I turned on the AM radio while I was on the way home the other day, so that I could get a traffic report that would help me escape the early evening gridlock that I was stuck in, and I listened to several minutes of the Dave Ramsey show. The majority of his message makes a lot of sense- pay your bills, don’t go into debt, etc. Then a person called in and asked if he should invest in buying gold. Now, I don’t have an exact quote, but the gist of Mr Ramsey’s comments were as follows:
Gold has barely broken even when compared to inflation over the past 50 years, and you are better off in a mutual fund than you are buying gold.
That statement is a little misleading, and I am not sure if I should be hoping that Dave Ramsey is a liar or a fool. Lets see why:
First, the dollar was pegged to gold until 1933 when the Bretton Woods agreement went into effect, pegging the price of gold at $35 an ounce. This ended in 1971, when Nixon canceled the system. This means that gold remained at a fixed price until 39 years ago. To compare any stock market fund to the price of gold in any year before 1971 is either deliberately misleading, or shows a lack of knowledge on the part of the speaker.
Comparing the price of gold to stocks, I turn to the DOW. There are problems with the DJIA, and I will discuss them in a bit, but for now lets assume that Dave Ramsey bought one share in each DOW company in 1971. That would have cost him $868.
Lets take a look our investments, shall we?
In 1976, my gold is worth $3,270 and Dave Ramsey’s stock is worth $975.
In 1981, my gold is worth $14,000 and Dave Ramsey’s stock is worth $947.
In 1986, my gold is worth $8,800 and Dave Ramsey’s stock is worth $1,582.
In 1991, my gold is worth $9,475 and Dave Ramsey’s stock is worth $2,730.
In 1996, my gold is worth $9,925 and Dave Ramsey’s stock is worth $5,405.
In 2001, my gold is worth $6,587 and Dave Ramsey’s stock is worth $10,759.
In 2006, my gold is worth $13,831 and Dave Ramsey’s stock is worth $10,953.
In Jan 2010, my gold is worth $27,200 and Dave Ramsey’s stock is worth $10,067.
Edited to add:
In October 2010, my gold is worth 33,350 and Dave Ramsey’s stock is worth $11,169.
So you can see that gold has outperformed the market for the last 39 years, with the exception of the period between 1996 and 2001. Even that is misleading, since there have been changes in the makeup of the companies that comprise the DJIA. During the time period of 1996 to 2001, AT&T, Hewlett Packard, The Home Depot, Intel, Microsoft, and Wal Mart were all added to the DJIA. Also considering that the DJIA has a multiplier that is used by banks to adjust the numbers, the prices that are quoted for the DJIA are inflated.
Had I bought $10,000 in stock in 2001, I would have $9356 today. Had I bought $10,000 in gold in 2001, I would have $41,293 today.
Bad advice, Dave.