Description
Gold Price (US$/ounce): 1970 - 2011
1,600
450
1,400
400
350
Nominal Price (current US$/ounce - left axis)
1,200
Inflation-adjusted (Jan 70 US$/ounce - right axis)
300
250
1,000
800
200
150
600
400
100
50
200
0
0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Source: Bloomberg
Consider the experience of an investor who chose to buy gold on the dip in late 1980, when the metal
was down about 30% from its high earlier in the year and annual inflation was still running at 12.5%.
Over the following 20 years, this hypothetical investor would have lost half his money. For today’s gold
investor, there are two takeaways here. First, even a long-term storehold of wealth like gold can be a
source of painful losses in the short term if it is purchased at the wrong price. Second, consider the
implications of Howard Marks’ conversation with the gold bug: if gold keeps going up from here, at
what price does one sell? At $5,000/oz.? $10,000/oz.?
To reiterate a point we have made in this space in the past, investors should build portfolios capable of
withstanding a wide range of possible economic environments.
High inflation and dollar decline not only threaten the real spending power of an investor’s wealth, but could create conditions that are extremely damaging to a range of financial assets, including US bonds and stocks. We agree completely with the proponents of gold that investors should own hedges against these risks. For our part, we choose not to use gold as a dollar and inflation hedge for a combination of reasons. On the one hand, we are not comfortable holding a strategic allocation to an asset that is impossible to value.
At the same time, we are concerned that after a decade of steadily rising prices the inflationhedging properties of gold may have eroded and the potential downside of owning this asset has probably increased. Our recommendation to investors who own gold is that they at least consider complementing their gold allocations with other inflation and dollar hedges. In doing so, we suggest that they seek out assets with reasonable, observable valuations and a high probability of performing well under inflationary conditions.
In our view, there are a number of investments that fit this description better than gold. 9 .
High inflation and dollar decline not only threaten the real spending power of an investor’s wealth, but could create conditions that are extremely damaging to a range of financial assets, including US bonds and stocks. We agree completely with the proponents of gold that investors should own hedges against these risks. For our part, we choose not to use gold as a dollar and inflation hedge for a combination of reasons. On the one hand, we are not comfortable holding a strategic allocation to an asset that is impossible to value.
At the same time, we are concerned that after a decade of steadily rising prices the inflationhedging properties of gold may have eroded and the potential downside of owning this asset has probably increased. Our recommendation to investors who own gold is that they at least consider complementing their gold allocations with other inflation and dollar hedges. In doing so, we suggest that they seek out assets with reasonable, observable valuations and a high probability of performing well under inflationary conditions.
In our view, there are a number of investments that fit this description better than gold. 9 .
Economic Conditions Sub Categories
Presidio Capital Advisors
