Gold vs. Bonds and Stocks: Why Some Investors Choose Gold

In many cultures, gold is viewed as a way to show others that we value the finer things in life. It is a beautiful metal to look at. This precious metal is the king of all precious metals, and its uses range from jewelry to electronics, dental fillings (before), and even in cooking and baking. It is admired for both its beauty and its various intrinsic uses.

Aside from the value of the metal itself, it will also be important to consider the aesthetics of the design. While gold bracelets and jewelry may be expensive price-wise, if the design fits wearers of an earlier era, most likely few people will wear it. It then gets labeled an “heirloom” that just belongs in a jewelry box or safe.

As of May 2024, the price of gold hovered above the $2,300/ounce range. With an atomic number of 79 in the periodic table, gold has been a measure of wealth and a store of value for thousands of years.

Despite its reputation as the king of precious metals, during good economic times, gold is not often thought of as an investment. This is because, unlike stocks and bonds, it does not offer any yield or cash flows. 

However during bad economic times, like periods of depression, many investors tend to use gold as a reliable store of value asset. This is because its value is intrinsic and not dependent on someone else’s promise to you.

During good economic times, like bull markets, stocks (especially tech giants like Nvidia, Microsoft, Google/Alphabet) typically deliver outsized returns. These companies often exceed analyst expectations in terms of quarterly and annual revenues, as well as earnings. Since stocks are valued with metrics like Price to Earnings (P/E) ratios, a small investment held over several years and even volatile price periods can produce outsized returns relative to gold. 

Bonds, on the other hand, like US treasuries, are debt instruments. Basically, you lend money to a borrower like the US Government (or private companies). They will return your money (called the principal) and give you an annual yield on top of that. So if you just want to preserve your capital, many people, companies and fund managers buy bonds so they earn interest on their capital and then get back their money when the bonds mature.

The Rolling Stone Culture Council is an invitation-only community for Influencers, Innovators and Creatives. Do I qualify?

That is great. Except now we are in an environment where there is a lot of uncertainty. Aside from the increasing possibility of war in Europe, the Middle East, and Asia, there is also high inflation in many countries, not just in the US. The culprit has been the overprinting of money by central banks globally, like the Federal Reserve. This excess money in the economy, typically measured by something called M2, drives inflation up because there are too many dollars chasing the same amount of goods and services in the system. 

In short, if everyone has too much money, those who produce goods and services can sell their wares at higher prices. Of course, on the other hand, if there is less money in the economy (or what economists call liquidity), people tend to be thrifty and avoid spending. Thus prices do not rise as much.

The Federal Reserve is doing what is called quantitative tightening, which means they no longer buy back bonds and mortgage-backed securities from banks and lenders to flood the economy with cash. They are also raising interest rates so that if you want to borrow money, you will think twice because the interest rates are high. Debt or borrowing becomes expensive.

So where does gold play into all this? Granted that it has been recognized as a safe haven if there are wars and uncertainties, what if the economy just suffers from inflation?

The problem is that there is too much debt in the world. Although central banks like the Fed are trying to reduce excess money in their respective economies, governments are spending left and right. Hyperinflation is a real danger that has happened in the past and could happen again.

Humans tend to abuse situations just to milk the maximum benefits they can get without a second thought; that’s why some investors have chosen to hold an asset that has its own intrinsic value and is not a promise of future cash flows nor a promise by someone to pay you back with interest.