In ancient times, the most valuable financial assets were gold coins. Throughout world history, individuals have wanted to own gold in times of political and economic turmoil. Since the Basel Accord established the current floating exchange rate regime in 1973, the price of gold has generally risen in times when the value of the U.S. dollar has fallen. This creates a real “appetite” for gold so news reports and ads featuring those producing or selling gold and gold-related investments get a lot of airtime. “Goldbugs” – defined as analysts enamored of gold as an investment, appear on TV daily and are broadcast over the radio. There’s a high level of anxiety about the U.S. dollar and the potential for future inflation. Given the level of debt at both the government and individual levels in the U.S. economy, such expectations are not irrational. What and how do we think about gold?
Gold, in 1980, hit a high of over $800 per ounce and fell as low as $300 per ounce by 2000. In real dollars, gold is still well below its inflation-adjusted highs. Prices rose to $825.50 per ounce on Jan. 21, 1980, which is $2,186.50 in today’s dollars. In 2008, it reached the $1,000 level and later dropped back down to $680; it recently re-crossed the $1,000 level – again reflecting the concerns about the falling dollar and potential future inflation. Gold is clearly a volatile investment and doesn’t have inherent long-term returns. Unlike bonds and stocks which represent claims on the income of a business or government or the increase in economic value of the business, gold generates no income and over time, the increase in gold’s value has often not kept pace with inflation.
We continually evaluate potential investments using knowledge, experience and assessments of the economic environment. We are anchored in long term historical data but open to new information. What’s our process to evaluate gold or any investment?
- We select asset classes and strategies considering historical and expected returns, volatility of those returns and how each asset class tends to perform relative to the others.
- We choose investments within these asset classes taking expenses and other factors into account.
- We assign a target allocation for clients based on his or her financial situation and tolerance and capacity for risk.
One thing we don’t do is recommend single assets within the asset classes. This increases risk. We don’t recommend individual company stocks. We don’t recommend individual corporate bonds. From our point of view, gold is an individual asset in the commodity asset class. We strive to help our clients reduce portfolio volatility and risk. Recommending gold would like increase volatility and risk.
We do consider the risk of inflation and a falling dollar and choose investments to protect against these risks. These include U.S. Treasury Inflation Protected Securities as part of our fixed income allocation and funds that have exposure to a diversified portfolio of the commodities asset class that includes gold and other precious metals. A mutual fund we recommend often has exposure to gold mining stocks.
In our professional opinion, these are better choices than gold to protect investors in an environment with a falling U.S. dollar and expected inflation.