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Investment Opportunities

Gold Bugs’ Favorite Chart… and the One That Kills Them

At the Four Seasons in Nevis a few weeks ago, I had a chat with a true dyed-in-the-wool gold bug.

A wealthy ex-pat, named Anthony, told me he doesn’t just have a lot of his money in gold – or even most of it.

“I’m 100% invested in gold,” he said with more confidence than I would have been able to muster under the circumstances.

After all, gold peaked at $1,895 an ounce over six years ago. It sells for around $1,175 today.

Anthony recited the old chestnut about how an ounce of gold could buy a fine men’s suit 100 yeas ago – and it could still buy a wool blend Georgio Armani today.

Gold will never go to zero, he said.

Looking into the future, Anthony insisted that the size of the U.S. debt – at $19 trillion and growing – meant that high inflation and, ultimately, a much higher gold price is guaranteed.

Hmm. When it comes to inflation and the price of “the barbarous relic,” the word guaranteed should by used sparingly, if at all.

Anthony doesn’t seem to fully understand the risk he is taking by putting all his eggs in that golden basket. For instance, he is acutely aware of the chart below. It shows that, thanks to inflation, the value of the greenback has steadily eroded for many decades, while gold has maintained its value.

investing in gold

And sure, if I had to choose between owning gold bullion or stuffing cash in a safe for 30 years, I’d choose the glittery stuff over the green stuff.

But investors don’t face this binary choice. If you don’t want to hold your money in depreciating currency, you can invest in T-bills, bonds or stocks.

All have done much better than gold over the long haul.

The chart below – from Jeremy Siegel’s investment classic Stocks for the Long Run – shows the performance of various asset classes over the last 200 years. (It hasn’t been updated in a few years, but it doesn’t matter. Stocks are much higher, and gold is even lower.)

investing in gold

Bills outperformed gold. Bonds outperformed gold. And stocks left everything else in the dust.

And while we don’t have reliable figures on equity returns that go back more than a couple hundred years, we have figures on gold that go back a few millennia.

Essentially, it holds its value in a way that paper money doesn’t. That’s because it is limited and tangible in a way that fiat currencies aren’t. But – as the chart attests – that doesn’t make it the best investment. Not by a long shot.

What about hyperinflation in the future?

That isn’t certain either. Japan, for instance, has the world’s biggest sovereign debt as a percentage of GDP – it’s more than twice ours – yet it doesn’t suffer from high inflation. In fact, it has the opposite problem. Prices there have been flat or falling for decades now.

Moreover, when gold peaked at over $800 an ounce in 1980, it then proceeded to fall for the next 20 years. (And those were not years of zero or negative inflation.) It didn’t stop tumbling until 1999, when gold came to rest below $270 an ounce.

That’s hardly a perfect inflation hedge. And, incidentally, if you do want a fine inflation hedge, Treasury Inflation-Protected Securities offer a federal guarantee that you will earn at least the rate of inflation.

I’m not suggesting that you shouldn’t hold gold. You should. But putting most or all of your money in it?

Sorry gold bugs, but that’s just nuts.

Good investing,

Alex


About

An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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