Yesterday, I attended the San Francsico CFA discussion of commodities as investments in an inflationary environment. Naturally, I had a bunch of questions about gold.
One of the presenters made the point that Gold has been a lousy investment. I gave him my card, and in a follow up note, he wrote the following:
“… I checked our databases and since the US came off the gold standard in 1975, I found these historical numbers:
Gold in 1975: $140
Gold in 2008: $865 (up 518%)
Dow Jones in 1975: 852
Dow Jones in 2008: 8776 (up 930% in spite of the financial crisis)
US Dollar Index in 1975: 33.0
US Dollar Index in 2008: 96.1 (up 191% which has had a positive impact on the gold price as it’s in US dollars)
It’s true that gold is much higher now but that underlies the point I made that gold is a great trade but has proved many times to be a poor investment – end point sensitivity is pretty much the only way you can ever make gold look like a good investment. If you take random periods that are 20 years apart, gold is likely to look poor – stocks won’t. Additionally, gold doesn’t deliver income and has no intrinsic value that isn’t connected to subjective views as opposed to something more objective like earnings.”
My response was that I thought it was important to start the analysis with the beginning of the current global monetary system, which is with the abandonment of the Bretton Woods system by Nixon in 1971. I put these charts together based on some historical data that I found. From them, it looks like:
o The S&P has outperformed gold over the period, and by a significant margin thru most of the 1990s and 2000s.
o In 1 year time frames, gold has outperformed the S&P in about half of the years since the US went off the gold standard, including 8 of the last 10
o The correlation between gold prices and the S&P is low.
What I think is remarkable here is not that Gold outperformed the S&P, but simply that it was close. S&P returns are a function of business risk, credit risks, and leverage. By contrast, gold has none of those.
And yet, I’m not sure that comparing gold to the S&P is meaningful investment analysis. Gold is a store of value and a raw form of money, and its returns should be compared to those of other forms of money, such as currencies and certain other commodities. It is not an investment. Investing involves predicting future cashflows and assigning a probability to actually receiving them. A purchase of gold involves no such analysis. It’s simply a hedge against the debasement of currency.
The difference is that it’s easy to extract a yield from currencies by investing them, or from land, by farming it or renting it. But, for whatever reason, despite $4.5 trillion of mined gold in the world, there seem to be few avenues for borrowing and lending it. For centuries people have borrowed and lent gold as money, and yet today, earning interest on a gold balance is as difficult a concept as squeezing water from a stone, despite the high, uncorrelated, and unleveraged returns since 1971. I find this fact very odd.
