Monday, June 21, 2010

Buying Gold at Record Prices

I recent wrote an article at HubPages entitled, Buying Gold at the Peak.  Essentially, I looked at what would happen if someone had begun in 1980 buying gold paying $1000 each January to buy gold.  I assumed that our investor paid $850 per ounce in January 1980 (buying at the peak) and then spent the next 31 years through 2010 spending $1000 each January to buy gold.

I then took that same individual and had them purchase the S&P 500 index using $1000 each January.  So two investors each spending $1000 each year from 1980 through 2010.  You might think that the investor buying stocks would have made a killing compared to someone buying gold.  I certainly thought that they might do better.

But in reality the difference was only about 2% total in favor of stocks.  I was really surprised given that gold was in a terrible bear market and stocks had the greatest bull run in history.

I mentioned this on another blog in the comments (did not spam with a link) and was criticized for not including dividends of the S&P 500.  It is a legitimate concern for sure but one that is not correct.  For if you include dividends (which are currently 2%), you need to include inflation as well and figure out the reduced purchasing power of the dollar. 

It turns out that the dividends and inflation cancel each other out and doing a simple calculation as I described is in fact legitimate, and the results are valid.  When I added in dividends and then adjusted for inflation, the results were incredibly close.  The bottom line is that gold does produce income but protects purchasing power.  Stocks produce income to make up for the loss of purchasing power.

It really didn't matter if you invested in gold or stocks, you still ended up in the same place with the same wealth at the end of 31 years.  The key was investing on a consistent basis and buying whether the price was high or low.  So don't be afraid to start investing in gold now.  Or don't be afraid to invest in stocks now.  Just keep a long term perspective.

Until next time--KEEP IT REAL!

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