Earlier this month, gold futures recorded a negative 12-month return for the first time since July 2009, “a rare occurrence over the past decade, occurring on just 118 trading days, or only 4.5% of the time.” The Wall Street Journal recently reported. During the same period, the S&P 500 suffered a 12-month loss on 741 trading days, or 28.4% of the time.
I find it interesting that some of the most successful and widely followed professional investors are not necessarily bearish on gold, but rather to hate it’s an investment and maybe even a topic of conversation. In response to a question about gold at our 63rd annual conference in May 2010, Investor Jeremy Granthamco-founder and chief investment strategist at GMO, admitted to having recently purchased gold, which was then selling for around $1,200 per ounce. He seemed almost embarrassed.
“I hate gold!” he told the audience at the time. “It doesn’t pay a dividend, it has no value, you can’t determine what it should be or shouldn’t be. . . . (It is) the last refuge of the desperate. I was so fed up with it that I thought I was going to kill it” by buying it.
About two years and $300 an ounce later, seasoned investor Charlie Munger from Berkshire Hathaway went even further when he told Becky Quick in a CNBC interview that “civilized people don’t buy gold.”
His opinion shouldn’t have come as much of a surprise given his friend. Warren Buffett’s well-known opinions on goldbut the vehemence of his statement suggests that he is even further along the “gold spectrum” than Grantham, who had no qualms about buying gold while rejecting it as a rational investment.
I grew up in a family where investing was part of the family culture. Dinner table conversations veered toward stocks, interest rates and everything else. Lou Rukeyser had spoken of the previous Friday Wall Street Week. Despite this “civilized” veneer, there were, unfortunately, coin collectors in my family, so we also talked about gold, and — horrors! – sometimes even bought. A particularly barbaric case occurred on my grandparents’ 50th wedding anniversary, more than 30 years ago, when my grandmother, in great ceremony, gave my grandfather a Krugerrand as his “golden anniversary” gift.
I remember my cousins and I, in an apparent fit of atavism, doing it around the table, feeling its weight and admiring its color, blissfully unaware that we were drifting off the rails of human progress, at least as defined by Munger. (In defense of my early family, I should note that this was during the Carter administration, a time of great economic and geopolitical uncertainty, not at all like the world we live in today.)
In reality, I suspect that neither Munger nor Grantham directed their disdain for gold towards my family or others like us, but rather perhaps revealed a disdain for those at the other extreme of the gold spectrum. ‘or, retail trade.golden bugs» we hear on the radio proposing investments in gold without regard to price and to the exclusion of other assets.
Although gold bugs may report dismal 10-year returns for the S&P 500 and claim that gold has outperformed stocks over certain periods, no serious investor would argue that this justifies a massive move in stocks to the However, this would go against the notion of a diversified portfolio, a fundamental precept of prudent investment. After all, as the Newspaper highlighted in the same articlethe S&P 500’s total return over two decades is nearly 380%, outpacing gold’s 354% rise.
Furthermore, the arguments against gold are not invalid. This produces nothing; its price is set in an emotional and unstable market which may include non-rational actors; it is inherently prone to theft and incurs negative transportation costs if proper storage is arranged. (In all honesty, the latter can we say this more and more about bank deposits).
But I think it is wrong to assert that gold has no place in a diversified portfolio and that there is a wide range of reasonable prospects on the gold spectrum that fall between the two extremes .
“Gold is a universal alternative to the man-made monetary system. » McLennan said in a recent interview with Morningstar. “So when people have the least trust in man-made financial architecture, gold tends to be a decent store of value. And that makes it a useful potential hedge for our portfolios, which are primarily invested in businesses.
Or consider Kyle Bass of Hayman Capital, who, as a trustee of the University of Texas, advised the university to purchase $1 billion worth of physically held gold (which represented around 6% of the university endowment at the end of 2011).
We asked him why, Bass said “Buying gold is simply buying an option on the stupidity of the political cycle. . . . Capitalism without failure is like Christianity without hell. We must atone for the ridiculous levels of spending that the United States and Europe have endured. The spendthrift stupidity of the world will catch up. And that’s where we are today.
Maybe McLennan and Bass are right. In a world characterized by undercapitalized banking systems, over-indebted states, credit rating agencies of dubious credibility, and excess political ineptitude everywhere one looks, it is perhaps rational to allocate part of its capital to an asset that does not belong to anyone else. responsibility.
At the same time, the memory of holding my first Krugerrand reminds me, perhaps in line with Munger, that gold can be an emotional investment, with a mystique deeply rooted in the history and culture of humanity, and it is probably wise to be aware of this when considering whether and at what price to buy it.
Where do you sit on the gold spectrum?
Please note that the content of this site should not be construed as investment advice and the views expressed do not necessarily reflect those of the CFA Institute.
Gold coin (Krugerrand 1978) image from Shutterstock.