How to Calculate The Rate of Return for Gold

In times of economic trouble, people will often sell their stake in companies (stocks) and instead buy commodities, with one particular commodity viewed as being particularly good - gold. The value of gold has gone up dramatically in recent years, leading some gold sellers to create radio and television ads promoting gold as an investment. However, as an investment, gold has terrible rates of return over the long run. Here's how to compute the rates of return for yourself.

	Find records of historical gold prices. Here's one example: http://www.nma.org/pdf/gold/his_gold_prices.pdf
	Pick out two different years from the table. To get a realistic view of the rate of return of gold over the long run, you should pick years that are at least 15 years apart. For example, pick 1992 where gold cost $343.82 per ounce and 2007 where gold cost $695.39 per ounce.
	Use the following formula to compute the rate of return of gold: 100*(second_price/first_price)^(1/(second_year-first_year))-100
	For our example, the formula becomes 100*(695.39/343.82)^(1/(2007-1992))-100
	Type the resulting formula into the Google search box on Google.com and click "Search". The Google calculator will compute the result. In our case, the result was about 4.8, so the rate of return of gold over the past 15 years was only 15%.
	Compare the long term return of gold to that of other investments. Since 1929, gold has only averaged about 4.6% per year. The S&P 500 stock market index, on the other hand, has averaged around 12% per year. Additionally, between 1980 and 1985, the value of gold went down by an average of 12% each year, meaning the price of gold, like that of stocks, is volatile and risky.

• If you are looking to avoid inflation, you can use TIPS: a bond issued by the US government that moves along with the rate of inflation.
• If you are looking for avoid risk for your savings, just use an FDIC insured savings account or CD.
• Remember to actually invest your money, too! If you don't plan to use the money for 5 years, then put it in investments (like mutual funds or real estate), because investments will generally give a cash flow and go up in value over time, whereas savings accounts and gold basically do about the same as inflation.