Should You Invest in Gold for your Family?

Should you invest your family’s money in a commodity like gold? You might have heard from a friend or seen an ad with reasons why you should buy some gold for your retirement or kids’ college investment. But in today's complex financial landscape, is gold truly a wise investment choice or merely a relic of the past? In this post, we will delve into the world of investing in gold, unraveling the myths and realities surrounding this precious metal.

History of Gold as An Investment

Gold has been part of our world for as long as God placed men and women on this earth. The earliest mention of Gold comes in Genesis Chapter 2. Cultures then started to use gold as a material for jewelry and decoration. Gold was also used for everything from the beauty of the Tabernacle to the depravity of pagan symbols.

The Egyptians used gold for decoration but eventually began to use gold for trade with other nations. They established a standard for how to measure the value of gold relative to other metals like silver. The Lydians, part of Asia Minor, are believed to be the first nation to use gold for coins. Eventually, the concept of gold for use in trade or as a medium of exchange caught on with other nations including the Greeks and Romans.

Roman Coin Known as an 

Aureus

 

The age of exploration by Europeans was driven, in part, by the desire to find new sources of gold. The early exploration from the Spanish conquistadors was largely driven by a desire to find gold in what we now know as North and South America.

Great Britain was the first nation to tie their currency to the price of gold. They decided to link a specific price to gold, in terms of weight. The United States did the same as a young nation.

During the great depression, Franklin Roosevelt made an executive order that effectively required Americans to surrender their gold to the government. This essentially made the direct ownership of gold (Bullion, Coins, and notes) illegal with the possibility of fines and/or jailtime. The prohibition lasted until the 1970s.

In the 1970s, the US dollar was unlinked from the gold. Since then, Americans have been able to buy gold in various forms including for investment purposes.

What Does the Bible Say About Investing in Gold?

Gold is mentioned hundreds of times in the Bible. Are we instructed by scripture to invest in gold? No. This is often represented otherwise. That representation often comes, coincidentally, from companies that sell gold.

It’s important to remember the distinction between Biblical instruction and what was a reference to customs and norms of the time. Gold is mentioned often in the Bible, but a mention, either literal or as a metaphor, is different from guidance. Scripture frequently cites practices of Babylon, but we’re not called to replicate those practices.

3 Verses Often Cited [Incorrectly] As Biblical Direction to Buy Gold

There’s a handful of verses that are often used to argue we are to buy gold as an investment.

Revelation 3:18

 “I counsel you to buy from me gold refined by fire, so that you may be rich, and white garments so that you may clothe yourself and the shame of your nakedness may not be seen, and salve to anoint your eyes, so that you may see.” Revelation 3:18 ESV

Revelation 3:18 is often cited as instruction for Christians to invest in gold. This passage from Revelation is addressed to the Church in Laodicea. Laodicea was an exceptionally wealthy city that traded with Rome and others. The city was known as a center for many industries which included banking.

Affiliation with Rome had many requirements. One of the chief requirements was fealty and worship of the emperor above all others. At the time Revelation was written, this would have been Roman Emperor Domitan. For the city’s inhabitants, this meant a clear conflict between what Domitan demanded and what their budding Christian faith beckoned. When the city is described in Revelation as “lukewarm”, this is what the text references. The people are trying to have it both ways by placating the emperor and participating in the newly founded church in their community.

When the text says “buy from me gold refined by fire”, this is a call to look toward the Lord and not the seat of power in Rome. How do we know this is not a literal instruction to go purchase gold? The previous verse calls the people Laodicea poor. The people being addressed were rich by every earthly measure so this can only mean poor in a spiritual sense. By the same token, the gold referenced here can only be “bought” with faith, as explained in the next few verses.

1 Corinthians 3:12-13 ESV 

"Now if anyone builds on the foundation with gold, silver, precious stones, wood, hay, straw— each one's work will become manifest, for the Day will disclose it, because it will be revealed by fire, and the fire will test what sort of work each one has done." 1 Corinthians 3:12-13 ESV 

In his letter to the church in Corinth, Paul recounts how he planted this church and others now do the work in that community. Paul uses the metaphor of construction by comparing his founding efforts to that of a home’s foundation. He calls the church to be thoughtful and intentional about how they build upon the foundation we have from Christ.

Paul goes on to compare different materials that could be used for building a structure. That included metals (gold and silver), stones, wood, hay, and straw. He then goes on to ask what will happen to each of these building materials when exposed to fire. This is a call for the church in Corinth to continue their work, but in a thoughtful manner.

The inclusion of gold is a reference to building practices at the time. If you went to Rome, the grandest building would be built of stone and decorated with gold. The gold was stolen many generations ago, but many of those stone structures stand today. The call is to build the church in a lasting manner in the same way. The reference to gold is to bolster this point and not a call to use gold as an investment.

Haggai 2:8 ESV

 "The silver is mine, and the gold is mine, declares the Lord of hosts." Haggai 2:8 ESV

The second chapter of Haggai tells us about the future of the rebuilt temple. The temple is described as great, and the assumption is it will be adorned with gold and silver. Verse 8 states that the precious metals used in the construction, as with all things, belong to God.

The passage is a description of materials that would be used to build a structure like the temple. Gold is called out, but it has no more significance to God than the mortar for the bricks. Haggai reminds us that all ultimately belongs to God even materials of value used to build something like the temple. It is not, however, a call to use gold as an investment.

What Are Some Common Beliefs About Gold as an Investment?

There's common reasons that investors seek out gold. Let's look at a few of those reasons and if they're true or not. 

Gold Serves as an Inflation Hedge

The reliability of this reason depends on the time period you examine. There are times of high inflation when gold rose to help beat or offset inflation. The turmoil of the 1970s was an example of this. There are other times when inflation has raged, and gold did not keep up with inflation and even lost value. The early 1980s was a time when a gold investor would have been hit with inflation and lost money in gold simultaneously.

Gold Preserves Wealth and Doesn’t Lose Value

It’s reasonable to assume gold will continue to hold some value as it has for thousands of years. How valuable is a question. Can gold lose value? Yes. Can you lose money in gold as an investment? Also yes. To be fair, that is true of any category of investment or asset class.

When we look at the longer term, the picture comes into focus more. Gold investors gained in the decade of the 1970s. The 1980s and 1990s were the opposite. Gold investors lost money in both decades. By comparison, diversified stock and bond investors fared much better.

Gold Will Diversify Your Portfolio

We are called by Ecclesiastes to not put all our assets into one venture or avoid putting all our eggs in one basket. This is an important investment principle. Increased diversification helps spread around risk. Can gold serve that purpose? Yes and no. There are many examples of times when stocks lost value and gold rose. On the other hand, gold can have long stretches of high volatility. Sometimes, that volatility (ups and downs) can be more dramatic than the stock market for the same period.

You Don’t Have Gold Right Now, So You Should Have Some

Many investors look at their investments and conclude they should “get some gold” because they don’t have it. You might already have some exposure to gold in your portfolio and not realize it. If your investments for retirement or college savings are diversified, then you could own thousands of investments like stocks and bonds. Some of these can be related to gold such as companies that mine, refine, or sell gold. In the same way you might own part of Apple, you likely have an interest in gold-related businesses.

How is Investing in Gold Different From a Stock or Bond?

Owning a stock or bond and owning gold are distinct in terms of what they represent, their underlying value, and how they function as investments for your family. Here's an explanation of the key differences between owning a stock or bond and owning gold:

1. Ownership and Value

Owning a Stock or Bond - When you own a stock, you own a share or a portion of ownership in a specific company. The value of your stock ownership is tied to the performance and profitability of that company. As the company grows and generates profits, the value of the stock may increase, allowing you to benefit from capital appreciation or dividends. Similarly, owning a bond means you have lent money to a company or government entity, and the value of the bond represents the principal amount plus periodic interest payments. The value of a bond can fluctuate based on prevailing interest rates and the creditworthiness of the issuer.

Owning Gold - Owning gold means possessing a physical or digital asset that holds intrinsic value. Its value is influenced by factors such as supply and demand dynamics, economic conditions, and investor sentiment. Unlike stocks and bonds, gold's value is not tied to the performance of a specific company or the payment of interest or dividends. Unlike a stock or bond, gold no produces no dividends or interest payments. Any loss or gain will depend entirely on the price of gold.

2. Investment Objectives and Risks

Owning a Stock or Bond - Owning stocks and bonds is primarily driven by the desire to participate in the growth and profitability of companies or earn income through interest payments. Investors in stocks seek capital appreciation as the company's value increases, while bond investors typically prioritize a regular income stream and preservation of capital. Both stocks and bonds carry varying degrees of risk, including market volatility, industry-specific risks, and credit risk associated with bonds.

Owning Gold – Gold buyers often have a goal of preserving wealth and diversifying one's portfolio. Gold is considered by some to be a store of value and a potential hedge against inflation and economic uncertainties. Investors in gold often seek stability and protection against market volatility.

3. Market Dynamics and Liquidity

Owning a Stock or Bond - Stocks and bonds are typically traded in established markets such as stock exchanges or bond markets. The prices of stocks and bonds fluctuate throughout the trading day based on market forces, news, and investor sentiment. These markets provide liquidity, allowing investors to buy and sell securities relatively easily. However, the liquidity of certain stocks or bonds may vary depending on their trading volume and market conditions.

Owning Gold - Gold is traded in various markets, including physical bullion markets, futures markets, and digital platforms. The price of gold is influenced by global supply and demand factors, economic conditions, and investor sentiment. Gold markets may experience price volatility just like other assets. The liquidity of gold depends on the form an investor chooses. For example, a gold fund offers much quicker access to sell gold and receive cash than options like bullion or coins.

In summary, owning a stock represents ownership in a specific company, with the potential for returns based on that company's performance. Owning a bond represents a debt obligation of a company or government entity, with fixed interest payments. Owning gold represents ownership of a precious metal with intrinsic value, providing stability and potential protection against economic uncertainties. Each asset class serves different investment objectives and carries distinct risks, and understanding these differences is essential for investors to make informed decisions aligned with their financial goals and risk tolerance.

How Does Gold Perform Historically Compared to Other Investments

Over the long term, gold has not performed as well as broadly diversified investments. For example, from 1973 to 2022 gold averaged a 6.91% annual return while stocks, measured by the S&P 500, averaged 13.59%.

What about during bad times like a recession? How did gold fare during just those times? Between 1973 and 2020 there were 8 recessions. Gold performed better than the S&P 500 during 6 of those 8 recessions. In other words, it’s a mixed bag when it comes to recessions.

Ways to Invest in Gold

Each of these methods offers different advantages and considerations for investors looking to buy gold. It's essential to carefully assess one's investment goals, risk tolerance, and preferred level of involvement before choosing the most suitable method. It’s important to note each option carries risk with some carrying significant risk. Consulting with a financial advisor or precious metals specialist can provide valuable guidance in making an informed decision.

1. Physical Gold: Buying gold in its physical form, such as bullion bars or coins, is a direct way to own gold. Investors can purchase gold from authorized dealers, mints, or reputable online platforms. Physical gold offers tangible ownership and can be stored at home, in a safe deposit box, or with a custodian. However, it requires careful storage and security measures, and there may be additional costs associated with insurance and verification of authenticity. Physical gold can sometimes require interacting with multiple parties to complete a transaction. For example, you might buy gold coins from a dealer and then ask a depository to hold them in a vault.

2. Gold Exchange-Traded Funds (ETFs): Gold ETFs are investment funds traded on stock exchanges that aim to track the price of gold. Investors can buy and sell shares of these ETFs, which represent fractional ownership of the underlying gold. The advantage of gold ETFs is that they offer exposure to gold without the need for physical storage. However, investors should be aware of management fees and the potential for tracking errors between the ETF's performance and the actual price of gold. An ETF or other type of fund tends to be an easier option to own gold than most for a typical investor.

3. Gold Futures Contracts: Futures contracts allow investors to buy or sell a specified amount of gold at a predetermined price and date in the future. These contracts are traded on commodity exchanges. Investing in gold futures requires a high level of knowledge and understanding of market dynamics, as it involves leveraging and potential risks. This method is more suited to experienced investors and traders and not appropriate for individual investors.

4. Gold Mining Stocks: Investing in gold mining stocks involves buying shares of companies that are involved in the exploration, production, or distribution of gold. The performance of these stocks is influenced by various factors, including the price of gold, operational efficiency, and geopolitical risks. Investing in gold mining stocks provides exposure to the potential upside of gold prices while also exposing investors to the risks associated with individual companies and the broader equity market. Gold mining stocks can be US-based or international.

6. Gold Certificates: Gold certificates are documents issued by some banks or financial institutions that represent ownership of a certain quantity of gold. These certificates can be traded, transferred, or redeemed for physical gold. They provide a way to hold gold without the need for storage or security concerns. However, investors should ensure the credibility and reputation of the issuing institution before investing in gold certificates.

7. Gold-Backed Digital Tokens: With the rise of blockchain technology, gold-backed digital tokens have emerged as a way to invest in gold digitally. These tokens are typically backed by physical gold held by a custodian, and each token represents a certain amount of gold. Investors can buy and sell these tokens on digital platforms. This option is unregulated and should be avoided due to the high risk and lack of investor protections.

Each of these methods offers different considerations for investors looking to buy gold. It's essential to carefully assess one's investment goals, risk tolerance, and preferred level of involvement before choosing the most suitable method. Consulting with a financial advisor or precious metals specialist can provide valuable guidance in making an informed decision.

Do You Recommend Gold?

When we work with our client families at Intrepid Eagle Finance, we want to choose the right tools for the job. For the families we serve, that means using investments to help send kids to college, fund retirement, and other goals. That means using investments to grow money while balancing risk. Because of that, we don’t recommend gold as an investment for our client families.

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