This article examines the differences between gold vs. stocks.

If you own stock in a company, then you own a tiny part of that company. The ownership of a company may be split into hundreds of million of little pieces, or shares. When you own some of those shares, you own a tiny slice of that company.

The price of its stock depends on many factors, of which future earnings are the major factor. You may also get payments of hard cash from the company from time to time if it has extra cash to deliver to shareholders.

Gold is known as a “hard asset”, because if you choose the right type of security, you will actually own chunks of gold stored in a vault somewhere.

You may own this gold directly if you purchase actual gold bullion or coins, through a security that represents actual holdings of gold stored in a vault, or through a security that is tied to the price of gold.

What are stocks?

A share of stock represents a piece of the company that you own.

Because most companies issue million and millions, or even billions of shares, individual investors will only own the tiniest piece of a company.

The price of the stock is going to rise and fall based upon the behavior of other shareholders, and their desire from moment to moment to sell their shares of the company, or to buy them. Historically, the future growth of a company’s earnings is the main reason that investors use to motivate purchase or sale.

What is gold?

Gold is, of course, the famous yellow precious metal. Gold has long been a store of value, going back to ancient times. It’s known as a “hard asset” because it is an actual physical store of value.

Gold is used for more than just jewelry. It is used in solid state electronic devices, including computers, as a conductor. It’s used in dentistry. Gold is also used a great deal in aerospace because it reflects infrared radiation and can stabilize the temperature of a spacecraft.

And yes, it is precious because the earth has a limited supply of it and it can be difficult and expensive to mine, making it

Read Also: What’re the best gold mining stocks?

What are the differences between gold and stocks?

Gold vs. stocks is a great way to demonstrate the differences between two very different asset classes. They both represent ownership in something, but those things are both very different in terms of the kind of value they represent.

If you own stock, you own a tiny piece of a company. The key takeaway is that the value of that company is going to be tied to the projected earnings growth of the company from one year to the next, and over the long term.

Thus, the value of the company will be reflected in an increasing stock price over the long term. Our long term expectation for the value of a solid company is that it will increase in value. It will very likely pay dividends along the way to investors.

Gold is very different. There is no expectation that the value of gold will increase over time, only that it will retain some kind of value.

That’s because gold is not an asset that earns anything for its owner. It’s just a storehouse. Gold doesn’t “grow” like a company does. It doesn’t earn anything. It doesn’t pay dividends. Its value is entirely determined by supply and demand.

Gold’s value was $20 per ounce in 1792. Today it’s about $1,236. That may sound great, but most of that gain has come since 2006.

Read Also: What are the differences between stocks and ETFs?

Advantages of Stocks

When it comes to investing in gold vs. stocks, here are the advantages of stocks:

1. Expectation of positive returns over time
2. Generally predictable earnings
3. Generally rational price movements

Here’s a video that gives additional information on investing in stocks.

Positive earnings expectation over time

Why is it that American business has been so successful? It’s because capitalism encourages businesses to innovate and grow, which stimulates consumers to buy goods and services. It’s a virtuous cycle, and it results in our economy growing over the long term.

As businesses grow, their earnings grow. As their earnings grow, their stock prices rise.

Thus, our nation becomes wealthier over time. Socialist and communist countries don’t have this system, so they end up spiraling into chaos and collapsing.

There has never been a 30-year rolling period where stocks have not increased by at least 8%. In fact, except for 1929, there has never been a 10-year rolling period where stocks have not returned at least 0.1%.

Gold, however, has no such positive expectation because it is a commodity. Its value depends entirely on supply and demand. Thus, gold vs. stocks has no comparison in this arena.

Its value shot up from $40 in 1970 to $584 in 1980 during America’s recessionary period. Investors were losing money in stocks so they switched to a store of value in gold. Then gold was stagnant until 2007, when the financial crisis hit.

Predictable earnings

Stocks are followed very closely by analysts, investment banks, and big institutions. Most companies offer earnings guidance. Combined with the expertise of analysts, investors are given a fairly narrow range of what to expect from a company’s quarterly and annual earnings.

Sometimes earnings fall short of estimates, sometimes they exceed them, and sometimes they are right on target. But for the most part, over the long term, earnings are fairly predictable with a predictable margin of error.

Thus, investors can evaluate and quantify risk and expected return over time. If a company is expected to grow earnings at a rate of 10% every year, investors can assume the stock will rise about 10% per year.

However, when it comes to gold vs. stock, gold doesn’t earn anything. Its price will fluctuate for any number of reasons, cannot be predicted, and can result in substantial gains or losses in any given period of time.

Rational price movements

The other obvious advantage of investing in stocks as opposed to gold is that with predictable earnings come rational stock price movements. If a stock moves, it generally is for an explainable or rational reason, up or down.

If a company says business will be slow next month, it would make sense as to why its stock price might fall.

If a company beats earnings estimates, a stock price increase makes sense.

Gold moves for many reasons, and none of them makes any rational sense. Maybe a country decides it wants to dump its gold to raise cash, driving more supply into the market, and depressing prices for a few weeks. Then it stops.

Or perhaps investors suddenly fear a recession, so they buy up gold and send the price higher.

Or perhaps gold moves one day for no reason at all.

Advantages of gold

When it comes to investing in gold vs. stocks, here are the advantages of gold:

1. Hedges inflation
2. Multiple ways to own it
3. It’s a long term store of value

Here’s a video that gives additional information on investing in gold.

Hedges inflation

When it comes to gold vs. stocks, gold is known as a hedge for inflation. That’s mostly true. The idea is that our purchasing power declines each year. Our money buys less and less each year because the costs of goods and services rises each year due to inflation.

Inflation runs between 3% and 10%, depending on geography and other factors.

Because gold retains its value in some form, it is often considered as a hedge against that increase in the cost of goods and services.

Multiple ways to own it

As mentioned, gold can be purchased in several ways. You can purchase gold coins that are 99.999% pure, or even gold bullion. Thus, you can physically own that gold that nobody can take away from you.

You can purchase something like the Sprott Physical Gold and Silver Trust. This is a security that entitles you to trade that security in, if you wish, to a Canadian firm that holds physical gold and silver in its vault. In practice, few people actually do this, but the ownership of the security is considered the same as owning the physical asset.

Long term store of value

As mentioned above, investing in a hard asset has very little downside. Gold isn’t going to become worthless. Sure, its value may decline, but over the very long term, it will always maintain some value.