have to look very far for the best inflation hedge that history can offer. It’s owning shares of the world’s most successful businesses, who have collectively found ways to innovate around and through every crisis thrown in their paths. Companies whose dividends have risen like an escalator even as their share prices sometimes behave more like roller-coasters.

Stocks are for optimists, people who believe the world has gotten better over time and will continue doing so. Gold is for pessimists, people looking for an investment to protect them from their deepest financial fears. But if history has taught us anything, it’s that fear is a mediocre investment strategy at best.

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