“We are living in a world of money printing.… That is why I have to recommend gold again…. Once gold surpasses $1,800 an ounce, it will run to the low-to mid $2,000s.” Quotation attributed to Felix Zuelauf, Zuelauf Asset Management. “Here’s What’s Cooking for 2013,” Barron’s, January 21, 2013.
Each January, a group of prominent investment professionals gather in New York as members of the Barron’s Roundtable to trade quips, stock ideas, and the outlook for markets and economic trends worldwide. Barron’s—a weekly financial newspaper with a small but devoted following of professional and do-it-yourself investors—publishes a transcript of their remarks. The quotations above are excerpts from this year’s panel discussion, and to the best of our knowledge they represent the only occasion that gold-related investments were among the participant’s choices for capital appreciation during the year ahead.
Although the year is far from over, it’s off to a rough start for gold enthusiasts. A sharp selloff in mid-April sent bullion prices to $1,395 on April 15, down 15.7% for the year to date and 26.4% below the peak of $1,895 reached in early September 2011. For the 10-year period ending March 31, 2013, gold enthusiasts have a more positive story to tell: The annualized return for gold spot prices was 16.83%, compared to annualized total returns of 8.53% for the S&P 500 Index, and 2.34% for the S&P Goldman Sachs Commodity Index.
Taking a longer view, for the 40-year period ending March 31, 2013, gold performed in line with many widely followed fixed income benchmarks, while lagging behind most equity indices. It is ironic that the return on gold over the past four decades is essentially indistinguishable from five-year US Treasury notes (see table).
|Gold vs. Benchmarks 1973-2013*|
|Index||Annualized Return (%)||Growth of $1|
|S&P 500 Index||10.18||$48.30|
|Five-Year US Treasury Notes||7.69||$19.40|
|Gold Spot Price||7.63||$18.95|
|One-Month US Treasury Bills||5.29||$ 7.86|
*40-year period ending March 31, 2013
Some might argue that gold’s price behavior will never succumb to rational analysis. For those seeking to try, “The Golden Dilemma,” a recently updated paper by Claude Erb and Campbell Harvey offers a useful framework for discussion without necessarily resolving the debate.
The authors cite a number of reasons advanced in support of gold ownership, including a hedge against inflation, a safe haven in times of stress, an alternative to assets with low real returns, and its “underowned” status across investor portfolios. Although the inflation hedge argument is likely the most frequently cited attraction for gold investors, the authors find little evidence that gold has been an effective hedge against unexpected inflation. They go on to poke holes in the assertion that gold qualifies as a genuinely safe haven.
What should investors make of all this? In our view, long-run investment results for any individual reflect the combination of available capital market returns and the investor’s behavior and temperament. As Warren Buffett has observed, excitement and expenses are the enemy of every investor, and all of us could benefit by examining our inclination to invest with our hearts rather than our heads. Often, the decision to own gold is motivated by an emotional response to current events, leading to a shift in asset allocation strategy and a failure to achieve capital market rates of return. If adopting a permanent 5% allocation to gold encourages investors to maintain a buy-and-hold strategy for the remaining 95% of their portfolio, that is a sensible solution for some.