Tempted by gold? Don’t be

Somewhere, I have it still: a gold quarter-krugerrand, bought in 1980 or 1981. At the time, it seemed like a good idea — but back then, in my late twenties, so did quite a few things that no longer seem quite so sensible today.

I forget the precise impetus for buying it. But I think about that krugerrand every time — as now — geopolitical tensions or financial crises prompt calls for investors to hold a portion of their wealth in gold.

On one level, you can see the appeal. In certain parts of the world, a little gold might be a handy thing to have — a store of value that is reasonably portable, and in terms of desirability, on a par with hard currencies such as the United States dollar.

But for the rest of us — investors such as you and I, for instance — then I remain to be convinced.

In any case, after that initial quarter-krugerrand purchase, I’ve never bought any more of the stuff since. Either physically, or as an ETF. 

Poor returns

Gold can be a lousy investment. It pays no interest, can be lost or stolen, and can fall in value. If you’d panic-bought in late February, at the time of the Ukraine invasion, you’d today be sitting on a 7% loss.

Should the gold price revert to its average for 2021, that loss would grow to 13%. If it fell to 2017–2018 levels, 40%. That’s quite a hit for something that’s supposed to be a ‘safe store of value’.

And to add insult to injury, if you’ve got more than a very modest amount of the stuff, you’ll probably want to pay for safe storage in a vault somewhere. Here at The Fool, we think that a decent investment should pay you to hold it, not the other way round.

But in times of high inflation — or strong investment returns in equity markets — there’s another problem with gold: the opportunity cost of holding it. 

Make your money work for you

‘Opportunity cost’ may be a new term to you, although it’s one that’s very familiar to economists. Basically, it’s the cost of not being able to do something, because you’ve already done something else.

And the opportunity cost of investing in gold is that you can’t invest that money elsewhere, or benefit from it through some other means.

The Bank of England is now conceding that inflation will very likely reach double figures in the months ahead. 10%? 11%? 12%? Who knows?

Personally, I wouldn’t be surprised if inflation, as measured by the Retail Price Index (RPI) methodology, reached 14%.

And in that environment, do you really want your wealth tied up in assets that don’t earn anything? Such as gold or — continuing the same argument — savings accounts, paying interest rates of 1% or so (if you’re lucky).

Income, plus wealth preservation

Instead, in such an environment, I think that the stock market makes a lot of sense.

A combination of solid, reliable, dividend-paying companies, capable of throwing off an income at a time when extra cash might be very handy, and also some picks targeting capital upside, from a wealth-preservation point of view.

Because with inflation in double figures, wealth preservation in real terms — that is, inflation-adjusted terms — becomes a significant priority. Just ask anyone who watched once-well-off retirees become poorer and poorer in the 1970s and 1980s.

Struggling stocks in strange times

Where, precisely, would I look for that future capital upside right now? I think that I’d start with those beaten-down stocks that were battered by Covid-19, and then follow-through with stocks that investors expect to trade poorly in an economic climate where consumers’ disposable incomes are under pressure.

Pub-and-brewing group Marston’s, for instance. Senior, which supplies components for the world’s aircraft manufacturers. Aero-engine manufacturer Rolls-Royce. Greggs, the High Street bakers. Marks & Spencer.

And so on, and so on: decent, solid businesses — but businesses undeniably laid low by the strange times in which we’re living.

But one day, the sun will shine again. And I believe their share prices will once again rise.