By its very nature, the investing industry is full of differing views on how one ought to invest their hard-earned cash. One of the more polarising debates is whether an investment in gold makes good sense. The debate tends to flare up each time gold experiences a rapid growth in value, such as in the last couple of years.

The pros

Gold has long been prized for its lustre and durability in jewellery, but its uses extend beyond this. As an excellent conductor, highly malleable, stable at high temperatures, and resistant to rust, gold is invaluable in industries like electronics, medicine, and aerospace. Its enduring demand contributes to its value and appeal to investors, as gold has retained purchasing power across centuries. For instance, in gold terms, the pay of a Roman centurion 2,000 years ago is comparable to that of a modern U.S. army captain[1].

Other positives are that gold offers uncorrelated returns to traditional assets such as bonds and equities, providing potential diversification benefits. Many see gold as an ‘Armageddon hedge’, expecting strong returns when faith in the financial system is shaken. Unlike many investment opportunities, gold is a relatively simple concept – being a lump of metal with a market value – and is easily accessed via physical purchase or low-cost open-end funds.

The cons

Gold prices are a function of supply and demand. Investors in gold speculate that others will desire it even more avidly in the future. Unlike traditional asset classes, gold produces no income stream [2], it does not pay dividends and usually costs owners to store and insure it. Many assume its long term expected return to sit somewhere near cash.

The chart below shows the increase in value of 1 ounce of gold from 1926 to August 2024, rising from around $20 to just over $2,500. Investing the same $20 in global equities during this period would have delivered a substantially superior outcome, nearly 50 times the cumulative gain.

Data source: Gold.org. Inflation: US CPI. Albion World Stock Market Index. https://smartersuccess.net/indices

Investors seeking an Armageddon hedge face a dilemma: while many opt for gold-backed funds or ETFs due to the challenges of storing physical gold, relying on the financial system to hedge against its collapse seems contradictory. Owning physical gold has its own issues due to its bulk and other risks such as theft. 

Though gold is often promoted as an inflation hedge, the evidence is weak. While it has maintained value over millennia, its performance over more relevant timeframes is less impressive—gold has yet to recover its February 1980 inflation-adjusted high in USD terms and saw an 83% drop in value over the following two decades[3].

The portfolio

Assessing whether gold belongs in your investment portfolio is the job of our investment committee. Each asset class must fill a specific role in your portfolio and is weighed up against the alternatives. In the case of gold, whilst it has some favourable characteristics, superior options exist. 

As Warren Buffet succinctly puts it:

"If you own one ounce of gold for eternity, you still only own one ounce at its end"

Warren Buffet (2012)

[1] Erb, Claude B. and Harvey, Campbell R., The Golden Dilemma (May 4, 2013). Available at SSRN: http://ssrn.com/abstract=2078535 or http://dx.doi.org/10.2139/ssrn.2078535

[2] Whilst gold itself does not produce an income stream, financial institutions may try and claw back some of the storage costs through gold lending revenues.

[3] Data source: Gold.org. Inflation: US CPI.

Risk warnings
This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.  

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

What is the impact of this pandemic on my investment portfolio? And what can you do to protect your future wealth?

As always, I will remind you we cannot predict the future. That is not our job. But what we can do is try and find similar issues in the past and see what strategy we can adopt today.

I have just finished reading ‘Dying of Money’ which was written by Jens Parsson. It tells the history of the German inflation after World War I and the US inflation after World War II. How they happened and what you can do to protect your wealth from events like this. The interesting one for me was the German inflation.

The Germans lost the war, as we know, but based their finances leading into the war and during the war on the basis that they would win. War was followed by reparations and then the Spanish Flu pandemic. The Germans broke with the gold standard and entered a period of money printing. Initially this led to a boom in the economy and very little inflation to speak of, but suddenly inflation got a grip and in a very short period the German Reichsmark became worthless. You could order a cup of tea and by the time it was served to you it was 20% more expensive.

After WWI, the Reichsmark was worth 23 cents to the $1. By the end of 1923, the Reichsmark was 1,000,000,000,000 to a $1! If you were a German depositor or a lender, you lost it all.

The money supply was the main issue. There were many reasons why the supply of money changed, but if you print more money, creating more notes, you make what you have worth less. To give a simple example. Let us say that the entire spare cash in the world is £1 and it is owned by one person. Let us also say that the only thing you can buy is a field of grass from someone else. There is nothing else to buy, just that one field of grass. Then the field, theoretically could be worth £1. If I now print another nine notes and give £1 each to nine more people as spare cash, we now have £10 in total available, but there is still only one field to buy. What is the field worth now? So, what can we learn from this:

• The nine people who got £1 each for doing nothing probably felt very happy!

• The first person to have a £1 saw his purchasing power reduce by 90%.

• The owner of the field retained their purchasing value.

Okay, that is a simple example, but we know that borrowing and spending in the western world and the printing of money; quantitative easing (QE), has been going on for years now. This virus has pushed all this out even further. There is no deposit interest to speak of and a great way of clearing all this debt, which cannot possibly be paid back in any reasonable length of time, is probably a savage bout of inflation.

So, who came out okay from the German Inflation, US inflation and my example? It was the people who owned real assets; shares in companies, home owners, land owners. Holders of precious metals as well. People who owned stuff.

Who lost? Those people who owned the money; bank depositors, cash and lenders.

And the big winners; Government and borrowers. Debts gone – happy days!

I believe we are now in unchartered territory. But history has shown that while shares can go up and down in value (as we have seen in recent months), they can be a good store of future long-term wealth, offering some inflation protection. There has never been a stock market that has gone bust, but there are several currencies that have disappeared!

Max Tennant

Risk Warning This newsletter does not constitute financial advice. Remember that your circumstances could change and you may have to cash in your investment when the value is low. The value of your investment and any income from it can go down as well as up and you may not get back the original amount invested. Past performance is not necessarily a guide to the future. If you are in any doubt you should seek financial advice.