Gold has its uses, but not as an investment.
Over the past ten years, gold has generated a total return of exactly zero. This is even taking into account the post-Great Recession frenzy gold experienced in late 2011.
The perception about gold is that it’s a good hedge against market uncertainty and inflation because you can touch and feel it. This couldn’t be further than the truth. People only have flocked to gold in bad times because of the “perception” of its value as a hedge.
However, as I will explain, gold is not only not a great investment long-term (see chart above) but also not a great hedge against bad times or inflation.
Gold is perceived as a hedge against bad times because it’s a hard asset. The perception is that tangible assets like gold are uncorrelated to the broader market and buffer volatility. The assumption is that gold prices won’t plunge with the rest of the economy in a downturn, and adding gold to your portfolio in bad times will help preserve your portfolio.
The reality is gold can be just as volatile as the broader economy.
Investors may flock to gold in bad times, but when things begin to calm down, its price drops like a brick. If you’re left holding the gold bag when the price drops, you’ll often be in worse shape than when you bought it in the first place to escape market volatility.
Although the value of gold is largely driven by public perception, inherently, it is neither a good hedge against broader market volatility or inflation. That’s because gold does nothing. It just sits there. In bad times, consumers cling to the essentials. They will always need shelter, food, clothing, and fuel in bad times or in times of inflation.
That’s why gold prices have not consistently risen with rising prices in inflationary times to justify its use as an effective inflation hedge. Think about this, in an apocalypse, what would be more valuable – shelter and food or gold?
Commercial real estate is a far superior hedge against volatility and inflation than gold. People will always need places to sleep, work, and rest. That’s why commercial real estate is an ideal hedge against bad times and inflation.
People are willing to pay higher prices for rent because it’s hard to uproot and start over somewhere else. This ensures continuous income and appreciation that keeps pace with inflation in the short term and over time.
Besides its superiority to gold as inflation and recession hedge, CRE is simply a better investment – through good times and bad.
According to the National Council of Real Estate Investment Fiduciaries (NCREIF), the average annual total return (income + appreciation) from commercial real estate was 13.56% over the past ten years. Compare that to the average yearly return of gold of 0% over this time.
Gold looks good on your finger but not in your portfolio. CRE is a far superior investment – providing better long-term returns and serving as a better hedge against downturns and inflation.
In addition, if structured right, passive CRE investments offer significant tax benefits that further pad the actual returns from investing in CRE on top of the average annual return of 13.56% of the past ten years.