The Case for Gold

Gold is often considered a poor long-term investment because it is a non-productive asset; an asset that does not generate income such as interest or dividends.  The list of reasons typically given by investors against gold invariably involves some version of:

1. Limited utility - limited industrial or practical uses.

2. Not a guaranteed inflation hedge - gold’s price may not keep up with inflation in all situations.

3. Storage and security costs - insurance, safety deposit boxes, physical security are required to protect physical gold assets which eat away at price appreciation gains.

4. Opportunity cost - stocks and debt instruments offer potentially higher returns.

5. Volatile prices - gold prices go up and down, making its value unpredictable in the short term.

Now that we understand some of the negative aspects of gold, why would we want to own gold and how can we go about it?

With so much written against it, what is the case for gold and how can we own it? 

We can own either physical gold, the type Warren Buffet says you can hold like a pet rock, or you can own synthetic gold or paper gold. I think of paper gold like a call option contract, only you cannot exercise the contract for the asset (gold) and instead are always paid out in cash settlement. 

The image below is from the economist called Luke Gromen. From 1902 to 1980, the Dow Jones industrial average (DJIA) grew by over 1,900%. The DJI/gold ratio over the same period, a loss of nearly 30%.

The chart below from Wealthy Venture Capitalist helps me understand the case for gold. As I look at this chart, it is important to remind myself that Bretton Woods exit in the early 1970s with gold priced at $35 per ounce, to gold over $900 an ounce in less than 10 years.  Well, I may not understand all the mechanics of why that happened. But it did happen. And it has continued to occur, despite calls that seemed absurd at the time like the August 1976 prediction from Citibank that gold would hit $60 an ounce.  And as I researched, I saw similar ebb and flow in price and sentiment for gold, but over time, gold has performed well relative to the US dollar, making it a continued portion of my portfolio for the foreseeable future. 

In conclusion, I want to own gold in my portfolio. I may not always understand why it behaves like it does, nor do I know where the price action will be in the near term. But I do believe over a long time frame, that gold will continue to be a good store of value. That said, I do not want to take the risk and extra costs to hold physical gold, so instead I am relying on the gold ETF with the ticker GLD to provide the desired exposure.