Before we can understand if something is a good investment, we must first define what makes an investment “good.” Better yet, we could begin by describing what an ideal investment might look like and then compare that to gold. I believe an ideal investment is one that performs well in the long run while remaining liquid in the short run. An ideal investment has a long history of success, with bright prospects for the future.
An ideal investment has a good risk-to-reward profile, meaning the risks of significant loss are low, while the propensity for gains is high. The costs of owning an ideal investment are negligible, while the benefits of owning an ideal investment are significant. While there is no such thing as a perfect investment, gold comes as close as any to being an ideal investment for the world we live in today.
In the Long Run
Gold has a long history of success, for thousands of years. Gold has seen every type of economic or geopolitical storm that exists and brought its owners through with their wealth intact. Not many (if any) other assets can say the same. Whether economic depression, recession, stagflation, or war, gold has been effective at preserving and growing wealth through the most difficult of times. If we look at shorter periods, like hundreds of years, gold has performed similarly.
My Great Grandfather purchased some gold in 1918, which has been passed down through the years and remains in the family today. This gold has been stored in a metal security box for most of its life, during the Spanish Flu, World War I and II, The Great Depression, inflation, stagflation of the 1970s, The Great Recession, and the recent pandemic. In spite of these difficulties, the melt value of this gold is nearly 10,000% higher in dollar terms.
In spite of having a track record of good long-term performance, gold is liquid enough to be converted back into local currency at any point along the way. In my Great Grandfather’s case, he purchased American gold coinage of historical significance, which also survived the governmental confiscation period that began in the 1930s. While gold was at one time used in common circulation as coinage, it has retained its purchasing power even after being removed from official circulation. At any point in time, these coins could have been sold at the then-current value in dollar terms to meet the needs at hand.
The gold content by itself is worth 10,000% more than when he purchased it in today’s dollars. When allowing for the numismatic value of these coins, they are worth 22,000% more than in 1918.
Prospects for the Future
Historical performance alone does not ensure gold would be a good investment today. We also need a reasonable expectation that gold will do well in the future. If we look back 52 years to August of 1971, when President Nixon delinked the dollar from gold, gold has averaged 7.8% per year since. Looking back 20-years, gold has averaged 8.65% per year in dollar terms.
Using these numbers, it is reasonable to say that gold has averaged about 8% per year over the long term.
But for the last 10-years, gold has only averaged 4.04% per year in dollar terms. This means gold is due to outperform for the next 10-years, just to return to its long-term average of 8% per year. It will take an average of 12% per year for the next 10-years, just for gold to perform “average”.
In today’s environment, 12% is nothing to sneeze at. Gold has already started to outperform, up 16% from a year ago today. The setup for gold compares favorably to the setup for other investments. Looking at the stock market, for example, indicates that we will need 10-years of underperformance to bring stocks back to their long-term average returns. A recent article highlights the view that stocks are expected to average a 2% per year return going forward. Yesterday the Federal Reserve announced further interest rate increases, which can wreak havoc on bond prices. And commercial real estate values are plummeting in many regions of the country, while the housing market is equally challenging looking forward.
Against this backdrop of underperformance for the alternatives, a reasonable 12% average for gold looks like one of the best prospects for the next several years.
Risks, Rewards, Taxes, and Fees
The risk/reward profile of gold looks better than many of the alternatives available today. “All In Sustaining Costs” (AISC) is an important metric when evaluating the downside risks of investing in gold. The cost to mine gold has historically put an implied floor under the price of gold, limiting the downside risk. Recently those costs have been rising. The largest gold miner (Newmont) has recently seen AISC reach nearly $1,800/ounce, according to industry insider Steve St. Angelo of the SRSROCCO Report. With energy costs expected to rise in the coming months, this will continue to apply upward pressure to the floor underneath gold prices. A rising floor means lower risk. No such floor exists under stocks or real estate prices.
With gold, there are no annual reporting requirements, ongoing taxes, or fees associated with owning gold.
The gold purchased by my Great Grandfather has been held privately since 1918, with no taxes, fees, or reporting requirements for 105 years - only gains in value (in dollar terms). With other investments, sometimes, the ongoing fees and taxes can eat up most of the gains. Some of the fees for other investments are compliance costs related to reporting requirements. There are no such fees or reporting requirements to own gold. Thieves cannot steal what they do not know exists. Gold also cannot be hacked electronically or stolen via identity theft.
There are a myriad of other reasons why gold is not only a good investment but a timely one as well. We will explore this topic further in future articles and podcasts. There’s never a bad time to make a good investment. This is certainly true of gold today.