Gold vs Stocks

 Gold investing

Gold is considered a highly advantageous and excellent investment option because its price has consistently risen over the years. However, some individuals argue that gold might not be the best investment due to the availability of alternatives such as mutual funds and stocks. Others believe that while investing carries risks, gold doesn't pose the risk of loss. Nevertheless, gold is indeed regarded as a valuable investment. How does gold compare to stocks and mutual funds in terms of performance?

Why is Gold So Valuable?

Gold not only possesses a captivating and attractive appearance but also derives its high value from several other factors:

1. Gold is a non-perishable item.

2. It doesn't rust.

3. It doesn't rot.

4. Its taste and function remain unchanged.

Additionally, gold isn't controlled by any specific country, government, technology, or company CEOs. While currencies can be printed by governments, leading to inflation, gold's extraction from separate mines makes it a scarce and resource-intensive process. As a result, gold's price doesn't plummet abruptly, making it a stable investment. Buying and holding gold won't result in a loss of capital since it can be acquired whenever needed. If you have substantial funds, investing in gold remains a viable option. Even if you reside in a country lacking diverse investment resources, investing in gold is feasible.

Why Don't Big Investors Invest in Gold?

However, there are significant challenges that prevent large investors from choosing gold as a primary investment. Gold faces three main limitations.

1. Gold doesn't generate any tangible value. Renowned investor Warren Buffett clarifies this point, asking, "If you have a lot of gold, then what?" Gold doesn't create jobs, improve people's lives, contribute to a country's development, or have an impact on progress. As Warren Buffett puts it, "I have no views as to where the gold will be in the future, but the one thing I can tell you is that it will not do anything between now and judgment day except look at you."

2. Another limitation of gold is that we cannot determine its intrinsic value. When investing in gold, we often refer to its past performance graph. If the graph indicates an upward trend, we consider gold expensive and suitable for selling. Conversely, if gold's short-term price drops, it appears inexpensive, prompting buying. This approach involves technical analysis, considering past charts to make buying decisions. However, in the world of investing, price and value are distinct concepts. This is why value investors typically avoid investing in gold. They cannot determine its intrinsic value as they can with bonds (interest), stocks (dividends/cash flow), or real estate (rent).

3. Gold's price doesn't exhibit rapid growth. Over a 40-year period in Pakistan, gold's price has only increased by approximately 10-12%.

Stock Investing

In contrast, companies like Coca-Cola and Apple continually generate revenue. Warren Buffett emphasizes the importance of investing in businesses that keep generating income, comparing it to having a goose that continuously lays eggs rather than a stagnant goose that requires expenses like insurance and storage. While selling gold can generate money, investing in strong companies offers more opportunities. By holding shares, you can earn dividends while watching your investment grow. Companies also create jobs, enhance people's lifestyles, and contribute to a country's development. For these reasons, Warren Buffett prefers investing in companies, particularly in stocks.

Demand for Companies

The stock market features numerous companies in constant demand, irrespective of market crashes. These companies consistently grow, and their prices remain stable. Examples include Google, Microsoft, and Tesla.

In my view, if your goal is to become wealthy through investing, avoid putting your funds solely into gold. Instead, consider real estate and stocks. However, if you're already wealthy, investing in gold can help maintain your wealth. Gold can preserve wealth but doesn't have the power to make you wealthy.