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Gold as an asset class

The dragon from The Hobbit hoarding his gold.

There’s not much else in investing that’s like gold. Companies listed on the stock market come and go. Currencies come and go. Heck, countries come and go!

But you’ll find gold in the Bible, and even before that.

I suppose it’s possible that in the year 4018 we’ll still be comparing this Vanguard tracker fund to that iShares version. But don’t hold your breath.

Of course, presuming scientific progress continues apace we’ll probably be able to make all the gold we want by then in our own 3D printing machines, as easily as making toast today.

This may put a distant Best Before date on two of the great virtues of gold – its relative scarcity and its peerless immutability – for anyone looking to invest over the next few centuries.1

On the other hand, alchemists have been trying to turn mundane matter into gold for millennia, and they didn’t get very far.

Had they succeeded they presumably would have crashed the gold price anyway – in the same way rampaging conquistadors in the Age of Discovery caused spiraling inflation in Spain when they sent back ships full of silver.

I told you these metals had history.

Gold: The barbarous relic

If this topic already strikes you as absurd in a discussion about modern investing, you’re not alone. Many investors hate the very idea of gold.

People have been digging up, fighting over, and reburying gold at vast expense for thousands of years. In that time it has done little for us save fill a few teeth, adorn the toilet seats of oligarchs and a certain US president, and play a modest role in electronics.

Yet gold continues to be coveted. And that alone is what gives it its great value.

Owning gold earns you no income. Shares pay dividends – or at least the promise of future dividends – and property and bonds pay an income, too. Even cash in the bank earns you some interest.

But gold pays zilch. If you buy one ounce of gold today and keep hold of it, in 100 years you’ll still have one ounce of gold. Gold doesn’t grow like a fruit tree or send you cheques in the mail. It just sits there. Looking shiny.

Worse, gold costs you money to keep it.

Because gold is expensive and easily transported – another of its benefits, actually, especially in a Mad Max societal breakdown scenario – it’s easily stolen.

This means gold must be kept under lock and key. And that costs money.

We can break down the cost of owning gold into two components:

  • The direct cost of owning gold (fees to buy and hold, insurance, retaining your own gang of armed thugs et cetera)
  • The opportunity cost of owning gold instead of cash (that is, the income you forego by having your money in gold instead of cash or bonds)

All assets come with these costs to varying degrees. With gold they loom larger.

Gold fingered

Another thing to remember is almost all the gold ever extracted is still out there somewhere.

Gold isn’t a commodity like oil or wheat that’s consumed. Its resistance to decay means gold stocks are always increasing, albeit slowly and with some lost in rotting hulks beneath the waves or forgotten under mattresses.

  • When the price is high, gold comes out of the woodwork, as ordinary people cash in the gold trinkets or jewelry they have around the house.
  • When the gold price falls, people forget about it. (And gold enthusiasts blame a global conspiracy.)

Gold price advances and declines can run for decades, with little apparent rhyme or reason.

The following chart shows the gold price in dollars2 over the past 100 years (in log format, which is the best way to view long-term charts):

Gold price since 1915. (Click to enlarge).

Source: Macro Trends.

That looks great, but remember two things. Firstly 100 years is very long time. Secondly, inflation eroded the value of a dollar over that time.

Here’s the same chart showing real returns (that is, adjusted for inflation by deflating using the US consumer price index):

Gold price, inflation-adjusted. (Click to enlarge.)

Source: Macro Trends.

We can see that gold has broadly kept – and even slightly grown – its value over the past 100 years after adjusting for inflation. But the ride has been very rocky, and there have been many periods where you lost money in real terms in gold.

How enthusiastically the typical investor will talk about owning gold probably depends on where they bought (and perhaps sold) on this timeline.

You might retort that the FTSE 100 index of shares didn’t make much progress following its year 2000 peak, say. The index was still underwater 15 years later.

True, but remember you would also have received regular dividends from your stake in the FTSE 100. Had you reinvested that income back into the index over time, you were up nearly 70% on your 1999 position by 2015.

In contrast, whether or not gold is in the doldrums you get paid nothing. In fact you pay to keep your dwindling pot of gold safe and secure.

Reasons to own gold

You may ask why anyone would own gold, given all these drawbacks? There’s a lot of stuff we used to do religiously that we don’t do anymore. Should hoarding gold go the way of other out-of-date wisdom, such that business about coveting your neighbors’ ass?

Views differ, to put it mildly. Respected passive investment writers such as Tim Hale and Lars Kroijer tell you to skip gold. Warren Buffett, the greatest active investor of all-time, also thinks gold is pointless.

But not everyone who invests in gold is a moony-eyed maniac longing for the return of the Aztec empire. These sober gold owners have three good reasons to hold gold:

Store of long-term value – Gold is often touted as retaining its worth against the ravages of inflation. Gold doesn’t pay an income, but over the long-term the price has risen and that’s preserved purchasing power. You will hear folksy anecdotes about an ounce of gold always being able to buy a decent tailored suit, for example. More rigorously, respected researchers such as those behind the Credit Suisse Global Yearbook3 have found that gold has on average been resistant to inflation in developed markets over the long-term. But beyond keeping its value, real4 returns have been small to non-existent, depending on your country, and there have been long periods where gold was underwater. Gold does not move in lockstep with inflation – not even when measured over years. Some people argue the price is so erratic it’s useless as a protector against inflation, since it cannot be relied upon.

Asset of last resort – Such gold skeptics would not include anyone unlucky enough to live in a period of hyperinflation for their economy. To a middle-class German in the 1930s – spending their wages in bundles of paper notes from a wheelbarrow before they become worthless – quibbling over a few percent of return might sound ludicrous. Similarly, German Jews couldn’t take much with them when they fled the Nazis, but gold could be hidden in a coat or shoe. Inflation-protected government bonds probably won’t cut the mustard at the end of the world, but the precious metal might still buy you safer passage. (Cynics say you need guns and baked beans (and a can opener) in that dire scenario.)

Gold is not very correlated with shares and bonds – I mentioned the gold price is erratic. It’s also, historically, shown little inclination to pay any attention to what other asset classes are doing. This almost makes gold the Holy Grail of investing – a non-correlated asset that can improve diversification and potentially cushion your portfolio – except for its very low expected returns. Your gold may or may not crash when your shares or bonds do, but it could equally well fall when the rest of your portfolio rises – and all without any great confidence of a good long-term real return. Still, you could get a rebalancing benefit from tinkering with your positions over time.

Notice how the correlation is lowest with important assets like stocks and bonds.

Source: GBI Gold / Bloomberg / Erste Group.

For most people who want to own some gold, these factors point towards it being an emergency or insurance asset, rather than a big holding. Having 3-5% in gold won’t do your long-term returns massive harm if you’re unlucky enough to own it through a long gold bear market – and it may come into its own in a crisis.

But as I say, views differ, and some investors own a lot of gold. One interesting low-volatility model allocation – the Permanent Portfolio – mandates a massive 25% holding in gold.

Also, true gold bugs (don’t call them that to their face) would argue even 100 years of return data is deceptive. They’d note all paper money (like our pounds and dollars) has eventually failed in the past – yet people still value gold today.

There’s no definitive answer. As I said, gold is strange like that.

Perhaps the best metric is how do you feel about it? If you’re drawn to gold and you’re happy to pay for it, then no doubt other people are, too. Buy a little.

If you’re repulsed by gold, don’t feel guilty about skipping it. You’ll do fine. Probably.

How to hold gold

Should you decide to you want to own some gold, you’ll need to decide how and where. Because another weird thing about gold is there’s a lot of choice.

Gold ETCs are the easiest way to get exposure to the gold price. ETCs (Exchange Traded Commodities) are just another kind of ETF. They are cheap to buy and the ongoing costs can be as low as 0.2% or so. That’s good value compared to what your grandparents would have paid to store gold in a bank vault, but it’s still a non-trivial drain if the gold price goes down or sideways for 20 years. Both synthetic and physical forms are available. Physical gold ETCs are backed by bullion. A synthetic ETC does not own any gold, just derivatives linked to the gold. (It may be cheaper, but if you want to ask a gold bug whether a synthetic ETC is the best way to get exposure to the benefits of gold – duck!)

Services like Bullion Vault5 and the Royal Mint bring you a step closer to physically owning gold. They have hoards of it in big safes. When you buy gold with them, a ledger records that you own a certain amount of that physical gold. Invest more and the ledger moves accordingly. Because the gold never leaves the bunker, it doesn’t have to be re-tested for purity, which saves money compared to taking physical ownership. But the services do stress this so so-called ‘allocated gold’ is still legally your personal property. Bullion Vault’s gold for example is held in vaults in various locations around the world, separate from the balance sheet of that company. If it goes bust, the gold should still be yours rather than, say, fair game for an administrator. Hold gold offshore and you may even have a back-up asset against shenanigans at home with your currency or your government if things turn nasty. Whether you’ll be able to access gold you stored in Zurich in the Zombie Apocalypse is debatable. (See an older article I wrote about Bullion Vault).

Physical gold bars, coins, and jewelry are the old-fashioned way to hold gold. In theory, pretty simple – buy something gold and keep it. In practice there are complications. You will have to bear the cost of holding, securing, and insuring your gold yourself. While it might be an acceptable risk to have a couple of gold coins hidden in your shed, beyond that it’s a security risk. Then there’s actually buying gold. You can’t just take somebody’s word the coin they’re selling is made of gold (for all I could tell it could be made of chocolate). This means every time gold changes hands it must be tested for purity (assayed), which costs money. Some forms of gold may also have value beyond the metal (notably jewelry) but do you have the expertise to assess that? On a more positive note, holding your own gold is the only way to go if you want it for when society breaks down. You’ll presumably need it to be accessible in a world without the Internet and scheduled flights. There can be tax advantages, too, if the coins you buy are UK currency – British gold sovereigns, for instance – so do your research.

Buying shares in gold miners gives you exposure to the gold price. However it also brings in a lot of other kinds of risk, such as management and market risk and exposure to other commodity prices (mining for gold uses vast amounts of energy). Gold miners are cyclical, and most people will do poorly trying to trade them. You could consider buying a specialist fund that invests in gold miners, but this is active investing and so you almost certainly shouldn’t.

Taxes are a whole other area to consider. Gold and taxes is an article in itself. In short gold ETCs can be held in ISAs and SIPPs and ideally you’ll want to do so, to avoid capital gains taxes on any gains when you sell. Gold platforms may enable you to wrap your gold in a SIPP, but as far as I know not in ISAs. As I say, some gold coins are capital gains tax free, but coins cost you more to buy and sell, so don’t think you’re going to day trade gold sovereigns.

Probably the best thing to do if you want some exposure to gold is to buy it, hold it, and do your best to nearly forget about. You might only need it in an emergency. Sort of like when you buy travel insurance.

If it never pays you to have bought gold, then you probably lived through happy times. Who cares then if your gold did nothing?

  1. Improving man-made competition is already a good reason to avoid plain diamonds as a store of value, in my view. []
  2. Like most commodities, gold is invariably priced in dollars. []
  3. See the 2012 edition. []
  4. i.e. Inflation-adjusted. []
  5. Affiliate link. []
{ 21 comments… add one }
  • 1 PC March 7, 2018, 1:49 pm

    Asset of Last Resort – only makes sense to me as gold coins under the floorboards, along with a gun and some baked beans .. if civilisation collapses I wouldn’t want to be relying on a gold ETF to pay out.

  • 2 The Rhino March 7, 2018, 2:30 pm

    Its a dampener – something to own when losing the least rather than making the most is at the forefront of your mind.

  • 3 arty March 7, 2018, 2:44 pm

    It’s not just the Mad Max type collapse in which gold would prove its worth.
    Russia, Argentina, Cyprus, Venezuela, etc, etc – all places in which having some of your savings in gold would have proved very useful in relatively recent history, without necessarily becoming Mad Maxesque. (unfortunately still looks to be a possibility in Venezuela’s case…)
    So really it just comes down to what you think the chances of your country of residence going through similar times is.
    Personally I think it’s very low, but obviously not zero.

  • 4 William III March 7, 2018, 3:54 pm

    Portfoliocharts ‘golden butterfly’ model portfolio shows how, historically, gold provides excellent negative correlation benefits to volatile shares: https://portfoliocharts.com/portfolio/golden-butterfly/ (the key word here is ‘historically’)

  • 5 MyRichFuture March 7, 2018, 5:31 pm

    The closer I get to early retirement, the more I’ve been thinking about introducing gold into my portfolio. It’s not something I’d bother with in the accumulation phase, but perhaps a year’s worth of spending in an gold ETC could be sensible in retirement.

  • 6 SemiPassive March 7, 2018, 8:29 pm

    Arty has made a good reason for holding it, when you fear your native currency is going to head down the toilet. Even in stable developed nations like ours.
    I’ve trimmed my 10% holding down to 5%, although it makes an odd bedfellow in a portfolio otherwise geared to having a decent natural yield.

    You could argue just holding US Treasuries is a better hedge against a weakening pound and crashing stocks, and gives a yield to boot. I guess gold saves you having to pick one country (or countries) winning over another.

  • 7 Stefano March 7, 2018, 8:47 pm

    Nice detailed write-up. The physical form is a nice to have, although it can easily get lost during a house move! I actually sold mine straight after Brexit (good old uncertainty) after owning it for 10 years and managed to double my money (although, it was only 100g gold biscuit). However, as you say, it has no yield. Hence no income can come from it.

    I would be tempted to buy one of those gold ETCs you mention, to shield a portfolio. I also came across one of those undervalued Gold Miners on my stock picker. Trans-Siberian Gold. Wonderful name. But, Russian…Mining…Enough to shove shivers down your spine:- )

  • 8 hosimpson March 7, 2018, 10:24 pm

    a couple of gold coins hidden in your shed, beyond that it’s a security risk.

    Oh come, TI, surely you could do more than that 😉
    – a couple of coins in the shed;
    – a few in a packet at the bottom of the compost bin;
    – a few in the water but if you have one;
    – a couple in the toilet tank;
    – a few in a plastic container at the back of the freezer, clearly labeled “LEFTOVERS 24/11/2008”
    – a couple more in a kitchen cupboard in a surstomming jar (if anyone opens it they will not stick around to investigate the contents).
    I like gold for the reasons you mentioned. Also because it’s a truly international commodity, and it appears to be a popular store of value in both India and Nigeria, which are projected to become among the most populous nations in my lifetime. Their per-capita GDP is growing too. That would make a lot of people who’d want to own gold and could afford to buy it. And if not, then as you said, 5 to 10% isn’t going to hurt too much.
    A lack of income is a good thing if you hold it in taxable accounts.

  • 9 Brod March 7, 2018, 10:47 pm

    @William III – I recently (just before the recent little wobble) thought stocks were getting pricey so I trimmed my 100% equities portfolio and bought 4% short duration Gilts and 5% Gold as Portfolio Charts said it increased my CAGR via diversification.

    No-one’s really sure if that’s the case in the future but what the heck, live on the (5%?) edge, eh?

  • 10 Rishi March 8, 2018, 7:12 am

    I buy my wife some form of silver/gold jewellery on each of our anniversary… it has 3 distinct long term and short term advantages. In the short term…. my wife showers me with gratitude (and other favours :)) for buying her nice shiny things …. in the long term, I am sure it will be protected / not sold as I have attached sentimental value to it by making it a gift signifying an occation and over time it will add up to 3-5% of our overall wealth…. which is what most investment gurus prescribe.
    Thus physical gold/silver/platinum in the form of jewellery is my insurance against UK going madmax …but more realistically devaluing the pound (albeit slowly) after Brexit to remain competitive on world stage ….
    Dare I say the process was already set in motion roughly 100 yrs ago (look at long term £ vs $ chart its gone from $5 to $1.5 (approx.) over the last century) that is 60-70% devaluation! Looks like Brexit will be the reason it will be driven to parity and lower….

  • 11 Neverland March 8, 2018, 8:08 am

    Gold is only valuable if enough people people believe it is

    Beyond a few industrial uses its just the parable of the Emperor’s new clothes

    If you think sterling is headed further down the U-bend just buy bond or shares denominated in other currencies that produce an income

  • 12 Survivor March 8, 2018, 12:57 pm

    The latest tech is often over-hyped as the next great thing that’ll save the world, but I wonder if gold still has the same emergency/insurance function now that you can have your cash in several currencies simultaneously via one card/bank account, operable on your phone even, with transactions taking just seconds. [existing fintech right now]

    Sure this is a nice hedge only against one currency tanking, & yes all currencies are fiat, so inherently only iou’s, but if all were destroyed by a loss of confidence at the same time, then civilisation would be over anyway. In that case, being instantly limited to locality due to a breakdown in the ability to travel, you wouldn’t be able to eat your gold or use it for anything else essential …..so would anyone else trade it with you for useful things if they would then have the exact same problem?

    A lesson from the past is when the Roman empire retrenched & as a part of that evacuated from the UK – the natives immediately faced a pretty fast collapse in their level of civilisation …..back to living in mud huts, subsistance farming & worshiping trees; the last brexit. So it would be interesting to know [any historians here?] if gold was helpful back then – at least to trade & store resources in the resultant simple/probably agrarian communities.

  • 13 hosimpson March 8, 2018, 1:49 pm

    @Survivor – I’m no historian, but I think the Saxons liked gold just as much as Romans had before them.

  • 14 Ms ZiYou March 8, 2018, 7:43 pm

    I have a little gold ETC, just to say I own gold.

    But on the serious side, I do wonder why it beat frankincense and myrrh.

  • 15 dearieme March 9, 2018, 1:17 am

    It’s infinitely easier to spell, dear lady.

  • 16 Neverland March 9, 2018, 9:32 am

    Why does any thread about gold mention society’s collapse within 15 posts? 🙂

    I think people who say “oh I’m investing in gold through an exchange traded commodity fund in case of a collapse in the whole banking system” are rather missing the point

    If you want to hedge against the collapse of society go buy and shotgun licence and a years’ supply of canned food…

  • 17 The Rhino March 9, 2018, 4:29 pm


    Gold is only valuable if enough people people believe it is

    But they have. Forever. So it is.

  • 18 Moo March 10, 2018, 5:27 pm

    I have been thinking of gold for it’s portfolio stabilising effects and gains to made from rebalancing. However, I think it is still a bit expensive by historical standards. You can make rebalancing gains from a falling price but it is harder than if you start investing in something when it is cheap.

    So for the present I am thinking of agricultural commodities which are mostly at low prices at the moment, but have low correlation with equities and bonds. But I can’t quite decide whether to go for a single commodity or a basket ETC. A single commodity should be more volatile – presenting more potential rebalancing benefits. But it feels a bit like putting all your eggs in one basket, which goes against my natural instincts. Anyone got any thoughts?

  • 19 UK Value Investor March 11, 2018, 9:19 am

    “we’ll probably be able to make all the gold we want by then in our own 3D printing machines”

    Gold is an element so you can’t make it unless you have a massive star or a particle accelerator, both of which cost far more than the gold they would produce. Or you could dig down to the center of the earth because it contains lots of gold and other nice stuff. But that would probably cost more than the value of the gold as well.

    Do I win the pedant of the week award?

  • 20 The Rhino March 11, 2018, 10:47 am

    @UKVI – Jules Verne already did that. Didn’t end well. Risky business model.

  • 21 William III March 11, 2018, 2:20 pm

    @Moo: I have gold as part of my overall strategic asset allocation, 10% atm. Another 10% of the portfolio is ‘active’ stock and tracker picking. In that slice, I have a tracker of the Barclays agri commodities index, and a few companies that derive revenues from long term cyclical oil price movements, perhaps making up 5% of the slice. Key thing is that I treat that as sitting in my gamble pot 🙂

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