All I See Is Gold
The words above are often attributed to Egyptologist Howard Carter when, on November 26, 1922, he first peered into the tomb of Tutankhamun. It’s not really what he said (see the Fun Fact below) but the phrase stuck because of our fascination with that mystical precious metal.
Gold has always been the talk of high society, but recently it has become the talk of the financial media, primarily because of the over 50% price run up this year to over $4,000 an ounce. You know things are getting wild when the Wall Street Journal writes about a California welder who has taken up prospecting for gold — complete with metal detector, pick and shovel.
Should you have gold as part of your investment strategy? There’s no simple answer. Although I do have an opinion that I will share. First, let’s be clear about some facts about gold:
- Not all “gold” is the same. There are two categories: bullion and collectible coins. Bullion can be bars or coins, but the only value is in the gold itself as determined by its weight. Collectible coins can have a value over their weight in gold because of the history and rarity of a particular coin.
- Actual physical gold is a pain in the neck to store and keep safe, for obvious reasons.
- Physical gold is not so easy to turn into cash. You just can’t hand it to a banker and get paid the spot price (the current market price) in crisp new bills. You must go through a gold dealer, who will give you (sometimes much) less than the spot price because he or she needs to make a profit on the resale. In addition, physical gold appreciation can be taxed as a collectible at a 28% tax rate, which is higher than the typical 20% capital gains tax rate.
- You don’t have to own physical gold to get some investment exposure. There are gold ETFs, which are investments that represent a specific amount of gold and the ETF fund itself stores and protects the physical gold. For those folks who want gold in their safe just in case Armageddon arrives, the ETF doesn’t cut mustard. If you’re just looking for a convenient way to get some gold investment exposure, then the ETF route can make sense.
Here’s my opinion on gold as part of your investment strategy. It’s hard for me to get my arms around calling gold an investment because it doesn’t produce anything. No profit sharing, no dividends, no interest. It just sits there, and when people find a reason to be more scared than usual (right now it’s the fear of the US dollar’s crumbling international reputation) than there’s a very human reaction to rush for gold, and thus demand peaks. When the crisis subsides, so does demand and thus the price of gold.
In fact, in the last 45 years, gold ($800/oz in 1980) has gone up 5X while the standard inflation measure has gone up 4.14X. Gold has barely risen faster than inflation, and if not for the huge run up in the last 10 months it would not have a stellar track record against inflation over the last 45 years. Stocks, as represented by the S&P 500 have gone up 62X during that same period. Is there really any question as to the better inflation hedge?
Let me conclude with a real-life scenario. My wife and I do own physical gold – 10 one oz coins that my father-in-law gave to us decades ago. I store them in a safe spot but still get nervous about them from time to time. I guess I can value them at $40,000 for the moment. I always joke that if the world goes crazy, I will cut each coin into quarters so we can buy food and gas–but I will likely never spend them. I don’t really need the value for support, and they have a sentimental value to my wife. We will probably give them to our kids or grandkids as gifts years from now…and then they will hold them for decades until they do the same. Gold…fun and interesting to hold? – definitely. An important part of your investment portfolio? – Not in my book.
Fun Fact: When British Egyptologist Howard Carter first opened King Tut’s tomb and pushed his candle inside his assistant asked, “Can you see anything?” Carter paused for a time to let his eyes adjust to the darkness and then said “Yes, wonderful things!” There was surely lots of gold, including a gold death mask currently valued at $2 million and a gold coffin valued at $1.7 million. The collection is insured for over $900 million dollars. Tutankhamun became king at age 9 and died at age 19.
