How Good Has Gold Been As An Investment?

|
Includes: GLD
by: Keith Yabz

On 21st Jan 1980 gold reached $850 an ounce and today it is $1,626 an ounce. Thus over 32 years the gold price has on average increased by 1.95% per annum.

You can prove anything with figures. Those who wish to prove that gold is a poor investment, and there are many who wish to, usually pick these dates. However you can make an entirely different case if you want to.

50 years is a nice round number and there is enough data available to do some meaningful calculations. It is also a sufficiently long period to have encompassed bear and bull markets in most asset classes.

Gold

S & P 500 Index

Silver

House Price Index

Diamond Prices

T-Bills

T-Bonds

50 years ago (1962)

$35/ounce

71

$1.2/ounce

15.8

2,700

Today (June 6 2012)

$1,626/ounce

1,285

$28/ounce

123

29,000

Annual increase

7.97%

5.95%

6.5%

4.22%

4.86%

5.22%

7.24%

Gain over half century

4,525 %

1,700 %

2,233 %

752%

974%

  • The house prices are calculated from Robert Schiller's house price index. It uses the nominal, non inflation adjusted number. The housing index does not include the rental value of the house.
  • Diamond prices are for a one carat colorless (D) flawless (IF) diamond.
  • The S&P index does not include dividends which would account for about half the gains. It also does not include taxes on dividends, capital gains tax, transactions costs, and whether the investor was able to successfully track the index.
  • This calculation does not put any value on 'beta' which is the measure of the correlation of an asset with the market as a whole. The lower the beta the more desirable the asset. Gold probably has the lowest beta of any asset class.

What makes the calculations almost impossibly complicated is the treatment of tax which would differ according to individual circumstances. If you held gold in physical form such as bars or coins and buried them in your back garden, this could be highly tax efficient. Ultimately tax could be the decisive factor in determining the best asset class.

Few people are aware of just what a great investment gold has been. There are a number of reasons for this.

  • The financial services industry has no motivation for encouraging people to buy gold. If they recommend gold at all it is in the form of shares in gold mining companies, where they can generate fees in the form of advice about which company to invest in.
  • Governments don't like people to own gold as it enables them to hold wealth outside out of the oversight of the regulatory authorities.
  • Widespread ownership of gold would threaten the fractional reserve banking system, and could ultimately undermine the global system of credit.

The threat of government action restricting ownership of gold could be an important consideration for gold investors - perhaps more so than gold's price performance.

Conclusion

Gold should not only be considered as a defensive asset; it is capable of outperforming stocks and other asset classes over long periods of time. Investors haven't yet woken up to this and perhaps they never will. But if they do this could have a dramatic effect on price given people's propensity for making decisions looking in the rear view mirror. In this event, if the authorities cannot continue suppressing the price they would be forced to take alternative actions - so investors should think about keeping gold in physical form.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.