It’s hard not to feel a little head-rush when thinking about gold as an asset class. The yellow metal’s mythical status and cultural cachet is enough to trigger a reflexive “I WANTSSS IT” from your inner Gollum. But then – after briefly checking your eyes have stopped bulging – your rational side wins back control and asks: is gold a good investment?
Well, is it? The barbarous relic? Beloved of conquistadores, James Bond villains, and pirates with dodgy accents.
Moreover given virtually all the information out there is US-focussed, is gold a good investment for UK investors?
The Investor previously wrote a passable (his words) introduction to gold as an investment.
TI cited the common arguments in favour of ownership as:
• A portfolio diversifier due to gold’s low correlation with equities and bonds
• Inflation-hedging
• Insurance against financial collapse, social disorder, and hyperinflation
In this post, we’ll use GBP gold return data to test how well those claims stand up – and which are about as credible as alchemy.
But for our first stop, let’s examine gold’s historical track record, and whether that tells us anything about the precious metal’s future potential.
(Note: All returns quoted in this article are real returns – that is, they are adjusted for inflation.)
Gold investment returns
The chart below shows the growth of gold’s investment returns from 1900-2022:
Gold GBP data from The London Bullion Market Association and Measuring Worth.
September 2023.
Over 123 years, £1 of gold transformed into £2.74.
Which translates into a real annualised return of 0.82%.
Hardly worth travelling to the end of a rainbow for.
For comparison, over the same period the other main asset classes delivered:
• UK equities: 4.85%
• Gilts: 0.91%
• Cash: 0.45%
Also notice how the graph’s trend line is stoved in by some monster bear markets – especially the 1980-1999 beast. We’ll come back to that.
But there’s a snag we need to flag up immediately. Which is that, in truth, the returns history of gold is compromised by the heavy hand of State control.
Gold annual returns 1900-2022
The fingerprints of government are easier to see in the next graph:
Prices are effectively fixed up until 1968 by various forms of the gold standard, along with other restrictions including the closure of the markets due to the World Wars.
The free market is gradually reestablished between 1968 and 1975. After ’68, the market wakes up and gold returns oscillate wildly thereafter.
The real return fluctuations you see before then are mostly a consequence of inflation (especially during WW1 and WW2) and deflation (during the 1920s to early 1930s).
The gold price only otherwise unmoors when the pound devalues against the dollar (1949 and 1967), and when Britain exits the gold standard (1919-1925, and from 1931 until the war begins in 1939).
For our purposes as budding gold investors, the track record before the dawn of the free market era is too distorted by conditions that no longer apply. They should probably be disregarded.
But naturally enough guillotining the data at any given particular point creates its own problems.
Goldie unlocks
The free market in gold thawed in stages from:
• 1968 – Gold bars are traded again on the New York market
• 1971 – The US ends the convertibility of the dollar to gold
• 1975 – US citizens are legally allowed to own gold again (a pleasure denied them since 1933)
The restoration of the market unleashed a shock wave of compressed change, as traders attempted to discover the real value of gold.
Thus three out of four of gold’s highest-ever annual returns medal from 1972 to 1974.
Notice how those years’ returns rise like skyscrapers above everything else on the chart (except the Burj Khalifa of results, 1979’s 69%.)
Gold returns in the free market era
Any of the three stages mentioned above (1968, 1971, or 1975) mark plausible starting points for gold’s modern track record.
Start digging from 1968 and we unearth a much more impressive growth story:
Data from The London Bullion Market Association, A Century of UK Economic Trends and FTSE Russell.
September 2023.
Gold turned £1 into £6.80 and notched an impressive real annualised return of 3.5% from 1968-2022.
The precious metal also ran golden rings around its rival diversifiers:
Data from Summerhaven1, S&P GSCI TR, BCOM TR, JST Macrohistory2, JP Morgan Asset Management, The London Bullion Market Association, Measuring Worth and FTSE Russell. September 2023.
1968-2022 real annualised returns (%)
• Equities: 5.7
• Gold: 3.5
• Gilts: 2.7
• Commodities: 2.7
• Cash: 1.1
However the yellow stuff’s performance is less than dazzling if we start from 1975 – and screen out the unrepeatable gold rush of 1972-1974.
1975 – 2022 real annualised returns (%)
• Equities: 8.4
• Gold: 1.5
• Gilts: 4.4
• Commodities: 0.9
• Cash: 1.3
The key takeaway here is that starting points matter. Not least because gold aside, the equities, gilts, and commodities results are all way off the historical averages you get from longer-term data.
Even 50 years’ worth of asset class returns can be misleading if that period is dominated by circumstances that aren’t likely to repeat in your investing lifetime.
For example, would you expect average future returns to look like 1914-1964, with its two World Wars and a Great Depression putting the boot in?
Hopefully not.
Golden ratios
When historical data is ambiguous, we can normally lean upon expected return models to help us form estimates of future performance that take current valuations into account.
So does a widely-respected expected return model exist for gold?
In a word: no. A few academics have taken a stab but there isn’t an accepted equation we can pull off the shelf to guide our thinking.
So what can we expect? What factors influence the gold price?
The greater fool theory
The greater fool theory suggests that when an asset has no intrinsic value, your hopes of making a profit rely on a ‘greater fool’ to buy it from you.
The question then is does gold have any intrinsic value?
Infamously, gold doesn’t offer compounding cashflow. Your golden nuggets do not pay out dividends or interest. You’re fully reliant on selling at a higher market price to make money.
The yellow element isn’t productive like a farm, a company – or even a gold mine.
Gold is just a lump of lifeless metal that some people think looks good dangling from their ears.
Industrial use accounts for less than 7% of worldwide demand, and is relatively price insenstive.
Jewellery makes up almost half of demand, though. It is somewhat influenced by the going rate for gold.
Load of old bullion
You’ve perhaps come across theories that an emerging middle class in India and China will drive demand for jewellery in coming decades?
But that story has been hanging around for years. Meanwhile, those two giant countries have enjoyed explosive economic growth – yet the gold tonnage required by the jewellery industry is no higher now than in the early Noughties.
Doubtless, if below-ground gold reserves ran out, that’d do wonders for your holding’s value. But a good third of gold is still entrusted to Mother Earth, relative to the total amount ever extracted.
And what if Jeff Bezos’ asteroid mining ship ever comes in? That’d dynamite your gold ETC for the foreseeable.
Mining for gold in space may sound like sci-fi. But think of it as an analogy for any technological breakthrough that increases the gold supply in the future.
Not to mention if the millennials of the ‘prepper’ persuasion ever do swap gold for Bitcoin en masse…
My point is that gold’s fate is obscured by a gauze of contemporary fables. If you want to remain dispassionate, then don’t get wedded to anyone’s alternative facts.
Fools like us?
The demand inelasticity of gold’s industrial and luxury goods customers means that much depends on your fellow investors. If the world supply of ‘fools’ for gold runs dry one day then your golden goose will be cooked.
Tellingly, the launch of gold ETFs3 during the Noughties does appear to have boosted the gold price.
According to the academics Erb, Harvey, and Viskanta:
The historical relationship between the real price of gold and the gold holdings of the two largest gold owning ETFs is shown for the period November 2004–July 2020.
As the gold holdings of these ETFs have risen, the real price of gold has risen. These two ETFs’ gold holdings represent the majority of demand for gold by ETF investors.
The authors go on to speculate that the emergence of these ‘massive passives’ could lead to:
…higher peaks and lower troughs for the real price of gold relative to the experience of the past.
Essentially, they’re saying that the financialisation of gold via ETFs and ETCs has led to it becoming a momentum play. Gold’s star rises when prices take-off and investors pile-on. But they’re as likely to head for the hills if prices sag.
He who smelt it…
Another hope lies in Cold War 2.0. If you’re a heavy subscriber to What the Government Won’t Tell You style newsletters, then you’ll know all about China’s attempts to diversify its central bank reserves away from the US dollar.
And actually, there is a nugget of truth to this one. If the figures are to be trusted then China’s gold reserves have doubled in 12 years. But then China is a mite larger than it used to be.
Feverish speculation about a gold-backed BRIC currency adds to the intrigue but – as a reason to be bullish – while I think this story is a crock, it ain’t made of gold.
Why gold can succeed when equities and bonds fall
In my view then, we have no fundamentals-based reason to expect a positive long-term return from gold. If you agree, then that could be reason enough to strike it from your investment shopping list.
But given the high level of uncertainty, we should also look at the other reasons why gold may be a good investment.
For instance, there’s strong evidence that gold works as a useful portfolio diversifier and can succeed when equities and bonds fall.
Here’s how gold responds when global equities take a hit:
Data from The London Bullion Market Association and MSCI.
September 2023.
The chart shows the performance of gold whenever World equities have suffered a 10%+ fall after 1970.
During 16 equity market slumps:
• Gold beat equities: 13 times
• Did was worse than equities: twice (plus one draw)
• Produced positive returns: eight times
Six out of 16 of those sell-offs were in bear markets:
- Gold beat equities: six times
- Gold produced positive returns: four times
So gold was really worth its weight when equities were in headlong retreat. Even the least of those bear markets inflicted a -30% knee-drop!
Using a different methodology,4 gold also bested UK government bonds in 11 out of 15 years when equities turned negative from 1970-2022.
And it helps too – when playing defence as a UK investor – that gold gets a bump when the pound falls against the dollar – as often happens during market strife.
All in all, the record shows that gold helps diversify risk in a traditional equity-bond mix.
Gold’s correlation to the other asset classes
Looking at a correlations asset class matrix can help us assess the diversification benefit of gold. An effective diversifier would register low positive or negative numbers against the other asset classes.
Indeed, one of the main arguments in favour of gold is that it enjoys low correlations to equities and bonds.
So let’s check if that really is the case:
Asset class returns correlations: annual returns 1968-2022 (inflation-adjusted)
| Gold | UK equities | Gilts | Cash | Commodities | |
| Gold | 1 | –0.30 | -0.17 | -0.1 | 0.44 |
| UK equities | -0.30 | 1 | 0.38 | -0.09 | -0.26 |
| Gilts | -0.17 | 0.38 | 1 | 0.22 | -0.26 |
| Cash | -0.1 | -0.09 | 0.22 | 1 | 0.12 |
| Commodities | 0.44 | -0.26 | -0.26 | 0.12 | 1 |
Gold’s correlation to equities and bonds is staunchly negative. This means it has a reasonable chance of pitching up when they’re tumbling down.
Conversely, that also means gold regularly falls when those assets rise – which will most probably be the majority of the time.
But while gold may prove to be a drag on overall returns, its typically negative correlation to your investment mainstays can help reduce portfolio volatility.
That’s especially useful for retirees wishing to mitigate sequence of returns risk. And it’s why small gold allocations are often recommended in investment portfolio examples.
As an individual holding though, gold is as volatile as equities. It’ll be a wild and often difficult ride. Don’t put money into it if you only like good news.
What’s that you ask? Just how rocky can gold get?
Gold’s biggest market crash
While gold had a glittering 1970s it didn’t take long for the shine to come off. The gold market began to meltdown from February 1980. It kept sliding for another 19 years.
Losses peaked at -78%. Recovery took until July 2011. The whole saga lasted a brutal 31 years.
Of course, gold isn’t the only asset class that can torch wealth on a scale. Witness the UK’s biggest bond crash and worst stock market slump.
When people say investing is risky – they mean it.
Hopefully such nightmare scenarios won’t come to pass in our investing lifetime, but it’s still as well to be briefed on what can happen.
Golden fleeced
For another take on how gold can cut up rough, here’s its real drawdown chart:
The graph shows how far gold dropped from its previous peaks, adjusted for inflation. The white space on the 0% line represents the precious moments after recovery is achieved and before the next plunge.
As we can see, gold investors got little respite.
A couple of nasty bears even dumped on the golden age of the 1970s.
Then came the 1980 to 1999 rout.
Even if you held on through that – until July 2011’s breakeven point – you only had to wait a few months for the arrival of the next bear that October. Cue a -40% mauling that lasted until December 2015.
Not to worry though, the pandemic arrived to take every gold investor’s mind off it. The yellow metal duly clawed its way back into the recovery position in April 2020. A mere nine years to breakeven this time!
The point is don’t invest in gold for kicks. Its performance could leave you as regretful as King Midas.
But enough misery. What about the claim that gold is a good inflation hedge?
Is gold a good inflation hedge?
Sadly this is a myth that’s as persistent as El Dorado.
Take the -78% real return gold bust we’ve just talked about. The equivalent nominal loss was -46%. If gold was a good inflation hedge, it shouldn’t have shed any additional value in real terms.
Perhaps that was a temporary glitch? Well here’s gold’s one-year return plotted against UK inflation.
The connection looks almost random. And, sure enough, gold’s annual correlation to inflation is 0.025 from 1968-2022.
A score near zero means the relationship between the two metrics is almost non-existent. And that’s close to the pattern we see in the chart.
Finally, here’s the path of the real gold price during the free market era:
If inflation was the only thing that moved the gold price, then the yellow line in the chart above would be level. Gold would be a perfect short-term inflation hedge.
However the fact that the yellow line weaves around tells us that factors other than inflation have caused the price to move. After all, the nominal price minus inflation equals the real price.
This means, at the least, that gold is not a good inflation hedge – because it is non-inflationary factors that will mostly determine the return you receive.
Gold as disaster insurance
The Global Financial Crisis (GFC) was the one true Time of Darkness I’ve lived through when people really talked like the wheels could come off our decadent Western lifestyles. To me at least, the pandemic didn’t even come close for scares from a financial perspective.
And gold definitely was the ticket during the GFC. Gold ETCs were up more than 70% at the height of the crash.
People feared QE-induced currency debasement was on the cards. Some thought a hyper-inflationary spiral could follow.
Which meant gold melt-ups accompanied the post-GFC aftershocks, too.
Thankfully the cashpoints didn’t close and we didn’t have to brain each other in the streets for Chicken McNuggets. But some investors did still fear the system was teetering and sought refuge in gold.
Call that anecdotal data.
But what does the actual data show?
Well, hyperinflation is another catastrophe that gold is reputed to repel. And Erb and Harvey sift the evidence in their paper The Golden Dilemma. Yet the financial golden boys report:
…there is no reason to expect that the real gold return will be positive when a specific country experiences hyperinflation.
That said, they do think that gold may be less bad than paper assets when you’re paying for bread with a ten trillion note.
So then, is gold a good investment?
I’ve read study after study, and poured over the UK data, yet I’m still ambivalent about whether gold is a good investment.
For every feature, there’s also a gold bug.
While I’m attracted to gold’s negative correlation to equities and bonds, I shy away from its lack of intrinsic investing value.
It’d be okay if there was a reliable demand story that forecast a procession of fools buyers long into the future. But the decisive factor appears to be investor sentiment, and that cuts both ways.
I think an honest appraisal has to be a shrug of the shoulders. The fact is we could end up choking on gold dust as per the 1980s and 1990s. Or maybe we’ll enjoy golden years like the 1970s or Noughties.
On the other hand, those two decades were awful for equities (and the Seventies were appalling for bonds).
And that’s the point about gold – you buy it for its diversification potential. If everything else is going swimmingly then you’ll probably end up loathing your gold. But if it’s not…
Let’s delve more into the diversification side in the next post in this mini-series.
How much difference does an allocation to gold make to an equity-bond portfolio? Perhaps if the risk-adjusted returns are good enough, and gold confers a juicy rebalancing bonus, then the case will be clearer.
Take it steady,
The Accumulator
- Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert, “The First Commodity Futures Index of 1933,” Journal of Commodity Markets, 2020. [↩]
- Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
- Gold Exchange Traded Products are ETFs in the US and ETCs in Europe. [↩]
- Due to the lack of monthly gilt returns data [↩]
Hmm, is gold a good investment? No, it’s terrible, due to the absence of return. And the volatility you have highlighted. I kind of struggle with the ‘investment’ in the title. I’m with Warren Buffett on the disadvantages of gold
> two significant shortcomings, being neither of much use nor procreative.
and it applies to pretty much any portable bearer instrument, by definition. They don’t make anything, the best you can hope for is they hold their value or appreciate. You don’t expect things like that to be an ‘investment’ – it’s like hearing too many people I know say their pension is invested in cash, no it bloody well is not invested in cash, it is saved in cash. That is not a good thing if you are younger than 70 IMO.
I hold more gold that I probably should do for my age. I don’t regard it as an investment. Well, not a financial investment. It is an investment in me, to stiffen the spine when equities go titsup. It tends to make that easier to watch.
I hold mine as ETFs. In a GIA, because the ISA is there for productive assets, not for barbarous relics, a trick I missed for a while. I got to churn it SGLP into SGLN over the tax year along with another holding to collect my £12k CGT allowance, price changes over the tax year end favoured that.
Having said that, I don’t feel the need to change the amount of gold units, I would not have a problem crystallising a loss if I needed to offset a gain elsewhere in the GIA, so it has some value as a swing producer either way. I’m not going to bitch about its gains in an up year stopping me offsetting other gains, but I’ll take the win in a down year offsetting other gains if that’s the way a tax year pans out.
Until recently that churned holding showed a loss against the new value, and I was prepared to offset that loss against the gains in the VWRL in that account by churning VWRL for say the Invesco all world ETF.
So it does have a potential investment role in unsheltered accounts, but only if you aim to have a static holding in terms of gold ounces, which broadly I do, it performs the role of bonds for me, I have a high bond-like exposure in my pension so I don’t need to hold more bonds.
I am too old to be prepared for such a world, but gold has other key advantages. In physical form it is a compact bearer instrument – the value is in what it is rather than a key to a centrally managed database. You can run with it. A kg of gold is worth £50k-odd, an able-bodied man can lift 25kg so in theory you could run with £1M in a backpack 😉
Bearer instruments have disadvantages – they can be nicked, lost, or destroyed. Another bearer instrument is cryptocurrency in a cold wallet (or on a piece of paper). This has many advantages – it’s not visible/can be disguised as something else, it’s a damn sight lighter. But while a piece of paper/Trezor HW key with crypto is a bearer instrument it is referenced value – it depends on t’internet functioning, and is volatile as hell, although this article indicated gold shares some of that errant behaviour.
I’ve recently cut my gold holding from 20% to 10%. 20% was too much for a zero yielding asset. It now forms a portion of my defensive assets with GISG (short/intermediate global hedged inflation linked bonds), BHMG, UKW and cash. Hopefully there’s something in that mix that’ll do well when TSHTF.
I agree with your comment that if everything’s going well, you won’t care about the drag or underperformance. I hold it simply because it does “other stuff”. Erratically, over longer than ideal periods. And I’ve trimmed my holding for some profits which is nice.
And, as they say, if you don’t hate something in your portfolio, you probably aren’t diversified enough.
Good article. I hold some gold mainly for the disaster scenario where people have lost faith in fiat money. It is not a large percentage of the portfolio.
Hi thanks for the article, I really enjoyed it.
Appreciate how you cut off the non-free market years of the gold returns, it winds me up a bit when people dismiss gold as returns have been terrible from 1900-2022, kind of misses the point.
Also, glad to hear that you are going to be looking into portfolios performance where gold is held as a small % and annually rebalanced. When I last ran the numbers on Portfolio Charts a small gold holding of 5-10% rebalanced annually with 95-90% global equities beat a 100% equity portfolio for average returns over a 15 year period, I’d be interested to see if that still holds true over longer time periods. For this reason I hold 5% of gold in my own pre-retirement portfolio (along with 5% BTC), which has allowed me to sell some gold in 2020 and 2022 and rebalance that into my Vanguard Global All Cap Fund.
I don’t hold any gold in my pension however as I’m still in my 30s so just have Vanguard Global All Cap.
Good article. @ermine could you elaborate on you comment “In a GIA, because the ISA is there for productive assets, not for barbarous relics, a trick I missed for a while. ”
I’ve currently got all investments in either my ISA or pension (plus cash savings). Is a General Investment Account for when you have more to invest and ISA’s are filled? I’m pre-retirement so I put anything spare into my SIPP at the minute.
Thanks.
A really magnificent piece @TA. I’m very much looking forward to part 2. @TI and you should write “Monevator the Book”, covering all asset classes, including gold and commodities (and the UK funds and ETFs covering them), alongside both the main (Fama-French) factors and systemic strategies and also @TI’s take on company level fundamentals based active investing.
I owe @Brod another apology for getting triggered by gold the last time it came up in the comments. I find it difficult to disaggregate the libertarian discourse of gold being the one true money from the investment case based on diversification and disaster insurance.
@ermine: the private key for a million in BTC might fit on a thumbnail drive or a barely larger Trezor, but if you forget the seed phrase, the drive gets corrupted, the power goes down, or the internet is blocked, then it’s curtains. A bar of gold or, more practically and portably, some Krugerrands, should always continue to hold whatever extrinsic value people assign to them.
@DaleK #5
> could you elaborate on you comment “In a GIA, because the ISA is there for productive assets, not for barbarous relics, a trick I missed for a while. ”
I used to hold it in the ISA for a few years, which was dumb, though I collected the Brexit moron boost in the ISA, but that also boosted foreign assets, probably more. It was a bed blocker, and it took me too long to realise that. So I sold it and used the proceeds within the ISA to buy mainly VWRL and bought roughly the same amount in my GIA as I took some ill-gotten gains after shorting some of my ISA holdings (w/o selling them) in Covid. I am not passive by nature, though probably more so as I get older. TA may not like gold, but cash is worse, going down the plughole at 10% p.a of late.
I naturally max the ISA first, the ISA is for genuine productive assets IMO, I don’t expect a return from gold over the long term. I hope to vaguely track the drag on the true value of money to inflation, while noting TA’s curled lip about the drawdown; I was late to goldbuggery on that chart, focusing all firepower on equities after the GFC for several years.
I do expect a return on what’s in the ISA. When I do a networth computation in Quicken the change in the gold tends to offset that in the ISA+equity part of the GIA, so the combination tends to make the variation of the parts easier to live with. TA does well to warn this is not always the case. I have not as much as Brod used to have, but more than he has now, OTOH nearly all the rest is exposed to equities not bonds.
@TLI:
> A bar of gold or, more practically and portably, some Krugerrands, should always continue to hold whatever extrinsic value people assign to them.
And worst case you can put them in a sock and use them as a makeshift cosh.
Never invested in gold and never will. I don’t even consider gold as an investment, just a speculative asset little better than crypto junk. That said, I do own 3 gold sovereigns. I inherited some sovereigns from my father. Most of them I sold, but I was informed by a friend that these 3 were worth far more than bullion value. I have yet to find the best way to realise that value.
If someone did want to speculate on gold, then it seems to me that sovereigns are a good way to go as gains are not subject to CGT.
@ TLI #6 > if you forget the seed phrase, the drive gets corrupted, the power goes down, or the internet is blocked, then it’s curtains.
I believe unlike the gold you can back up the crypto cold wallet. Certainly if it is printed on a piece you paper you can make duplicates with any office copier, and I think Trezor can be backed up to a restorable data file
Crypto is unusual in bearer instruments. Historical bearer instruments carry their value in what they are, with a presumption of uniqueness in the case of financial bearer instruments, hence the number on a banknote, which is also a bearer instrument. A particular lump of gold is unique, if I pinch it, you don’t have it any more.
The crypto cold wallet is more like a key to a particular part of the decentralised register. If I pinch it from you, you haven’t lost it unless it’s unsecured and I beat you to transferring it. If it is secured, provided you have a copy of it, I can’t run off with your stored value. I can’t think of any other bearer instrument like that, normally the value is directly associated with the physical object.
@Naeclue, I use ATS Bullion for coins, they are just off the Savoy. Their website is pretty transparent in as much as they list their buy / sell prices side by side allowing you to see the spread.
Depending on where coins were minted, how many etc the value can be larger than the spot price. I am no expert but 1987 commemorative sovereigns for example, with Henry VII on them, sell for four times their gold value.
I like my sovereigns and Britannias but I view them more as a fun collectible than an investment.
Gold is, to most people interested in money, not a great asset if financial gains are your primary interests. However, you really don’t have many great choices for converting wealth into physical, portable, tangible assets that have a good chance of at least holding some value even in different locations, if that is your aim.
I am not a prepper or even close to it, but at less than £200 you can buy everything you need to filter/purify water for 5+ year, and to have sensible stocks of normal long life food that would last months, possibly years, as well as some basic survival gear for your car such as a decent torch and emergency survival bags etc. The natural progression after this then becomes minimal ‘assets’ that might have some value in the event of your local currency collapsing or if you needed to get cash via a quick sale or have to flee due to an emergency; this then leads to owning some coins such as sovereigns of various denominations. Recent world events have demonstrated such a situation to not be as rare as we would hope, from covid, to your country deciding to invade a neighbour with forced conscription and your currency/assets being effectively worthless and inaccessible elsewhere in the world.
Is gold a good investment or asset now or in the future? – probably not. If another pandemic, or a war or a disaster emerged, would I regret spending less than a weeks pay every few years to be able to survive in my home for months if need be with basic long life food and clean water – no. Similarly, if I could flee the country in a war situation, would I regret having some portable gold coins whose bullion resale value is about 4-6 months living expenses depending on the spot price of gold – probably not.
Gold is not a great asset class, but if you had to flee your home, having minimal gold would be something you would not regret with the additional options you might have.
Until March 2020 I did not think like the above, but after covid lockdowns and the associated panic buying, and the more recent invasions and wars, I would suggest any FIRE planner or successful FIRE-ed individual to consider minimal, relatively low cost planning for quite a different set of situations – in some of these, gold may serve a purpose. It is also for this reason I only hold physical gold in very small divisible quantities (I would not hold a kruggerand for example as it is ~£1600 of gold in a single coin!). Golds potential value to me is for extreme emergency scenarios I never want to live through. If I am lucky enough to never see such scenarios, well, I have some nice coins to leave in my will.
Did try to see if there’s a “commodity-gold” tracker that pays the “roll return”, instead of just the (I assume) spot price tracking.
I haven’t found anything very promising yet. You can buy the “Precious
Metals Commod” funds like AIGP.L – so that should hold typically 80%gold,20%silver futures. But the fees are higher, the broad return shape is much the same, and in recent history there is no obvious sign of added “roll”.
Excellent article, which could only be improved by including my favourite investing phrase, the “Brown Bottom”, to describe the market low in 1999-2002 when Gordon Brown sold off half the UK’s gold reserves just before the greatest bull run in history.
Had my 15 Kruger Rands back in the day when as a young ignorant investor in the midst of hard times -17% mortgages etc ( I had just bought a house!) and was starting out on my long investment journey
Enjoyed their feel -so much more fun than a share certificate!
Sold them after a few months -at a small loss I think -and never dabbled in gold again
Equities,Bonds and Cash are only investment assets I have used for many years -these three seem to have provided enough solid returns (and excitement!) and be well within my small capabilities to understand the vagaries of investing and get the job done -ie feeding and educating a family and being able to retire-avoiding penury -so far!
xxd09
Thanks all! I enjoyed finally getting a GBP eye view of the numbers.
A question for the coin collectors. How do you protect them? I don’t mean during the apocalypse but from burglary etc
Funny how Gordon Brown folded at the bottom of the market. If only he read Monevator he’d have known that was the very moment he should have gone all in. He could have sold off the NHS, bought gold, and we’d all be living it up like Emiratis now. How different things might have been 😉
@ DaleK – yes, a GIA is a taxable account, so it’s only a consideration if you’ve run out of room in ISAs / SIPP.
“Funny how Gordon Brown folded at the bottom of the market. If only he read Monevator”. This site’s the only one which I know of to have nailed, almost to the very day, the bottoms of both March’s market madnesses in 2009 and 2020.
Gold perhaps gives negative correlation benefits at times of extreme market stress where there are either unrealised fears that the ship might keel over (2008/9) or in a wage- price and/or commodity-price spiral (1980 in the US).
But it’s less clear cut that it would be of much use if the system actually collapsed.
If the market closes then gold ETFs are going to be as inaccessible as any others.
If the banks do close (as has recently happened in Lebanon, which has gone through one of the worst peacetime economic contractions since the 19th century over the last several years), then it’s not at all clear that we will then all switch to using gold as a medium of exchange.
With no new paper currency issuance/distribution or digital money available to access if the banks shut shop, then it seems more likely that those remaining notes in circulation would rise in their purchasing power – i.e. deflation.
This happened to an extent in Somalia between 1991 and 2013, when there was no government to issue new notes and the value of even the highest denomination Somalia Schilling notes was too low to be of great interest to forgers. Whilst the purchasing power of each note remained tiny, it held up:
https://www.economist.com/finance-and-economics/2012/03/31/hard-to-kill
So, maybe hoarding some paper cash is a better way of prepping than holding onto some physical gold?
I think Brown rolled most of the proceeds into Treasuries though if I recall correctly so not quite fair to say he sold at the bottom and locked in a huge loss as many seem to think.
This is a good article pinched from TimD on the citywire forums recently. It shows how you can’t look at Gold in isolation but as part of something that has been mixed and blended to create outcomes you would not instinctively expect. It does show that Gold has a powerful place in a portfolio when not looked at in isolation imo:
https://portfoliocharts.com/2021/12/16/three-secret-ingredients-of-the-most-efficient-portfolios/
@lenahan #17
Thanks for that link, I’d say that the reduction in the ulcer index is probably what I have seen 😉 From that article
> As we’ve seen, too much gold gets rough pretty quickly.
Looks like 20% is absolute tops for that, I have never been that high. There was far less science in my determination than portfoliocharts, but it seems I got in the ballpark.
I also don’t get the physical gold thing. It gives you much headache.
I get the theoretical SHTF thing, but seriously? You have a wasteland, zombies running in the streets. And you let it be known that you have a sovereign, WLTM a loaf of bread or two? Every bad guy for 20 miles around is going to hear about it, think to themselves that there’s more that one in that stash, and will press their case with extreme prejudice. You better have the guns and ammo first.
Physical gold does things to people, and it’s not usually good. Perhaps Gollum encapsulates a truth. I’m not saying paper gold does nothing to you either, after all I drifted the comment thread on a sane article qualifying the investment case for gold into the paranoid prepper zone right from the off, so I’m not immune from the diabolical effect of the barbarous relic.
I didn’t intend the swing element of harvesting capgains/offsetting losses in the GIA as a plan, though I took it opportunistically. You do of course have to qualify the cost of the turn against the tax saved, but as the CGT allowance falls over time, that becomes more important to do with unwrapped holdings.
A sovereign coin drifts between £390-£420 depending on spot price, smaller versions cheaper again. The gold bullion value is slightly less, so 10 sovereign coins is about ~£4000 worth right now. A sovereign is about the size of a £1 coin.
A fresh tube of brand new sovereigns from the royal mint (25) is about £10,000 to buy and the tube would just about fit in your jeans pocket.
In summary though, a small safe is sufficient, and if you declare them and use the appropriate storage in a small safe they can be insured at not a huge amount of extra cost. If I get robbed and my very small number get stolen, fine. I don’t have a fancy house so the chances of me being intentionally targetted are very low, and if anyone finds my coins while robbing my home it will be opportunistic and by luck alone. Also, if you are careful you can usually buy any sovereigns with unique designs at near spot price the year they are released and within a few years sell them for a gain and then buy the next special design sovereigns in the year of release (at the current, near spot, price). Reputable online dealers and even the royal mint buy sovereigns back from you.
To me, it is not zombie or shtf prepping, and no one will ever take a sovereign for food I agree, but gold has immediate value conversion in most parts of the world to local currency. Having a little when your already well into FIRE planning, does not seem a terrible idea. Anyone fleeing a country to a safe country could sell a gold coin at near spot price (albeit with presentation of accepted national ID) and immediately have local currency. A gold ETC just doesn’t offer this immediacy. I have no gold other than some minimal coins for this very reason.
For those with huge wealth (not me), gold sovereigns have CGT benefits too, but the golem in me has to admit I like them just as shiny coins too in normal times! I would never have more than a few months of living expenses in them and only physical, as the only time I see me potentially doing anything with them would be when something seriously was up with the UK as a country.
The likely scenario is they do nothing, cost me opportunity cost my entire life, and I pass them down in my will. Not that bad an outcome.
@All: interesting rereading the “You Might Also Like” pieces linked to under @TA’s piece.
In #20 comment to “Peak gold or peak gold price”, @TI linked to an article by Morgan Hounsel on Motley Fool which lays out a case for it being a sentiment cycle.
Where gold (or for that matter any asset) is sufficiently hated (or loved) it will out (or under) perform in the longer run.
But, without any underlying cash flows, there’s now a meaningful opportunity cost to hold gold of ~5% p.a. compared to gilts.
Granted here that some studies suggest that a 5-10% gold allocation improves risk weighted returns in some portfolios over some periods, and that the holding cost might possibly be worth it.
However, there’s plenty of attractively yielding high and low risk assets out there (e.g., and in no particular order):
– Quality global growth ITs on double digit discounts.
– ILGs on over 1.5% p a. real yields, with some TIPS now pushing 2.4% real YTM.
– PE Trusts on 40% discounts.
– Infrastructure trusts (with substantially inflation linked assets) now yielding 5% to 7%.
– Conventional Gilts and T-Bills at over 5%.
– HY debt funds at 8% to 10%.
– High quality CBs on 6.5%.
– Cash at upto 5%.
That’s an awful lot of competition for investor funds for what’s ultimately a zero yield asset.
And that’s before factoring in that fewer people (esp. Millennials?) seem to buy the investment case for gold, perhaps because there’s now the distraction of crypto.
I’m a crypto hater BTW, or a no coiner as I believe that it’s called, so I’m not shilling for BTC/ETH/SOL here, but just noting that since the early 2010s some of the goldbugs may have migrated in whole or in part to crypto, and that some people who would have become goldbugs but for crypto will have got into that instead.
Peter Spiller, manager of Capital Gearing Trust (which, despite poor performance – it’s worst ever – this last year, is still the best performing IT over its whole 41 year history, and is still up 100x in price terms since 1982, split adjusted, and it pays a small divi) is currently big on using crash protection.
But he only has ~1% of CGT in gold now because, as he’s noted, although you can’t value gold it doesn’t really look cheap in inflation adjusted terms compared to its own price history. IIRC, he’d noted a year or two ago that when gold ownership had been made fully legal in the US by the mid-1970s it’s adjusted price in today’s money would be about $600, which is obviously massively below where it trades right now.
I had thought about hedging my reticence about gold by scaling down a notional 3% to 5% exposure to the metal itself to an (in effect leveraged) exposure of 1% to 2% via a gold miners’ ETF, trying to use both the correlation between spot gold and gold miners and the fact that the volatility of miner returns has been double that of spot gold (36.4% vs. 18.8%, from the PGIM IAS, S&P Capital IQ, and Datastream data as of 5/13/2020).
But the problem is that miners have gone through long periods of very materially underperforming gold, as @TI notes in his own “Time to buy the hated gold miners?” piece back in 2013, linked to above.
So, this does not look to be an effective way to try to scale up using gold as crash protection but without having to use up as many percentage points of the portfolio allocation.
Gotta 101 gold sovs, physical form, in a safe location.
Why 101? I meant to get 100 and miscounted 🙂 It’s a small % of my overall wealth. Not a good investment based on the data but…
If the proverbial sh*t hits the fan and you can think of many ways that it might, they will likely be a poor hedge but it’s better than no hedge.
Depending on your imagination there are other ways to protect yourself. This is just part of the armoury. So it’s currency / insurance not an investment for me.
p.s. I also have access to 5 bags of sand at a moments notice as grease money in case ever required.
Sleep better at night for it. Probably not for sensible reasons.
A lot of the above comments can be summarised nicely by saying once you have the big things under control, you start to worry about de-risking for tail events and gold in one way or another might have some role in that.
I don’t think many readers of this blog will be hoarding gold, physical or otherwise, until the bigger gain stuff is under control – emergency fund, pensions vastly on track, sensible saving rate as a proportion of take home pay, isa allocations, other ‘proper’ investments, whatever you may define those to be.
Then, people get to where we are talking about and essentially worrying about the tail events or marginal gains to be had with areas like gold and crypto (I am a crypto hater too, and even moreso an NFT hater). These may be one off rebalancing ideas to sell when everything else goes down and the negative correlation is hoped for, or whether you plan on liquidating a coin or two to a bullion coin dealer in bad situation.
If I called myself a coin collector and said I like to buy a sovereign coin every year nobody would care and just view it as a hobby, but being honest about thinking about the potential of capital controls in place, or a big disaster that required moving country makes the same outcome (owning about one coin per year alive!) less acceptable to many people.
At the point you have money to consider putting into gold in any form, be it physical or an investment form, you probably are already doing fine compared to most of the UK and probably have the stuff that really matter in place already. A (proportionally small) gold allocation isn’t going to be responsible for a bad financial position in later life for most people.
In 2015 I opened an ISA for my wife. I chose a flat-fee platform which proved needlessly expensive because we never did add any more money to it. Ah well.
Anyway what we subscribed we put entirely into gold ETCs. I checked them this afternoon, as chance would have it. Up 90% – pretty decent against the headwind of the cost of the platform.
True we’re going to sell. But only so that we can rebuy in our SIPPs where the lack of income matters less.
I suppose this is an argument too for checking your assets values only once every eight years.
I agree, holding physical gold is for edge cases once everything else is sorted out. I have about half a dozen sovereigns, and rather more silver. I think I bought most of them around 15 years ago.
Sure some marauding gang might steal it, but we look like the poorest in the street so I think it unlikely – and there’s plenty of prior history of people using valuables to improve their chances of getting out of a country so they obviously weren’t all mugged for it. If we ever reach the point, where we’re trading gold coins for luxuries like toilet paper – most of us will have bigger problems (including all of the preppers which for most part in the UK won’t be sufficiently armed to protect their stash).
@ Random Coder – thank you for taking the time to lay out the case for portable wealth. I do find it interesting and can’t fault your logic in paying a small insurance premium. History is littered with examples of successful societies collapsing into disorder. William Bernstein wrote a short but interesting piece on this, including a side-note on a couple of near misses for the UK:
http://www.efficientfrontier.com/ef/901/hell3.htm
For my own part, I’ve got one tin of soup (past its sell-by-date) and half a bag of frozen peas so could definitely do with upping my game.
@ TLI – really interesting comments. The notion that the gold price is historically high has stayed my hand for years. I should have just done a Dearieme, allocated a few per cent to gold and let fate run its course.
@dearieme #24 > in our SIPPs where the lack of income matters less.
Damn. I had never considered that. Though the obvious temptation to add NI to pension income slightly takes the shine (groan) off that idea IMO, and also that the tax on any gain without that as CGT on shares unwrapped is 10% because I am a lowly BRT taxpayer, as opposed to the 20% BR tax (less the 25% PCLS) on the nominal gain in a SIPP, assuming you get the tax uplift going into the SIPP on the capital.
@TA:
Bernsteins piece was written more than twenty years ago, but seems increasingly apt!
Bernstein is depressingly insightful and, I fear, sadly (for humanity’s/civilization’s sake) probably accurate.
I’m neither a prepper nor a goldbug, and I don’t have Peter Thiel’s money to buy a catastrophe blot hole in the backwoods of New Zealand; but I would very much recommend that people get a baseline on the odds of disaster by checking out the Bayesian version (the only one not to have a plausible refutation) of the “Doomsday Argument”. The other versions by Gott (1969), Collins and Hawking (1973), Carter (1974), Leslie (1989, 1992, 1996), Bostrom (1999, 2001) and Gale (1996) sometimes get confused or conflated with the Carter-Leslie Bayesian version, as they both worked on some of the other versions. Comments #41, 42, 44 and 45 in the “Not a prayer for serenity” weekend reading on Monevator on 19th August 2023 reference the DA generally and the Bayesian version specifically, with an intro. reading list with links in #45. The PhilSci Archive at the University of Pittsburgh (which is a bit of a leader in the Philosophy of Science) also has a decent collection of 26 research papers on the DA (on one or more of its different versions) that turn up on a keyword search.
Regarding:
“However, there’s plenty of attractively yielding high and low risk assets out there (e.g., and in no particular order):
– Quality global growth ITs on double digit discounts.
– ILGs on over 1.5% p a. real yields, with some TIPS now pushing 2.4% real YTM.
– PE Trusts on 40% discounts.
– Infrastructure trusts (with substantially inflation linked assets) now yielding 5% to 7%.
– Conventional Gilts and T-Bills at over 5%.
– HY debt funds at 8% to 10%.
– High quality CBs on 6.5%.
– Cash at upto 5%.”
Indeed, also by a couple of measures Gold is really expensive now.
Based on this analysis it’s ‘intrinsic value’ based on real rates is between 700 and 1300:
https://www.bankeronwheels.com/role-of-gold-in-a-long-term-portfolio/
Excellent link @Jenny. Many thanks for sharing. Looking at the chart under “#1 Opportunity Cost”, the gold price in Feb 2006 looks just over $500, and $1 in 2006 is equivalent to $1.53 today. That suggests if gold were priced to inflation it would be <$800 now, corroborating the $700 – $1300 range based on real rates. Can't recall any people suggesting at the time gold was esp cheap in 2006, unlike when gold bottomed out at $260 in 2001.
My view on gold is just that it’s another fiat currency. A somewhat special fiat currency since it has a much longer history than other currencies plus a bit of intrinsic commodity value. One that yields zero with risk-off properties.
Since spot currency risk is basically uncompensated volatility, I cannot see gold as an investment. It’s a speculative position. I don’t see anything wrong holding speculative positions, but you need to remember what you’re speculating on. It might be that you hold physical gold to speculate against a long-term tail that will probably never happen. Can make sense. It might be that you want it to hedge against a shorter-term event. Again, can make sense. In the second example though, you need to remember that there is no point holding gold unless you are willing to sell it. It’s a trade. I think that’s the biggest error people make. When the hedge works, you need to sell it.
I also think to see gold as an inflation hedge is wrong. It’s a hedge against macro-economic shocks and paradigm shifts. In the early 70s, it was the end of fixed exchange rate systems (Bretton Woods). Every major currency devalued so Gold/XXX shot up. Inflation was another part of that. In the deflationary world since the 90s, it was a risk -off proxy during credit crunches and recession. Against the likes of CHF, JPY and EUR when they had negative yields, it was a risk-off trade with better carry.
Gold’s function changes. That’s because its real function is just to be the other leg of a bilateral trade. You don’t buy gold. You sell something else and gold is where you wait hoping for the problem to pass.
Great article thank you.
My thoughts are what ZX said basically, many years ago I fell into the ZeroHedge perma-doom influenced position of buying physical Gold (Swiss vaults, only the best!) because it “must” go up. After a couple of years of sideways or mildly downward price movement I came to my senses and sold up. A few pounds poorer but hopefully wiser.
Now many moons and much Monevator influenced reading later I again find myself holding a Gold position. The difference this time is it’s a conscious asset allocation with the sole intent of providing some volatility reduction (Negative correlation with my 80% Equities) and to act as the reserve for enforced purchasing of lower priced assets via Rebalancing.
Hence I’m extremely interested in what Part II has to say about the effectiveness of that approach!
Gold Sovereigns, near a 1/4 ounce of gold, were money for ages, when the Pound/Dollar was pegged at around 4. Rather than hiding surplus money (gold coins) around the house, deposit them for security and that money might have earned interest, more gold. January 1932 that ended, deposit a gold sovereign, returned a Pound note paper currency … no thanks. The US also nationalised American gold, compulsory purchased it and locked it up in Fort Knox, issued paper money in its place. Silver was the next best choice, poor mans gold (silver shillings instead of gold Pounds). T-Bills 1900 – 1931, silver 1932-1979 (when silver prices went crazy), gold since 1980, and 1900 – 2022 inclusive … 3% real.
But as wild as stocks, however where there’s a tendency for multi year inverse correlations; What might drive stock prices to dive tends to see gold do well, when stocks do well gold tends to decline. 50/50 of both stocks and ‘gold’ (as defined above) and since 1900 4.7% real (my figures for UK stock differ slightly from yours, indicate a 4.6% real 1900-2022 inclusive).
Hmm! Broadly 50/50 stock/gold had the same return as stocks, but where half of your money was in-hand, no counter-party risk. What if your home value is half that of the combined 50/50 stock/value … well then you’re diversified across land, gold, stocks in around equal weightings, two thirds of your wealth in-hand, or as the Talmud suggested millennia ago, diversify risk by keeping a third in merchandise, a third in hand, a third buried in land.
In a era of economic/social stress, so taxes will tend to rise, own a UK home, BRK US stock, Gold, and not a penny in income flows … since 1986 https://tinyurl.com/53prarv8 (Pound/Dollar year end data from FRED here -> https://fred.stlouisfed.org/series/DEXUSUK/# ). Three currencies (Pounds, Dollars fiat currencies, gold commodity non-fiat currency), three assets (land, stocks, commodity).
1980 to 2000 was a great time for gold … accumulation. 50/50 stock/gold yearly rebalanced saw something like 6 to 10 times more ounces of gold in your safe at the end of 1999 compared to at the start of 1980. 100 Sovereigns originally, 1000 at the end. Then the rough 2000’s saw a good time to sell some of that gold to add more stock shares. Most however wont have the required patience, we live in a increasingly instant gratification expectation world.
Probably more likely that most investors are rotten market timers and get it wrong more often than not
This results in them eventually opting out of market trading due to continual heavy losses
xxd09
“For our purposes as budding gold investors, the track record before the dawn of the free market era is too distorted by conditions that no longer apply. They should probably be disregarded.”
The pre-free-float years had Pound/Dollar/Gold pegged as that yields greater certainty for international trade/settlements. Sooner or later that always fails however, has to be revised. King Henry for instance intermixed copper into silver-coins. Free floating nowadays is still constrained, just not a precise constant fixed rate. In 1934 the US Treasury bought up all American gold issued dollar paper currency in its place, it also issued non redeemable gold certificates to the Fed, at around $42/ounce. Nowadays with gold at $2000/ounce that means the fed has approaching a 50x leverage factor with which it can direct the price of gold. The dollar is still aligned to gold (gold aligned to dollar) to a variable extent. As Yellen and other Fed chairs have noted, when the dollar drifts too much bad things tend to happen. So rather than step/plateau type historic gold price motions, under free-float we’re more inclined to see flattish sideways channels, with periodic step-up revisions to a new sideways channel level. With around 8000 tons of US Treasury gold, and a 50x leverage factor = pretty much all of the gold in the world type ammo for the Fed, and the higher the price of gold rises so the more ammo the Fed has.
@SeaJay #37: I’ve just spotted that you’ve got the whole of the Peter Spiller (of Capital Gearing Trust) quote over at a Bogleheads forum on gold. It’s the quote which I’d only been able to faintly recall in my post #21 above. Hope you will not mind if I reproduce what Mr. Spiller said here:
“And we said, ‘Ok, let’s look at what that real value is.’ So we took a base of August 1973, so that’s two years after Nixon closed the gold window, at a time when inflation was pretty rampant, and I’m pretty sure the free market price of gold was not depressed. We applied the CPI in America to that and you get a number if you do that of under $600 … So gold does indeed have attractions in times of inflation, particularly very high rates of inflation. But it’s trading at a very big premium to that long-term value.”
Fun fact, from 1924 to 2023 gold went from $20.68 to $2046 for an annualized return of 4.7%, but a market cap weighted investment in US stocks went from $20.68 to $412,000 for an annualized return of 10.4%.
Would love to read the follow-up soon!
Hopefully it’s still on the agenda for 2024 🙂
Thank you
5%-10% allocations to gold might make sense as diversifier, but unlikely to be as effective (either as an inflation hedge or a source of return) as broad commodities.
But, if one were to put a 5% allocation into gold then, in the absence of any cash flows, assessing gold’s ‘value’ may involve cross asset comparisons (ratio of gold to something else) or, alternatively, an inflation adjusted comparison of the gold price now with its own price history.
One system for the former is Dow/Gold timing model. To quote Bill Bonner recently:
“If you’d begun following the model a hundred years ago — simply buying stocks at a Dow/Gold ratio of 5 and returning to gold when the ratio reached 15 — you would have bought stocks in 1924 and enjoyed the wild ride until 1929. 10 ounces of gold would have turned into 30 ounces, when you sold out. Then, you would have bought stocks again in 1932 and held on until 1959 for another 3x gain. Now you would have had 90 ounces of gold. The next move was in 1975 buying stocks and selling them in 1998 for another 3x gain. In and out of stocks only three times in a century and you transformed $200 worth of gold into $644,000”.
Whilst impressive, this is still well under the cap weighted LTBH return for US stocks though over the same century (1924-2023), see #39 above.