All that glitters – investing in Gold

Gold holds an unusual and fascinating allure in the investment world. Admittedly, even to me, the thought of gold ingots stored in a safe house just sounds kind of cool. It’s times like these that I start fielding questions such as, “should I have some gold in my portfolio?”  At the time of writing, an ounce of gold is priced at $1,499.23.  That’s an increase of $313 (or over 26%) over the past year. Who wouldn’t want a piece of that?

The truth of it though, is that over 200 years of recorded history, gold has essentially simply been a store of value. It has roughly kept pace with inflation, but it has not been accretive. Put another way, the amount of gold it took to buy a bag of groceries in 1802 is about the same amount of gold it would take to buy a bag of groceries today. An ounce of gold owned in 1802 didn’t grow in value, but it did roughly maintain its purchasing power. Sure – there have been times in history where it’s jumped.  But there have also been times where it’s slumped. All in all, it has simply been a store of value.

Don’t get me wrong. Gold can have a place, but it should never be considered a money-making strategy. If you are a come-the-revolution sort or if you are a post-tribulation type, buy a bit of gold as insurance. If you are a student of history, you know that Germany was a pretty calm, happy (even democratic) place before Hitler. The transition from a peaceful democratic society to one of utter evil was incredibly quick. Could that happen here?  Of course, yet highly unlikely that it would happen in our lifetime. But if you are the type of person who wants to have a little insurance against the potential for that type of rapid, catastrophic societal decline, then by all means pick up a few gold coins or bullion and store them in a safe accessible place.

Just don’t buy gold because you think it’s a good investment. It’s a lousy investment. Buy it as jewelry that you can enjoy or coins and bars as an insurance policy that you hope you will never need, and expect that (like all insurance) it will cost you money, not make you money. There’s a chance that it might work out in the short run – it certainly has in the past year – but odds are very much against that in the long run.

I’m not alone in my thinking. Warren Buffet had this to say about it in his 2011 Berkshire Hathaway annual report (and while you’re reading, note the price of gold then compared to now)…

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

A century from now…

The 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty…

Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons).

The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Owning a diversified group of great companies that accrete in value over long periods of time is the best recipe for getting wealthy.  To the extent that you just can’t live with the risk inherent in being an owner of companies (read stocks), add in some bonds.  Mutual funds are one of the easiest ways to accomplish either in a well diversified manner.

If it’s the glitter of gold that you want, buy a ring or buy it for insurance.  Just don’t buy it to make a buck.

Arnold Machel, CFP® lives, works and worships in the White Rock/South Surrey area where he attends Gracepoint Community Church.  He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services.  Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca.  Please note that all comments are of a general nature and should not be relied upon as individual advice.  The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation.   While every attempt is made to ensure accuracy, facts and figures are not guaranteed.