Gold versus Apple

Recently, CNBC ran a short interview segment entitled "Battle of the Bugs," comparing the fanaticism of some Apple investors and some gold investors (or "gold bugs").*

While the network and interviewer chose to focus on the similar intensity of both camps, and jokingly tried to portray each group as a sort of "cult," we feel that the interview completely overlooked the real story.

The real story, in our opinion, is the amazing outperformance that investors who committed capital to an innovative company adding value would have experienced versus investors who put their money into a commodity such as gold, even during a time period in which egregious Fed oversteering has boosted the price of gold to record levels.

The chart below, frequently flashed on the screen during the CNBC segment, is worth a thousand words:

The chart shows that over the past twenty years, the price of gold has risen 229.66%, while the price of Apple stock has risen 3,866.97%. There truly is no comparison, no matter how hard CNBC tries!

The arguments for investing in gold found in the clip above are no doubt familiar to anyone who has seen or heard the numerous gold commercials on television and radio over the past year: namely, that the failure of the government to prevent inflation and dollar devaluation has led to the current stratospheric gold price, and all indications point to continued government mismanagement of the same sort in the future.

We ourselves have written many posts about the historic trend of dollar devaluation, and the fact that its cost is far more damaging than many people realize -- see for example "Stand still, little lambs, to be shorn!" and "Avatar and long-term inflation."

However, we have always argued that investing in innovative companies is a far better defense against such devaluation than investing in gold and other commodities. We made this point as far back as this post from February 2008 (which featured two San Francisco Giants tickets as an illustration of long-term dollar devaluation). That post included a link to a discussion by Professor Jeremy Siegel on the reasons that innovative companies adding value have historically been able to stay ahead of inflation better than either gold or real estate.

On a deeper level, we would point to the philosophical aspect of this "debate." Innovative companies such as Apple grow by adding real value to those who buy their goods or services. Commodities, by their very definition, are materials to which no value has yet been added -- they go up or down in value only by the changing value of currencies and markets. "Playing" the change in market valuation is very different from identifying a company that is adding value and participating in that growth by the investment of capital in that company. We discuss this distinction in "Growth is the answer: the primacy of human creativity" and in "Gambling, speculation, and investment."

While we have always agreed that gold (apart from its use as a commodity) has historically been a store of value, and that hasn't changed, lately it is being touted as an "investment alternative," and we would caution investors that playing its changing market price is speculation and should not be put into the same category as participation in the growth of a well-managed and innovative company.

The graph above from the more recent CNBC segment tells the story as powerfully as anything else we've seen. That was the real story that investors should take away from CNBC's "Battle of the Bugs."

* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Apple (AAPL).

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For later posts dealing with this same subject, see also: