You will be able to describe gold's role and limits without the usual claims about it.
Aisha, a made-up 33-year-old teacher in Bishan, has heard the case for gold from three directions this year. Her uncle says it is the only thing that keeps its value when everything else falls. A video on her feed says central banks are buying it, so she should too. And a colleague says it beat shares last year. Aisha already has an emergency fund and a core portfolio of index funds. She wants to know whether gold belongs beside them, and if so, how much and in what form. This module answers the second and third questions. This lesson deals with the first: what gold does and does not do.
A share can pay dividends. A bond pays coupons. A fixed deposit pays interest. Gold pays nothing at all. A bar of gold sitting in a vault for ten years is still the same bar at the end, and if anything it has cost you money to store and insure.
So the whole of your return from gold comes from the price changing between the day you buy and the day you sell. That puts it in the same family as bitcoin in lesson 1.3, What gives bitcoin a price, and why it swings: no cash flow, and a price set by what other people will pay. Gold has a much longer history as a store of value, and real uses in jewellery and industry, but the investment logic is the same. You are betting that someone will pay more later.
That also means you give something up by holding it. Money in gold is money not earning interest, dividends or rent. Lesson 7.1 of How money works, Every dollar spent is a dollar not doing something else, called that opportunity cost, and it applies to every year you hold.
Gold is priced worldwide in US dollars per troy ounce. Aisha thinks in Singapore dollars, so her return depends on two things: what the gold price does in US dollars, and what the US dollar does against the Singapore dollar.
Here is a made-up example. Suppose the gold price rises 10% in US dollars over a year, but the US dollar falls 5% against the Singapore dollar over the same year. In Singapore dollars, Aisha's gold is up by about 4.5%, not 10%, because 1.10 times 0.95 is 1.045. If the currencies move the other way, the effect reverses and helps her. Either way, there is a second risk tucked inside every gold holding that the headline price chart does not show.
The strongest claim for gold is that it has held its value over very long periods, across centuries and through the collapse of many currencies. Over spans that long, that is broadly fair.
The trouble is that you will not hold gold for centuries. You will hold it for years or decades, and over those spans gold has had long stretches when its price fell or went nowhere. In US dollar terms, for example, the gold price set a peak in early 1980 and then spent most of the next two decades well below it. An investor who bought near that peak waited a very long time to get back to even, earning no income along the way. Your activity for this lesson asks you to find such periods on a chart yourself, so look for them rather than taking this paragraph's word for it.
Also remember the real return idea from lesson 4.2 of How money works, Real return is roughly the nominal return minus inflation. A gold price that is flat for twenty years has lost a great deal of buying power, because prices of everything else rose over that time.
The most common argument for holding some gold is that it tends to hold up, or rise, when shares fall, so it cushions a portfolio in a crash. Sometimes that has been true. In some sharp share market falls, gold rose. In others, it fell along with almost everything else, at least for a while, as investors sold whatever they could to raise cash.
So whether gold steadies a portfolio depends heavily on which period you look at. A claim like "gold protects you in a crisis" can be made to look right or wrong by picking the start and end dates. When someone makes the claim to you, ask which period they are using, and then look at a different one.
This is the honest position on gold. It has a long record as a store of value, it diversifies a portfolio in some periods and not others, it pays nothing, and in Singapore dollars it carries currency risk. None of that says Aisha should or should not hold it. It tells her what she would be buying.
Aisha's uncle and her colleague were each describing a real period. Her uncle was thinking of crises when gold did well, and her colleague of one good year. The way to check both is to look at the whole record. A long-term chart of the gold price in US dollars, with the scale set to logarithmic if the site allows, shows the good decades and the bad ones side by side. When you open one, look for the stretches of ten years or more where the line ends up no higher than where it began.
Look up a long-term gold price chart in USD and mark two periods of ten years or more when the price fell or went nowhere.
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