Monday, November 1, 2010

Gold: Bottom of the 8th Inning?

November 1, 2010. I get a lot of e-mails and questions from clients and friends about gold. Is it a good investment or bad one? Should I buy some? My friends are buying gold, should I? What if everything goes to hell? I wrote a typical glib response the other day that I thought I’d share as a blog in response to those questions:

On gold, let’s see:

  • Is gold a good investment? Since the year zero (0) to 1950, gold went up exactly 0%. From 1979 (a year in which gold went up 100%) to 2009, gold went up 5.37%, and stocks went up 11.93%. (Note: from 1257 – 1945, in England, the price of gold went up 0.23%- nice return).
  • How do you view gold versus equities? Companies (via their ownership through equities) make stuff and services, and sell them. Companies have earnings and can pay dividends. Gold is a metal. It has no earnings and no cash flow.
  • Is gold an inflation hedge? Gold is not an inflation hedge. From 1871 – 2009, inflation in the US was annualized at 2.12%, for the same period, gold went up 0.58% (the S&P 500 equivalent went up 8.53%). If you measure from 1981-2009, the CPI went up 3.11% annually, the stock market did 9.86%, and gold was 0%.
  • Is gold a currency hedge? There is no base of currency tied to gold, so its value is tied only to market forces. In other words, no currency is tied to gold, which might make it a store of value.
  • Is it easy to buy gold? If you buy physical gold, like bars or coins, you have to pay a commission, store it, and sell it at a commission. The commission on gold is vastly higher than the commission on stocks and infinitely higher than no-load mutual funds. (In fairness, you can buy GLD, an ETF that buys and stores gold, but you are still paying storage and commission through the ETF). By the way, gold can be stolen; it’s tougher to steal GE (although I suppose that Enron was stolen).
  • What about the emergency scenario, if the economy collapses? If everything goes to hell, the argument is that gold will be valuable: you can have a little sack of gold coins to trade with other survivors of the apocalypse. I assure you, if everything goes to hell, my .45 automatic (and a couple of hundred rounds of ammo) will assure me greater possession of food, beer, shelter and gold (although I think I would want food, beer and shelter rather than the gold: more ammo too) than a little sack of gold coins.
  • But I keep hearing about gold and reading the ads…If gold is such a darn good investment, why are people spending millions of dollars in advertising trying to sell it to me (Why don’t they just buy more gold?).

So, other than the fact that it has not outperformed the markets, has not served as an inflation hedge, does not appear to be a currency hedge, has no cash flow, and high carrying costs, gold seems fine: For a nice gift for my wife. I predict the returns could be good.

All that glitters…