Why is Gold such a terrible investment?

There’s an amusing bit of entertainment set up on a distant planet, where aliens observe human investing behaviour in a virtual context.

They have a circular racetrack set up where two vehicles race each other around. One of those vehicles has a “G” on the top—symbolizing “Gold”. And the other vehicle has a “B” on it, signifying “Business”. These aliens have had this game going nonstop now for more than 200 years. And so far, the “Business” vehicle has completed more than 9 million laps during that time. The “Gold” vehicle has completed fewer than 70 laps during the same 200 years.

The race itself doesn’t excite the aliens—because you have a “car” that has done 9 million laps and a car that has done fewer than 70. But what they love, is when the “B” car stops for fuel, new tires, changes drivers, or needs a few repairs. That’s when things get exciting.

The “G” car actually “passes” the stalled “B” car during these times. OK—we know that the “B” car is still millions of laps ahead, so that in itself isn’t what excites the aliens. What excites them is watching what humans do next: many of them start betting on the “G” car.

And that’s when loads of aliens come to the alien racetrack. They laugh and laugh and laugh.

You see, the aliens have a massive scoreboard with a wireless connection to Earth. They can read our newspaper headlines. And they can see the numbers of people investing their newfound hopes on the “G” car. And the aliens start charging money for people to watch this taking place at the racetrack—where they watch the folly of humans.

Aliens live a lot longer than people, and they think we’re hilarious. They saw the “B” car roar ahead at the start of this race, 200 years ago. But then the “G” car passed the “B” car in the 1860s. Sure, the “G” car really was thousands of laps behind, but when it passed the “B” car on the track—while the “B” car refuelled– the humans really though the “G” car was taking the lead as it completed one or two laps, while the “B” car stayed still.

 The humans completely forgot that the B car was thousands of laps ahead of the G car. Some of them just saw the G car moving past the stalled B car, and never presumed that the B car had already completed thousands of laps, while the G car crawled to complete its 4th lap.

But the aliens loved this—because humans put their money on the “G” car then. They gambled investment money on it. But then the “B” car came out of the pits and ran circles around the “G” car. And by the time the shock subsided, those who had bet their money on their beloved “G” car were left with their pants down.

The aliens thought this was hilarious. They thought it was so funny—especially when tapping into our media networks.

 They read about people who actually thought they could nimbly switch their bets from the “G” car to the “B”—or vice versa—when they saw opportunities arise. But despite their best levels of overconfidence, only a ridiculously small number got even close to timing it correctly.

And in practically every case, that “timing” was just luck. And luck led to overconfidence, where the “timers” tried “timing” again and again. And ultimately, they lost out to where they would have been if their money had just stayed with the “B” car the entire time.

The aliens thought it was even funnier to see humans pay other humans to try to do this “timing” for them.

That was 1861. And the aliens laughed. And the B car pulled further and further and further ahead of the G car—lapping it numerous times, over and over and over. Some years, the B car stopped and the G car passed it. And as people always have done, they said, “This time it’s different. The G car is going to be the best one to bet on.” And again, humans started to bet on the G car. But then the B car caught them with their pants down, roared to life and lapped the G car again and again.

But things were mostly dull for the aliens until 1921, when the G car picked up some speed. By this time, the G vehicle was tens of thousands of laps behind. But many humans caught the “G Bug” as the aliens call it—and they reacted irrationally. With the B vehicle looking like it was slowing down, the “G Bugs” talked up a storm about the G vehicle, and they bet big on it. The aliens laughed. The “B” car picked up the pace, and stormed a further thousand laps ahead. The aliens howled in laughter as those backing the G car were caught with their pants down once again.

That was 1921. From 1931 to 1971 the G vehicle didn’t move. It broke down, and the B vehicle continued to run circles around it. It didn’t budge an inch—other than lurching a few inches forward, and then a few inches backward. Many humans still bet on the G vehicle from time to time, which brought hoards of laugher from the aliens.

Then in the late 1970s, the G vehicle picked up the pace. By 1979, it had completed a full 16 laps—since 1801. It was moving at a pace that amazed the humans. And that got the aliens excited as they watched humans from afar, betting on the G vehicle. Wow! It had completed, by then, 16 laps in about 180 years.

But by 1981, the G vehicle lost steam. The B vehicle whipped into an even more fervent pace, extending its lead over the next twenty years by more than a million additional laps. But still, there were humans willing to bet on the G vehicle. And the aliens roared with laughter. And they roared because the humans thought—once again—that they could nimbly jump from betting on one vehicle, and then the next. But their odds of winning by gambling in Vegas were about as good. So the aliens kept laughing.

It’s now 2009. And the Business vehicle is in the pits again. It has completed more than 9 million laps since 1801. The Gold vehicle has completed fewer than 70 laps since 1801.

But—as in every other time in history, humans want to place their bets on the Gold vehicle. Gold’s investment returns have been crushed by stocks (the B vehicle) as well as real estate—and even bonds. But gold bugs are saying, “This time it’s different”. But most have no idea how lousy gold has been as a long term investment. Yet, so many of them are willing to place hope over experience, as so many of them were willing to do in the past.

From 1802 to 2005, a dollar invested in the U.S. stock market grew to $10.3 million, including dividends.

From 1802 to 2005, a dollar invested in Gold grew to $27. It paid no dividends.

And you’re excited that Gold has doubled in value since 2005? And you’ll rejoice if it grows to $100? Someone very far away is laughing.


Pioneering Portfolio Management, page 57—David E Swensen

Stocks for the Long Run, third edition, page 6—Jeremy J. Siegel

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Millionaire Expat: How To Build Wealth Living Overseas. My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions.

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3 Responses

  1. Barry says:

    What stocks could you have bought in 1802 and how many have died a natural death as opposed to those that are still around? There were no idex funds back in 1802 where there? I wonder what stocks made up the market back then? Would an index provide the dividends that have been used in the example of the final stock value?

    Responses you may get from a Gold Bug

    Any idea of the answers?

    • Hi Barry,

      If you bought 20 Blue chip businesses in 1801, many wouldn't be around today, in their current form. Some would have gone bankrupt, been bought out by others or just changed names during many many mergers. Interestingly, if you check out Jeremey Siegel's data on the original S&P 500, assuming you could have bought it and held it (rather than buying a S&P 500 index which would have had turnover, dumped bankrupt companies, companies falling off the index etc) the buy and hold of the originals (despite the mortality rate) would have made more money. Buying 20 random, solid businesses in 1801 would have put cash in your pocket when businesses went private (in that case you would need to reinvest) and surviving, morphing, merging businesses would likely ensure that one company you owned back then is now 10-15 companies today. You have likely seen that happen with some of your stocks in the past 20 years. If you own one business, and just leave it, you soon find that you own two or three, if you do nothing. Merck and Medco would be an example. Then there's Bell, and all the baby Bells that followed.

      As for debating with Gold bugs, I certainly avoid doing that. Gold is like religion to some people. Unfortunately, it hasn't been profitable over the long haul. Owning businesses has been much more so.

  2. Frank says:

    Dear Andrew, I am setting up my own portfolio (starting with 150k euros) based on your different advises, and the permanent portfolio showing a 25% in a Gold ETC. I am still dubitative investing into gold after reading this old article. Shall I keep this 25% for an ETF fund or get a Gold ETC making probably less money?

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