Gold can be a fantastic way to hedge against inflation and protect your portfolio against systemic risk. But tracking your investment returns on gold may not be as straightforward as looking at your stock portfolio. So, here’s the best way I’ve found to do this:
To calculate your gold investment returns, subtract the spot gold price you bought gold at from the current spot gold price; the difference will be your profit. Then divide your profits by your total gold investment to calculate your total return on investment.
In this article, I will go over several methods you can use to calculate your gold returns. We’ll also look at average investment returns on gold over the years, what gold might be worth in 20 years and why gold is actually not an investment. So, here we go!
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How is gold return calculated?
Although there are several ways to go about calculating your gold returns the most straightforward way involves tracking the spot price of gold and calculating the difference in price between when you bought and gold and now.
Say you bought gold when it was $1,500 and now the price of gold has risen to $2,000. What is your return on investment?
First, let’s subtract the price you bought at ($1,500) from the current price ($2,000) which gives us a difference of $500. Then multiply this by the amount of gold you bought and you will get your total profit if you sold all of your gold now.
In order to express this profit as a percentage or ROI (return on investment) simply divide this difference in price by the price you bought at and multiply by 100 ($500 / $1,500 * 100 = 33,3). So, your return on investment would thus be 33,3%.
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How to calculate your gold returns the easy way!
But hey, what about inflation and all these macro-economic factors that may affect your gold returns? While we could look at the CPI each quarter and adjust our returns manually it is much simpler to use a financial tool such as PortfolioVisualizer. (Also saves a lot of headaches, trust me!)
Simply go to the “Backtest Portfolio Asset Class Allocation” section and set your asset allocation to 100% gold. Then select the year you’d like to start tracking your profits and voila you’ll get a beautiful chart of your gold returns:
And what is more, you can even adjust for inflation by just checking the box below the chart and PortfolioVisualizer will automatically adjust your returns:
What’s more, if you scroll down further you’ll also be able to see your annual returns since the start of your gold investment and make adjustments as needed:
What is the average return on a gold investment?
In order to compare gold to investment alternatives, you might want to know the average gold investment returns or the CAGR (compound annual growth rate). Since this CAGR will vary depending on the timeframe we look at, it is common to measure the average gold returns starting in 1971 when Nixon the Dollar off the gold standard.
Lucky for you – since you were smart and used PortfolioVisualizer – finding that average return is as simple as scrolling up and checking your portfolio returns:
And voila, the average return on a gold investment from 1971 up until today is 7.54%!
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What will gold be worth in 20 years?
This sounds like a fairly decent return but perhaps you have already missed out on all of this growth. What if gold has already reached its peak price and will not continue to climb? What may gold be worth in 10, 20, or 30 years?
Before we continue please be aware that price predictions are inherently speculative and that anyone who claims to be able to make an accurate prediction is likely incentivized to do so. In other words, take all claims about future gold prices with a grain of salt (including this one).
First of all, the price of gold is largely determined by the demand for gold. If demand for gold increases, price increases, and gold will be worth more. Now, gold demand is a tricky one because of the role gold has traditionally played in the financial system of the world.
Thus, gold demand is not only determined by its industrial use – as with most other precious metals and commodities – but by its perceived value as a currency and store of value. In other words, the lower the trust in the current financial system and fiat currency the higher the value of gold will be perceived as wealth storage.
If overall trust in the financial system weakens and the U.S. dollar continues to be inflated it is likely that the price of gold will continue to rise. However, this is mere speculation!!! This might be a good point to discuss why buying gold is actually not an investment.
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Why gold is not an investment
The simple way of checking whether an asset is an investment or speculation is this: is the only way to profit from this asset selling it to someone else at a higher price? If the answer to this question is “yes” we are looking at a speculative asset.
And the answer is “yes” for all precious metals and commodities and – yes – also for gold. The only to profit from your gold “investment” is to sell your gold to someone else at a higher price. Gold does not produce anything in the meantime for you; no income, no dividends, no rents.
Does this mean that buying and owning gold is absolutely worthless? Of course not! There are plenty of use cases for owning gold, just investing is not one of them. Keeping a small percentage of your portfolio in gold and rebalancing regularly can be a fantastic way to stabilize overall returns. Owning some physical gold as an insurance policy against a financial system collapse can be equally valuable.
So, the next you’re thinking about buying gold, just know that you are not investing.
Current recommendations:
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To see all of my most up-to-date recommendations, check out the Recommended Tools section.
I believe that money is just a means to an end: to be free to spend your time as you wish, to maximize your positive impact on the world.
