Gold (GCY00) prices are on the rise, up more than 9% in the last year as of writing. Yet after hitting 52-week highs in May the price has retreated about 5%, which might make some investors eager to buy the dip.
However, there are quite a few famous investors and analysts who would caution investors from doing so.
Why gold might be a bad idea
From Dave Ramsey to Warren Buffett, some of the biggest and best financial gurus out there aren't fans of gold. The big reason? It doesn't do a thing.
In a his 2011 letter to shareholders, Buffett once explained why he thought gold investments were a bad idea, calling it “unproductive” and “assets that will never produce anything, but that are purchased in the buyer's hope that someone else…will pay more for them in the future.”
As for Dave Ramsey, an American radio personality who offers financial advice, believes not just gold, but all precious metals should be out of the picture. Instead, investors should stick to paying down their debts, and investing in useful products that actually serve a purpose.
Though some argue that gold prices rise during recessions and time of instability. But this is often a fleeing rally. For example when gold surged in 2020 due to the Covid-19 pandemic only to fall about 20% by March of 2021.
Furthermore, there are better options than investing in risky growth stocks rather than abandoning the stock market all together to invest in gold.
Is the S&P 500 any better?
So what do investors such as Warren Buffett and Dave Ramsey recommend? A few things, such as sticking to your investment strategy and long-term financial goals. However, if you're looking to make an investment, Buffett has long favored investing in low cost, high yield S&P 500 Index ($SPX) exchange traded funds (ETFs).
To understand his reasoning, it's important we look to the past. Instead of relying on individual stocks, or betting on the short-term growth of gold, Warren Buffett likes the S&P 500 as it provides diversification. There is a diverse range of stocks, with investments in hundreds of blue-chip American companies. Together, this collection provides the strength that comes with American business. And as Buffett has said in the past, “For 240 years it's been a terrible mistake to bet against America.”
In the last decade, the S&P 500 has climbed 164%, as of writing. That's compared to a 55% rise in gold prices during this same period. Meanwhile, the price of gold, as mentioned is up 9% in the last year, compared to the S&P 500, up 16%.
Where both are headed
Good news from the United States Treasury lifted yields, causing the price of gold to drop last week as strong macroeconomic results came in. While there have also been rate hikes across the world in June, the U.S. managed to scrape by without another one this month. While there's likely to be another rate hike in the near future, a pause does suggest that the American economy remains quite strong. And a strong economy usually leads to lower gold prices, as well as a higher S&P 500.
Even so, recession fears have still led many investors to think perhaps it's better to invest in gold for now if the market is going to drop. Yet now that we're half way through 2023, analysts are providing more of an opinion about where both gold prices and the S&P 500 might be headed.
At the end of 2022, the World Bank predicts gold will end 2023 at $1,900. Which is about 1.5% less than where it is currently trading.ABN-Amro Group believes the yellow metal will average about $1,900 in 2023 and rise to $1,950 by the end of 2024.
However, analysts such as Fundstrat's Tom Lee recently increased his outlook for the S&P 500, believing it will hit record highs in the second half of 2023. He raised his previous target for the S&P 500 of $4,750 to $4,825, stating now is the time to take advantage of current prices. The crisis of 2022 is now shifting to opportunities in 2023, according to Lee, with at least an 8% climb in the index for the second half of this year. It won't be a smooth transition, he warned, but a transition to positivity nonetheless.
“The equity market has been a 'game of inches' all year, with a lot of blocking and tackling. And then periods of market progress. I think this will still be the case in the second half. So be prepared for volatility. But as we highlighted a few months ago, we have entered a 'buy the dip' regime, so 2% pullbacks are generally buyable. We saw this on display last week,” he said in the research note on July 3.
And Deutsche Bank has predicted the S&P 500 will rally to 4,500 this year.
Bottom line
Investing in the S&P 500 allows you to gain exposure to a diversified portfolio of these companies, which can provide potential for long-term growth. Historically, the S&P 500 has shown a positive trend over the long run, although its performance can fluctuate in the short term due to various factors, such as economic conditions, company earnings, and market sentiment.
Gold, on the other hand, is considered a store of value. Investors often turn to gold during times of economic uncertainty or market volatility. The price of gold can be influenced by factors such as global economic conditions, geopolitical events, interest rates, and investor sentiment.
Though gold can and has outperformed the S&P 500 for short periods of time, in the past 10, 30, 50, 80, and 100 years, the S&P 500 has significantly outperformed gold. Long term investors should remember this when investing and, I believe, allocate most of their hard-earned dollars to an index ETF, like the S&P 500 ETF Vanguard (VOO), rather than the precious metal.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
