YEARS AGO, I SPENT a few days in Bangkok touring the city. A highlight of my short stopover was the temple of Wat Traimit, which houses a five-and-a-half metric ton Golden Buddha, made of approximately $250 million of gold.
Cast more than 700 years ago, the statue symbolized the prosperity and cultural heritage of Sukhothai, the first Thai kingdom. Sometime in the 18th century, the statue was completely plastered over to conceal its value from Burmese invaders. The significance of the statue was forgotten for some 200 years, until the plaster accidentally chipped off to reveal the gold underneath. The miraculous 1955 discovery made headlines and the statue was restored to its former glory. I was mesmerized by its brilliance and beauty.
Our longing for gold is as old as recorded history. It was significant thousands of years ago, as evidenced by Egyptian archeology. Ancient Greeks, Incans, Aztecs and many other civilizations used gold. It was viewed as a status symbol to separate the elite from the ordinary. Holding gold was synonymous with holding power.
Why such a deep-rooted fascination? There’s no simple answer. The color and luster of the metal create a unique aesthetic appeal. Gold is scarce, yet durable and resilient, hence it’s historical role as a way to store wealth and transfer it to future generations. Even today, in many countries, gold is widely used in social ceremonies and religious offerings. Strong consumer demand persists.
For centuries, gold also played a vital role in monetary systems. The gold standard, a system that promised a fixed gold-based exchange rate for circulating paper currency, was widely used by many countries until World War I. In 1944, gold’s importance was reestablished by the Bretton Woods agreement. This new system pegged all other currencies to the U.S. dollar and allowed them to be converted to physical gold at $35 per ounce. But the new system soon faltered. The international currency-to-gold convertibility was finally abolished almost half-a-century ago by President Nixon.
Nixon’s decision triggered two shifts in the global monetary system. First, the smooth functioning of fiat—or paper—money around the financial world became solely dependent on the responsible, collaborative action of central banks. Second, the price of gold went haywire. It spiked almost 20-fold in less than 10 years, only to lose 60% over the following two decades. The rollercoaster ride continued in the current century. Gold climbed from less than $275 per ounce in 2000 to more than $1,900 in 2011. From there, it dropped below $1,075 in 2016 and then crept up again, closing yesterday at $1,570. Widely differing views on its value have made gold a highly speculative asset.
Meanwhile, many central banks maintain substantial gold reserves. The U.S. leads with over 8,000 metric tons, more than 4% of all gold ever mined. But should people like you and me follow suit and invest in gold? I struggled with this question during my retirement planning—and found no clear answer.
Many experts, including Warren Buffett, shun gold. It’s a nonproductive asset. It neither generates a dividend nor produces anything of value. The 200-year return is terrible. The only way you can make money, after paying the 28% capital gains tax, is by selling to someone who is willing to pay a higher price. Gold’s ability to hedge against short-term inflation is questionable. The list of drawbacks goes on and on.
On the flip side, there are countless pundits who favor gold. The World Gold Council, an organization of 26 goldmining companies from across the globe, presents counterarguments to stimulate demand for gold, promoting it as a strategic investment. Gold’s low correlation with other major asset classes makes it an appealing portfolio diversifier. It’s also a safe haven, preserving financial value over very long periods, and it’s seen as a hedge against unforeseen crises and “black swan” events. For long-term investors, gold is pitched as insurance, rather than as a profit-making investment.
Gold is part of a few well-known model portfolios, especially those designed to weather bad times. The so-called permanent portfolio stashes up to a quarter of total assets in gold. An all-weather portfolio might allocate 7.5%. Both of these portfolios held up well in recent recessions.
Torn between these opposing views, I opted for the middle ground. I decided to buy some and be done with the dilemma. But because of its steep price by historical standards, I limited my gold allocation to 5%—and I hope my portfolio’s performance will never need its help.
A software engineer by profession, Sanjib Saha is transitioning to early retirement. His previous articles include Risky Option, Thanks for Nothing and Blessing in Disguise. Self-taught in investments, Sanjib passed the Series 65 licensing exam as a non-industry candidate. He’s passionate about raising financial literacy and enjoys helping others with their finances.
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Nothing against investing in the gold, but, when the American Petroleum Institute recommends oil as a the preferred mode of energy I might be a little suspicious.
Why such a deep rooted fascination? Who knows or cares? Why are women entranced by diamonds? Humans are known to be silly, and assigning value to a rock with very little use in the real world (gold or diamonds) is just about as silly as you can get.
Thank you for presenting a non-bias reasonable overview of the pro’s and con’s of Gold. I personally keep a years living expenses in gold coins, it trades like currency and there’s no paper trail when I buy or sell.
Why not not just buy some gold jewelry and hang it on your wife? She can think you’re a big spender, and you can think it’s an inflation hedge?
Sanjib, Thanks for an informative and well balanced article. I have struggled with the gold decision for decades. I never really understood how it is a hedge in a catastrophe. I guess I need to keep studying.
Investing in gold is speculative, since as you aptly point out, it has no cash flows. My take on it is that most if not all of our portfolios are in USD terms. What happens should the USD get debased? (Isn’t it already being debased with endless QE and skyrocketing debt?) Having a small allocation to gold to protect against this scenario seems like reasonable insurance. I think of gold as insurance rather than as an investment. Great piece Sanjib!
In what form did you invest in Gold? If in physical gold rather than stock based where do you think the best place is to invest in physical gold? I see ads for gold coins, but realize these coins most likely carry a hefty mark up.
Thanks for your input,
Paul, I chose physical gold and used an online gold dealer. The spread and premium for specific coins tend to be high – but some online dealers are quite competitive. Also, people who own physical gold prefer keeping them in safe-deposit box. But banks generally don’t insure safe deposit boxes – so that’s something to keep in mind.
There are some “gold dealer review” sites and you can find the common dealers there. Some brokers offer them too.