I have to admit that I never really understood gold. I never even cared much for the look of it—though I’m well aware that many billions of people have for many thousands of years. It just never seemed particularly beautiful—or useful—to my eye. But I’m not everybody.
For most of my life, I tended to associate the stuff with unapologetically ostentatious rap stars, far right-wing extremist nutjobs, Saudi princes and James Bond villains. It was something for “silly” people—for living, breathing cartoon characters. I never thought I’d be “the kind of person” who would be interested in owning any gold, perhaps not even in my wedding ring.
This of course, leaves me with a lot of explaining to do: I have to explain why I own a small amount of gold, and why it has been the single best performing asset in my portfolio in 2016.
I have to explain why my modest holding is up more than 20% year to date, and why the gold mining stocks I purchased near their very bottom are up more than 33% in just this past month or so.
What’s not to love?
Warren Buffet has famously made a great case against gold by asserting that fairly-priced, interest-bearing assets are likely to outperform it dramatically in the long run.
Buffet argues—and quite correctly—that if you were to take the money you might use to buy gold, and instead buy a reasonably-priced stock or bond or piece of real estate or farmland, any of those assets would outperform gold many times over the course of a hundred years.
A great company or a good farm bought at a fair price can provide an increasing amount of real value (and ongoing interest payments) for many years to come. Gold on the other hand, just sits there glistening, but otherwise, doing nothing at all.
He is at once entirely right and completely wrong.
Buffet is right that gold does not pay interest. But what Buffet fails to acknowledge is that it’s not supposed to. In fact, gold is not meant to be considered an “investment” at all.
Rather, much like the U.S. dollar—and all other currencies for that matter—gold is simply a form of cash savings that you can take on when interest-bearing assets are priced far too high to be considered a decent buy.
What Buffet leaves out of his analysis is that if you had the choice between buying gold or buying interest-bearing assets near the top of a bubble in interest-bearing assets, when they are overpriced by any reasonable metric, gold would far outperform. Then, at a later date in the future, you can trade in your gold to buy interest-bearing investments when they are priced more reasonably again.
Gold is just like any other form of cash in that regard. And Warren Buffet himself is currently holding a whole lot of cash. He’s just holding it in dollars instead of in gold. (Though to be fair to him, as one of the richest men in the world, it would look terrible for him to hold that much in gold at this point. Talk about giving the market jitters!)
Cash may be “king”, but what kind of cash?
The only material difference between gold and the kind cash that Buffet holds is that the US dollar has lost about 97% of its value over the past 100 years, while gold has gained about 150% in its purchasing power, depending on the exact dates you pick.
This means that when you compare gold, not against stocks and bonds and farmland, but instead against other forms of money, as one would be wise to do, you find that gold has outperformed dollars—and everything else in the same category—and dramatically so over the past 100 years.
If, for instance, you took $20 out of the bank and put it under your mattress 100 or so years ago, it would be worth about $0.40 or so today, thanks to inflation.
But, if you took the same $20 in gold and put it under your mattress 100 years ago, it would be worth about $1300 at this moment, give or take. That’s a far better prospect than any bank’s savings account available today.
And so I, a longtime gold skeptic, have come to see the value in the metal, not as an “investment“, but as an alternative form of cash savings. It’s essentially a highly liquid “store of value”—a form of money. And it works far better in that regard than does any government’s currency over long periods of time.
Of course, gold is not great for spending day-to-day (unless you sign up for a service like GoldMoney, which is definitely worth checking out) but it is a great way to defer from investing until the valuations of interest-bearing assets are more reasonable again in the future.
And that’s the point of gold: It’s not an investment at all. It’s just a form of cash savings that does not suffer from monetary inflation.
It’s for preserving a portion of your wealth until you see an attractive bargain. It is just like any currency in that regard, though arguably, a whole lot better at it than all the rest.
PS: As always, I cannot give you financial advice, but I can tell you what I am doing, which is to hold a small amount of gold, along with some cash, fairly-priced stock indexes (many of them outside the US), and some historically undervalued commodities as well.
How much in gold makes sense? That’s for each person to decide, but billionaire macro investor Ray Dalio recommends that 5%-10% would be “prudent” for the average investor. That’s his advice. As always, study widely, and decide for yourself. And as always, never expect any investment or holding to pay off overnight.