The Plusses and Minuses Of Buying and Holding Gold

Seems like this is a good time to discuss the plusses and minuses of buying gold.

You have heard of gold, right? Silly question? Not really. After one of the most explosive price rises in memory, few still own gold. 

Sure, one assumes more folks have bought it lately. How true is that? Who knows. But even if so, how many? You'd think lots. After all, the typical investor jumps into big bull market upswing just when it's topping. And this has certainly been a big bull market upswing. 

But look at it this way. Topping brings in the little guy - in droves. Is the little guy jumping in in droves? Not really. 

Yes, there's a core of folks who have taken to gold because they understand its history of preserving wealth throughout history. But the size of that core? Not the size of those who jump into stock market tops. Indeed, that core has been buying for years. They're not jumping in now. They already understand why they want/wanted to buy gold. The latest jump in price has been a reward, not an incentive to buy.

We would see the lack of mass retail jumper-inners as a sign that there's not topping yet.

That being said, we suspect that if the rise in price continues will draw in more and more folks. Actually we more than suspect. We kind of know based on the past. 

The late great Richard Russell said it best: There's no fever like gold fever. When he was writing his venerable Dow Theory Letter, this was a common phrase, especially during the run-up from 2000 - 2011. He claimed that while mania sets in when a bull market has reached its final stage, nothing compares with the mania that historically sets in when gold finally gets the full attention of the masses.

Will he be right again? We'll see.

Meanwhile, how about we calm down and just consider the plusses and minuses about buying gold.  

We're not talking about trading Gold here. We're not talking about buying "paper gold" like the ETF GLD. We're talking about buying and holding the actual metal.

We offer our thoughts now because Gold's incredible performance relative to all other assets - including tech stocks - recently. And our view won't change if its price has settles a bit, or even goes into a more substantial correction. Whatever happens in the near-term, the bull market hasn't yet run its course. So it seems a good time to take stock if you've ever thought about taking a position.

To be clear, though, you can take a position in "digital" gold, typically the various gold ETFs, with GLD being the most prominent. But, again, our focus here is on whether you might consider owning the metal itself and keeping it for the longer-term. 

While it's a subject worth discussing, it would be enhanced by knowing a bit about the history of Gold and its place in the world as real money for 5,000 or so years. But we don't have time for that today. Instead, we'll trim things down and focus on a few relatively simple concepts: Long-term source of value; how it compares to stocks; the major draw-back of holding gold.

Long-term store of value

You may be surprised to know that gold has held up well compared to stocks. Yes, folks say it's a bad investment. Having served on the Investment Committee of an Endowment, there were occasional discussions about this. Most members just assumed that gold was nothing like the stock market when it came to long-term investing. But that's not true.

The typical argument compares gold to stocks going back to the time when the price of gold was fixed by governments who used it for money, or at least for their trade with other countries. They needed the price to be agreed upon and relatively stable. The years of the so-called Gold Standard are a vivid example of this. But when all that ended in the 20th century, first when the Gold Standard was abandoned and countries preferred paper money to gold, then when gold was loosed from its bonds and traded freely, beginning in the late 1960s/early 1970s, you find that had you bought and held gold vs. stocks you likely held your own. Indeed, counting this latest run-up in gold's price, you did better than holding stocks. 

Now, there were times that gold lagged stocks, and vice-versa. But if we're talking longer-term - e.g. from 1968 to the present - a span 58 years, gold actually comes out on top. So for long-term preservation of wealth, especially vs. the steady relentless deterioration in the purchasing power of our own currency, the US dollar, gold gets - yes, you guessed it - a gold star.

Major draw-back of holding gold

On the other hand, if you rely on your investments for income - e.g., those who no longer earn income from their work, a/k/a retirees - gold might be a challenge. At least that's true if you're holding it as your largest asset. It doesn't pay dividends or interest. What if its price goes into an extended funk as it did from 2012 through 2020 when the price went down then back up again? If you needed income and started selling your gold into this, it might put a big dent into your retirement financial plan. Other assets that throw off income might be better suited for this.

Then again, in bold bull markets, you could simply sell slugs of gold for your income needs.

Or you could simply provide for your income with other assets (if you can get a decent return of dividends and interest - another issue these days) and just have some smaller portion in gold to provide longer term wealth preservation, even some gains vs. the rate of inflation.

But this assuredly is not investment advice. Not knowing anything of your individual circumstances, don't take any of this as actionable. 

Ideally, there's some information here you might find helpful in sorting through the plusses and minuses of buying and holding gold.