GOLD AS AN INVESTMENT

Is Gold a good investment? Over the 50 years of my investment experience, the potential for price appreciation of gold has always come into consideration by investors when the dollar is experiencing devaluation either through inflation or through excessive monetary policies of the Federal Reserve. From 1970 when President Nixon took us off the gold standard until 1980 when Ronald Reagan was elected and Federal Reserve Bank Chairman Volker instigated harsh restrictive monetary policies, Gold rose in price from $200 per ounce to $850 an once ($2359 adjusted to today’s dollar value). Speculators made or lost a lot of money as they traded futures which gave them huge leverage. The gold bubble was much like the housing bubble, the 2008 oil futures bubble or the U.S. Treasury bond bubble today. It just kept going up day after day and the Gold bugs were out there telling everyone the price was going to rise to $2000 or $2500 per ounce. The parabolic curve was frightening when in juxtaposition to the prices on the stock market. But like all speculative moves, when holders wanted to get out, they found that they were trying to sell to each other and the downward pressure saw the price of Gold fall by 75% in a matter of a year. There is no investment (if measured by comparison to a business that earns a profit and shares some of that profit in the form of dividends to their shareholders) in holding gold. There is only the hope of price appreciation. Like raw land or other inert commodities, there is a cost to store such property and over time this negative cash flow eats away at the perceived appreciation that takes place due to price changes. In the period from 1980 to 2000, the price of gold fell 90% from its high in 1980 while the Standard and Poor Stock index rose over 400%.

Now we are at a place where some of us are concerned about the prospects for interest rates to rise to double digit levels again as the U.S. Treasury tries to finance higher and higher amounts of debt during the coming decade and the outlook for economic growth sufficient to pay the interest let alone repay some principal is more moderate than it has been before the 2007-09 recession. If one believes that the Federal Reserve will monetize some or most of the increase in this huge debt then I suppose Gold or any commodity including oil, will rise in price. But remember this, if the Fed prints money and dollar costs of goods and services go up, those managements that are able to adjust quickly to the cost of doing business and raise prices because their product or service is inelastic to demand, the company will be able to maintain their profit margins thus producing higher and higher nominal dollar income. There are plenty of good investments with inelastic demand or semi inelastic demand and their earnings and dividends will rise in an inflationary period. I find it more comfortable to hold investments in these kinds of companies than a “claim ticket” for a measure of an inert product like Gold stored someplace in a depository, speculative price volatility not withstanding.

One Man’s Opinion- Bud Brewer