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The 2020 Gold Rush

For many years, investor Warren Buffett has claimed that gold is a poor investment. Just two years ago, at Berkshire Hathaway’s 2018 annual meeting, he compared the investment performance of $10,000 in stocks vs. $10,000 in gold. If you had put your money in the S&P 500 in 1942, the year Buffett started investing, you would have had around $51 million in 2018. If you had purchased gold instead, it would have only appreciated to around $400,000, according to Buffett.

Buffett calls gold a nonproductive asset, because, unlike stocks, it doesn’t earn money or pay dividends. So, imagine the surprise when Berkshire Hathaway decided to invest in Barrick Gold earlier this month. The move sent shares of Barrick’s stock soaring more than 10%, and sent retail investors gold shopping. But just because Berkshire Hathaway did it, should you?

Ways to Invest in Gold

Investing in gold can take many forms. First, you can buy the actual metal, say, in coin or bullion form. Then comes the problem of keeping your investment secure. Are you going to line your sock drawer with it? Put it in your home safe? Keep it in a safety deposit box?

Second, you could purchase shares of a mutual fund or exchange-traded fund (ETF) that replicates the price of gold, but not many funds focus solely on investing in gold. More likely, you’ll find it in commodity funds that include other metals.

Third, you could buy shares in a gold mine, like Berkshire Hathaway. While the stock will likely fluctuate with the price of gold, there may be other factors that affect the price, such as company management.

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Is Gold a Good Investment?

As Erb and Harvey wrote in 2012, at least six different arguments exist in favor of owning gold as an investment:

  • Gold provides an inflation hedge
  • Gold serves as a currency hedge
  • Gold is an attractive alternative to assets with low real returns
  • Gold is a safe haven in times of stress
  • Gold should be held because we are returning to a de facto world gold standard
  • Gold is “underowned”

However, after examining each of these claims, the authors concluded that very little evidence exists to support these claims. A more recent paper by Erb, Harvey and Viskanta further explored an investment in gold in the COVID-19 era and ultimately came to a similar conclusion.

Even so, some experts believe gold still has a place in your portfolio. A June article in ThinkAdvisor suggested that gold could be useful as a portfolio diversifier and a hedge against traditional investments, while acknowledging that gold tends to be volatile and susceptible to panic selling.  

Our View

For centuries, the world has valued gold. As this Morningstar article mentions, it has been a symbol of wealth and power, a form of currency, enabled trade around the world, and existed as a tangible symbol of safety, beauty or romance. As such, an investment in gold can be emotional, as well as risky.

The Wall Street Journal explains the risks of investing in commodities very well in its 2019 article, “Five Myths About Commodities Investing.” In short, commodities aren’t like stocks and bonds. They’re speculative, subject to imbalances between supply and demand, and risky. While companies like Berkshire Hathaway have a large capacity for risk and could potential absorb losses if the price of gold were to plummet, most everyday investors don’t have the ability, the desire, or the need for to take a risk at that level.

When AMDG Financial works with clients, we have a fiduciary obligation to recommend investments that are in our clients’ best interests. To date, we haven’t seen evidence to support a recommendation for gold in our clients’ portfolios. If gold seems attractive to you right now because the price of gold has been on the rise, consider that you would be purchasing at a time when gold prices are at their highest. If you purchased gold today and the price dropped suddenly tomorrow, how would you feel?

As an investor, you have lots of options, and our job as interpretive advisers is to help you understand the potential for risk and the expected return of your customized portfolio. If you’re a client of our firm, the investment plan we’ve created with you already incorporates the long-term goals you’ve identified, as well as reflects your appetite for risk. We know that circumstances change, though, and that’s why we schedule periodic checkpoint meetings with you so we can update or modify your plan as needed.

If you’re a client and have questions about gold, or any other type of investment, feel free to contact us anytime. We look forward to helping you understand and get comfortable with your investments.

 

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