[Editor's note: This is Part II of a two-part series on whether it makes sense to include gold in your portfolio. Part I is “Should gold be part of my portfolio?“]
This is the second installment of a two-part series about gold as an investment for your portfolio. The two posts may appear like a candidate's debate or popularity contest, but they really aren't. Our purpose is not to win an argument in either direction — it is, simply, to provide you with both sides of an issue which doesn't have a clear-cut best side (no matter what people may try to tell you). Our hope is that this format provides you with sufficient information to make an informed decision.
Yesterday you saw the reasons why gold should not be part of your investment portfolio. And those reasons are valid, but (and you knew there was a “but” coming) before you shut your mind to the notion of owning gold in some form, you might want to ask yourself: How come, if gold was such a terrible thing to invest in, is it by far the oldest, and most consistent investment of all in the history of humanity?
There are (if you want to keep an open mind long enough to consider them) several reasons:
1. Gold is Time-Tested
Times change appetites, and so it is with the investment flavor of the month. Dig back through the musty archives of human history, and you will discover that no other investment has stood the test of time like gold. None. As Robert Brokamp mentioned yesterday, there was a time when the latest wisdom said that tulip bulbs were a better investment than gold. And, indeed, for a short period, they were. In the long term, well, you know how that turned out.
From the traders in the time of Hammurabi to Genghis Khan and Marco Polo, the universal investment vehicle has always been gold. We have roughly about 6,000 years of recorded human history — and gold has been a part of all of it.
Compare that to the stock market as we know it, which is barely a hundred years old and still wet around the ears, relatively speaking. And if you think the stock market is young, mutual funds are like kids in diapers running barefoot around the yard. Index funds are the infants in the group, being even younger than mutual funds.
Tulips bulbs and mutual funds may not be around a few decades from now, but gold will always be there.
That's not to knock the investments we take for granted today; millions do well with them every day (and you can count me among that number). All I am saying is be careful before you totally dismiss an investment that has proven itself over a far longer period of time.
2. Gold is a Universal Store of Value
No matter which country you go to, gold is immediately recognized as valuable. Take out a few pieces of gold in a rural village in Tibet or Tanzania and you're in business. Try that with an index fund, or even your dollars, pounds, yuan, yen, or rubles.
At its core, investing is simply shopping: You shop for things to buy in the hopes they will increase in value and/or give you money every year. The difference between investing and shopping is that, at some point, you have to sell the investment to buy other things. Nobody can predict the future — let's just get that out of the way — but it is good to know that when it comes time to sell, your investment has been in universal demand for as long as humans have recorded their history.
3. Gold Offers Safety
For what purpose do you invest? A rainy day. But, when the days get rainy, what happens to most investments? They tank … just when you need them most. Gold, for reasons nobody has been able to fathom accurately, is the investment of choice around the world for those who are preparing for a rainy day. Rainy days are not confined to recessions. Something like the oil embargo of 1973 brought unprecedented change to America. Gold was the only investment which offered safety during that crisis.
Not to be an alarmist here, but domestic upheaval or major war is always unthinkable … until it happens. In just the last hundred years, we've seen not one, but two world wars. On top of that, many countries have undergone major changes in government, even revolution. Not long ago, peasants looted the wealthy in two of the largest countries — Russia and China.
It still happens in other parts of the world. Those are not just arcane lines in a dusty library history book; there are many people alive today that experienced those events when they happened. If you are inclined to scoff that something like that will never happen here, consider this: Social upheaval always follows unusual and indefensible shifts of wealth from the poor to the super-wealthy. Again, I am not suggesting this is going to happen to you; but, do you think that America's run-away debt — like those in other nations, such as Greece — will leave the money world as we know it unaffected?
If anything happens to paper money systems anywhere, gold alone has proven itself as the safest of investments available to the mortal man … for thousands of years. No other investment can make that claim. Even real estate bombed in the Great Depression.
4. Gold Remains the Most Portable Investment of All
Heaven forbid that you should have to change countries; but even if you just want to, there is no better means of taking your wealth with you than gold. This type of circumstance can be as dramatic as the Russian pogroms which forced Jews to flee in haste or as mundane as your wanting to spend five years traveling the world. The only instrument of wealth most people took (literally) with them when they faced similar events was their gold.
Again, you may argue that this situation doesn't apply to you, and you may be right. But what if you simply want to move to Belize or Mexico because their cost of living is much lower, they don't force you buy overpriced health care and, well, whatever reason you regard as important? You may have access to your mutual funds … but then again, you may not. It is important to realize that those links to investments can be severed at any time when life-changing events like those examples unfold.
5. Gold's Return on Investment
“Yeah, yeah, yeah,” you may be saying, “that's fine, but it sounds a bit like a politician looking for a vote. I am not interested in voting; I just want to make the best investment for my family's future. Sure, some of those arguments may be true, but come on, man. The commies aren't going to invade us any day soon, so knock it off. Any investment is about risk and return. Cut to the chase.”
In America (where most readers are) the gold price was pegged at $35 an ounce until the late '60s, when the U.S. government started backing away from it bit by bit until, by 1972, gold traded freely. So, let's compare the return of an investment in gold since that time with an investment in the Dow Jones Industrial Average (since index funds weren't around that far back):
Gold has outperformed stocks — so far. Those are the facts in black and white (or Bronco colors, my favorite).
It is hard to argue against hard facts, but that has never stopped determined scoffers. They try to explain away gold's superior track record in two ways:
A. Manipulating dates
Anyone can play with dates to make a chart look different. That is not hard to do if you want to make things look your way. Simply pick a start date corresponding to a peak in the gold price in the chart above. From that particular point on, the Dow is guaranteed to outperform gold (and make you a hero if you want to discount gold's return on investment). For instance, let's pick 1981 as the start date for a chart:
Bingo! Look how much better the stock market and mutual funds look now as opposed to an investment in gold. However, you can use the same trick to support the opposite argument by simply picking a different start date:
I am not playing games with dates because I am just trying to find the truth myself (as an investor). Therefore, I went with the longest period possible to provide all of us with the best idea, objectively, of how gold performs. And, frankly, I was surprised to see how good it was.
B. The future
The second argument scoffers respond with when they see gold has outperformed stocks (and, by inference, the mutual funds based on stocks) is that the past is no predictor of the future. And technically speaking, they are correct of course. But the same applies to whatever else they tout as well, and … what else can we use?
None of us can predict the future — nobody. Yet, by its very nature, investing is all about the future. We need to make investing decisions for the future, which we cannot predict.
The only alternative to history as a decision base is a story of some sort, such as, “I believe developing countries are going to grow” or “an index fund will offer the best return with least risk.” The people who say those things may believe them passionately, but upon what are they actually based? The past and some story.
Whether you are Warren Buffett or Joe Shmoe, we all make decisions based on some measure of fact and fiction. The past is the fact, and the story about the future is the fiction. We all do it — none of us are superior in some way to be able to tell the future.
And the fact is that gold has outperformed the Dow ever since it was set free in the early '70s. You have to add your own story about its future.
When all is said and done, I make more money from my investment efforts than from my writing pursuits. Therefore, I look at this question from my own perspective: Should I have gold in my portfolio or not? I really couldn't care less if I win or lose the argument; it sincerely comes down to wanting to know what the best investment is that I can make for my (not so long anymore) future.
For decades, I was a scoffer. I passed on anything to do with gold, despite that I came from the country whose entire economy was built on being the largest gold exporter in history.
No longer. Several facts have forced me to reconsider my views:
- The burgeoning debt of many governments
- An anemic economic recovery without a solid technological base
- Central banks the world over have no room to lower interest rates to end the next recession
Personally, I will never sell everything else and just buy gold; but to totally ignore gold as an investment is, I believe, no longer prudent. As with any investment, I will not choose an entry point near a peak, but gold is not at a peak right now.
The whole idea behind an investment portfolio is that you can't know what the best investment will be for the future, so you pick a half-dozen or so of them in the belief that some will shine when others stall. Gold, I believe, should be one of those elements in everyone's portfolio. And isn't that what the titles of the two posts asked?
The vehicle I have chosen is the GLD ETF, because it actually owns the gold in a vault in London, as opposed to owning futures contracts. They publish, every day, a complete listing of every gold bar they own, down to the serial number, and that list is audited twice a year. (If you print it out, prepare to burn over 800 pages.) While owning an ETF like that is not the same as owning physical gold, it captures the behavior of the metal's price with the lowest overhead. Granted, it doesn't have many of the benefits listed above, but it is close enough for my personal taste. So, I have put a smallish part of my money where my post is. :)
Again, the reason we wrote these two posts back to back is to give you the opportunity to hear both sides of the gold-investment argument, as it were. The future is unknown, and none of us can know which choice will turn out better. But each side has its merits, and each side's supporters have their beliefs — some held with great passion. The object, though, is not to win with words or votes, it is to help you understand the pros and cons well enough to make an informed decision about how to get the best return on your money.
What do you think? Has our discussion helped you solidify your position on gold as an investment? Should gold be part of your portfolio?
Author: William Cowie
William Cowie spent 30 years in senior management (CFO/CEO) before retiring. He has a bachelor's, a master's, and a partial doctorate in management and strategy. Author of the book “The Four Seasons of the Economy,” William also assists medium-sized businesses in the use of the Four Season Strategy to help them capitalize on economic cycles. He runs two blogs: Bite the Bullet Investing (investing) and Drop Dead Money (the economy) and writes for several other blogs in addition.