2001-2011: The Golden Years of Investing
I’m being tongue in cheek, but speaking literally of gold and all the gold hype. Before 2000 for about twenty years gold was hardly spoken of in the media as an investment of any interest. Let’s look at some history:
From the period of 1934-1971 gold was set at a fixed rate of $35.00 = one ounce of gold. The purpose was to set an internationally understood declaration of what US dollars were worth. Anyone could trade $35.00 American dollars for one ounce of gold. In the late 1960s people began to seek to increase their gold reserves by cashing in on this promise. Our gold supply drained down until August 15, 1971 when Nixon close the gold window. The price of gold climbed steadily reaching $850 per ounce on January 21, 1980 (which also caused interest rates on mortgages, US Treasuries, CDs and everything else to go to historic highs – high oil prices exasperated the problem).
For today I’m more interested in the price of gold and gold as an investment; more specifically, whether or not gold is a good investment. What I tell clients when they ask this is, “Does your net worth care HOW it increased or what vehicles it took to grow, or is it more concerned THAT it increased?” Obviously, most people don’t really care whether or not they made money in stocks, bonds or in gold, they just care that their money grew. Gold, because it’s gold, has an inherit illusion of value more than a stock. We, the people of the earth, have used it forever. But for now ignore that it is gold and let’s pretend that it is a stock of XYZ Company and retrace its steps going back to the last time gold was hyped up to these levels.
Some may be shocked that as recently as 1971 you could buy an ounce of gold for $35.00. I can feel my readers kicking themselves for not stockpiling gold while they could. Let’s look at a rate of return. Gold recently peaked at $1,913. So we’re looking at about a 40 year time span and I’m calculating this at about a 10.52% rate of return, which is about what the major equity indices have averaged the past 80 years. And let’s be honest here, for those who are diving into this gold hype, what prices did they pay? Did they jump in at $35.00 or some of the low prices of late 90s? It’s very unlikely as it is simply the nature of bubbles that investors jump into the investment later in the price run up and that demand gives the price even more increase… until, it doesn’t and everyone panics out of it. Was this not the same thing with: the dot.com hysteria, oil and real estate?
So, is gold a good investment? Will it go to $2,500 an ounce? $5,000 an ounce? I have no idea. But what would make it go that high? It would be an investing environment of extreme fear and the people of the earth fleeing to perceived safety. If it did hit those levels, does anyone believe that it would permanently stay at those levels? I’ve never heard anyone say “yes”; furthermore, most of the gold hype implies letting it rise and pulling out at the peak. This is patently stupid. For one, the last time it peaked, it didn’t return to those peak levels for nearly 30 years. Ahem, no growth or dividends or anything for 30 years.
More importantly, how good is anyone at timing a market peak? Nobody. Lastly, historically speaking what happens to all periods of extreme fear? They end. At some point, the mass fear settles down. Today, is anyone afraid of the Cuba Missile Crisis? Communists? The Russians? The Japanese systematically buying America? Not really. How about more recent history? How afraid is the typical American of “the next terrorist attack”? For years after 9/11 all we heard about was where they would strike next. How about us going to war with Iran? Very few people are even thinking about this anymore. So what are the fears d’jour? The Euro dissolving, where are the jobs going to come from, the deficit, etc. Take your pick.
Based on history, I humbly assert that at some point in the future, people won’t be worried about the financial crisis anymore. It will begin to feel like past history and something that is behind us. Investors will feel confidence in their financial systems and will invest in “normal” things (not overbuying things like cash, gold, and US Treasuries). Does it mean that bad stuff won’t happen between now and then? Who knows, but the point is that gold is a completely irrational long-term investment. I sorrowfully chuckle every time I see an advertisement hyping up buying gold… “It has quintupled in the past 10 years… it’s constantly setting record prices”. Folks, these are all reasons to get out of gold, not buy it.
Sometimes we hear the claim that people will eventually realize that dollars are worthless (because of a lack of gold backing) and that it only has the illusion of value. Yellow metal has some intrinsic value for commercial use, but that value is largely nothing more than the markets behaving like a large voting machine. Millions of people are voting on the price of gold, based less on supply and demand issues, but on guesses on future price. This is never a good way to analyze any investment.
I’ll leave you with a perfect quote from Warren Buffett, “You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all-not some-all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Investing in securities, including stocks and bonds, is subject to market fluctuation and possible loss of principal. No strategy can assure success or protect against loss.
Chad Gordon is registered with, and securities are offered through LPL Financial, Member FINRA/SIPC.