During times of turmoil, it’s common to see advertisements promoting gold as an investment. These pitches highlight concerns over overstretched federal budgets and the weakening of the U.S. dollar. Government-backed currencies often suffer from steady inflation. Since gold has been a store of value for thousands of years, it is presented as a safe place to park your money.

The Golden Pitch

These pitches often occur after the price of gold has jumped, reinforcing the argument that dollars should be exchanged for this ancient, shiny metal. Gold is particularly attractive to those who fear doomsday scenarios of runaway deficits bankrupting governments and leading to societal collapse. Keeping wealth in tangible, transportable assets is appealing for these “Preppers.”

Check the Data

However, these arguments wither away when you dig deeper into them. Take the premise that gold should be a good hedge against inflation. Many years of data on the price of gold and the erosion of the dollar show that the two do not correlate well. Just look at the chart!

Inflation-adjusted price of gold over the past 100 years.

Gold Panic Spikes

It is easy to spot the enormous spike in the price of gold during the years when America last dealt with protracted runaway inflation. Those who bought gold early hedged against inflation and made windfall profits as prices skyrocketed. However, this buying and selling was driven by panic, not rational inflation hedging.

Then Gold Collapses

Those who bought gold in later years at super-inflated prices lost tremendous sums. Once the panic subsided and inflation returned to moderate levels, the price of gold plummeted and stayed low for decades. It’s important to note that while inflation was still present, it was controlled, and panic pricing disappeared, causing losses for those holding gold. Gold didn’t hedge the inflation risk.

Market Timing

You might convince yourself that you can get the timing right to ride a gold wave up and sell at the peak. However, even professionals who study this 24/7 struggle to outsmart the market and predict short-term price movements, as with all market timing. It is far easier to rely on the long-term potential of well-located real estate or an index fund than to guess where the price of gold will be in the near future.

Buffett Prefers Growth

Investing in gold means you miss out on potential opportunities in other investments. Warren Buffett eschews gold, pointing out that stocks and real estate, which offer regular compounding growth through earnings and dividends, provide a much greater hedge against inflation. Buying a hedge is, by definition, playing defense. Why not play offense by investing in stocks and real estate?

Growth of gold (Orange) versus growth of US stock market (Blue) over the past 100 years.

Real Opportunity Costs

We’re talking about real money here. The chart shows how someone who invested in gold during the ’70s missed out on tremendous growth opportunities in the long run, even if they bought at the pre-boom price. While there is value in having a small percentage of your net worth in gold as a hedge, beyond that, the case is weak.

Overblown Concerns

The arguments and concerns over the risk to the U.S. dollar are often not well fleshed out. Although fiscal irresponsibility in Washington, D.C. is concerning, America remains an exceedingly wealthy and productive country, and its finances are in better shape than most developed countries. Even though debt has risen quickly, it is relatively small as a percentage of the country’s net worth.

Small Tweaks Required

Many of the fiscal issues debated endlessly in Washington can be resolved with minor tweaks. For example, securing Social Security reserves by gradually raising the retirement age is not politically palatable, but when financial reality demands, these tweaks will almost certainly be implemented.

Misplaced Doom

Those who spend too much time listening to right-wing talk radio might find it hard to believe, but economists are not worried about a governmental fiscal collapse. Doomsday scenarios are far more likely to arise from geopolitics, internal social divisions, and natural disasters than the federal government running out of money.

Doomsday Hedge

This brings us back to buying gold as a doomsday hedge. If social order collapses, wouldn’t owning portable, precious assets be vital for survival? Jews, in particular, with our long history of being chased from country to country, have good reason to keep wealth portable. Is gold the answer to these concerns?

Rabbinic Disagreement

There is an interesting question here, and I’ve heard conflicting thoughts from different gedolim. Is preparing for societal collapse or threat of expulsion a reasonable and required hishtadlus? The answer depends heavily on one’s perspective on how imminent the risk is.

Buy Guns, Not Gold

However, I have a different issue with using precious metals as a doomsday preparation. I don’t think it is an effective and efficient approach. During social collapse, guns and ammunition are needed, not precious metals and stones. It’s unpleasant to imagine these scenarios, but a well-armed, penniless group would likely fare far better during a crisis than an unarmed, wealthy one.

Small Percentage

So, while having a small portion of your net worth in gold as a hedge may make sense, I do not think it is a good investment for more than that. If you are interested in investing in gold, there are several ways. A straightforward way is to buy a lot of jewelry. Then you have the hedge and a happy wife! However, there are pros and cons to this approach and other approaches, which we’ll explore next week.