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Gold - My Best Investment Ever

Looking back over four decades of investing, I would say that easily my best investment ever was buying gold. In 1979, following a pull back from $850 an ounce, I took my college graduation money and bought gold at $664 an ounce.

With all the confidence and cluelessness of youth, I was convinced that, within a year, it would shoot up to over $1,000 an ounce, and probably more than $2,000. I was also convinced that the brilliance of this single investment was going to make me rich.

So how did that work out?
Well, you tell me. Recently gold surged to $1,340 an ounce, and over the 31 years, I averaged only a 2.3 percent annual return. By comparison, inflation averaged 3.5 percent annually, and the US stock market earned 11.1 percent a year. A $664 investment in the stock market would have been worth $16,661 today, well over ten times the current price of gold. Those expectations of skyrocketing returns ended up fizzling out on the launch pad.

Why gold shined for me
Considering the bleak outcome, you may be wondering exactly why gold was my best investment ever. The reason it was had nothing to do with returns, and everything to do with the important lesson I learned from the experience. Getting rich by outsmarting the market apparently wasn't as easy as I thought it was back then. Being young, I thought I knew everything, but thanks to the wisdom that typically comes with age, I came to realize that I wasn't smarter than the market. I embraced the works of people like Jack Bogle.

What I learned from this mistake
Behavioral finance hadn't been invented in 1979, so I didn't realize I was merely following the herd, expressing overconfidence, and allowing my greed to dictate a buy-high strategy. I didn't realize that I was seeking out any article or news report to confirm my choice, and avoiding any warning of a possible end to the gold rush like the plague. I thought I was a logical being, and that traditional economics would vindicate me and guide me on the path to riches.

Three decades later, people like Daniel Kahneman and Jason Zwieg made me aware that what I was actually doing was merely following the herd, and was destined to get slaughtered.

Lessons for today's gold fever
It has been said that he who does not learn from history is destined to repeat it. Historically speaking, the current gold fever has many similarities to the one that taught me such an important lesson. I'm certainly not going to assert that I know that gold prices will collapse, but I do know:

  • Gold cannot continue to increase at the pace it has over the past few years.
  • We will not be going to the supermarket and buying our groceries with pieces of gold.
  • Gold has value only because we are drawn to shiny things, and we say it has value.
Gold is a good diversifier because, historically, it has had a low correlation to the U.S. stock market. That's the reason I own some gold and a precious metals fund - Vanguard Precious Metals and Mining Fund (VGPMX). I've owned both for many years and happen to be selling as part of a rebalancing strategy. That's right, I'm selling while the herd is buying.

My advice
No investment skyrockets in value forever. Gold has a long history of keeping up with inflation and producing a zero real return. The tax treatment of gold makes it even more unlikely that you'll even match inflation in the long-run.

If you bought gold recently, or are thinking of buying some now, keep in mind that you are buying high and exhibiting a human behavior that may be nearly as old as the gold itself.

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