Monday, August 17, 2020

Gold – A Great Investment?

Pathways Advisory Group, Inc.
Jeff Karst, CFP®










Gold is back in the news again after hitting record highs.  This seems reminiscent of a few years ago (about 9 actually) when gold was on everybody’s mind.  We had just gone through the financial crisis and even though stocks had partially recovered from dramatic lows, they still hadn’t reached the previous highs.  There were quite a few ads for “securing” your money by owning gold.  They might even be airing the same ads they did back then – “with such uncertainty in the stock market, protect yourself with gold”.

We’ve examined whether gold makes sense to hold in the portfolio but I’ll save that for another blog post.  I really wanted to look at what sort of return you could expect by owning gold.  We have certain expectations for stocks based on data going back as far as 1926.  Gold has been around a lot longer so surely it would be easy to review its return.

It turns out, it’s not so easy.  Gold has a tenuous past in the United States.  In 1933, the US Government ordered all gold coins and gold certificates valued over $100 to be turned in to the Federal Reserve and made it illegal for citizens to own gold (other than jewelry and some coins).  The US Government gave gold a price of $20.67/ounce initially and then raised the price to $35/ounce once it had possession of the gold.

It wasn’t until 1971 that President Nixon removed the fixed price of gold.  For 37 years, gold had the same, steady price.  Once the US Government allowed the price to change, it did so - rapidly and fluctuated quite a bit.  At the end of 1974, gold was trading as high as $195/ounce, even though during this time it was still technically illegal for US citizens to own gold bullion.  But, on New Year’s Eve in 1974, President Ford signed a bill making it legal to own.

If we wanted to look at the return of gold starting in 1934, it would be a bit unfair to gold since the government maintained the steady price.  Starting in 1971 could make sense but citizens still weren’t technically allowed to own gold until the beginning of 1975.  Starting in 1975 versus 1971 ignores the five-fold increase those few years but it’s easy to say much of that was due to the flat price for the previous time period.

I’m going to assume that someone wanted solid gold and bought in the beginning of 1975 when it became legal again.  Gold was trading between $175 and $190 per ounce, so let’s assume it was purchased at $180.  As I write this (on 7/30/2020), gold closed the day at $1974.  For the investor that bought gold in 1975, that would represent a 5.47% return on investment.

To put that in perspective, here are the results of some US indices starting in 1975 and ending 6/30/2020:

  • Consumer Price Index (inflation)                     3.59%
  • US Government T-Bills                                     4.46%
  • US Government Long Term Bonds                 8.95%
  • S&P 500 Index                                                  11.92%

During that time frame, gold did better than inflation and short-term T-bills. 

The commercials are not lying when they say it’s a “hedge against inflation”.  We just have to remember that “hedge against inflation” really means a return just above inflation which could easily be accomplished with a mix of short-term and long-term government bonds.  At least with bonds, your pockets won’t be so heavy.

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