Earlier this month, gold futures notched a negative 12-month return for the first time since July 2009, “a rare occurrence over the past decade, happening on only 118 trading days, or just 4.5% of the time,” The Wall Street Journal recently reported. Over the same period, the S&P 500 endured 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 loathe it as an investment and perhaps even as a topic of conversation. In response to a question about gold at our 63rd Annual Conference, in May 2010, investor Jeremy Grantham, cofounder and chief investment strategist at GMO, admitted he had recently bought gold, which was then selling at around $1,200 an ounce. He seemed almost embarrassed about it.
“I hate gold!” he told the audience at the time. “It doesn’t pay a dividend, it has no value, you can’t work out what it should be or shouldn’t be. . . . [It’s] the last refuge of the desperate. I just got so sick of it going up I thought I’d kill it” by buying it.
His opinion shouldn’t have come as a big surprise given his pal Warren Buffett’s well-known views on gold, but the vehemence of his statement suggests that he sits even further out on the “gold spectrum” than Grantham, who was not above buying gold even while dismissing it as a rational investment.
I grew up in a family in which investing was part of the family culture. Dinner table conversations swerved into stocks, interest rates, and whatever else Lou Rukeyser had talked about the previous Friday on Wall Street Week. Despite this “civilized” veneer, there were, alas, coin collectors in my family, so gold was also discussed, and — horrors! — occasionally even purchased. One instance of particular barbarity occurred at my grandparents’ 50th wedding anniversary more than 30 years ago, when my grandmother, with great ceremony, presented my grandfather with a Krugerrand as his “golden anniversary” gift.
I remember my cousins and I — in an apparent fit of atavism — passing it around the table, feeling its weight and admiring its color, blissfully unaware that we were running off the rails of human progress, at least as defined by Munger. (In defense of my primitive family, I must 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 actuality, I suspect that neither Munger nor Grantham were directing their scorn for gold towards my family or others like us, but were perhaps instead revealing contempt for those on the other extreme of the gold spectrum, the retail “gold bugs” we hear on the radio pitching gold investments without regard to price and to the exclusion of other assets.
While gold bugs can point at dreary 10-year returns for the S&P 500 and make the claim that gold has outperformed stocks over certain periods, no serious investor would make the case that this justifies a wholesale move from equities into gold, which would run counter to the notion of a diversified portfolio, a fundamental precept of prudent investing. After all, as the Journal pointed out in the same article, the S&P 500′s total return over two decades is nearly 380%, beating gold’s 354% rise.
Furthermore, the arguments against gold are not invalid. It produces nothing; it is priced in an emotional, fickle market that may include nonrational actors; it is inherently subject to theft and incurs negative carrying costs if appropriate storage is arranged. (In fairness, the latter can increasingly be said of bank deposits).
But I believe that to state that gold has no place in the diversified portfolio is wrong, and that there is a wide range of reasonable perspectives 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 least faith in the man-made financial architecture, gold tends to be a decent store of value. And that makes it a useful potential hedge for our portfolios, that are primarily invested in enterprise.”
Or consider Kyle Bass of Hayman Capital, who as a trustee for the University of Texas, advised the university to purchase $1 billion in physically-held gold (which at the end of 2011 represented about 6% of the university endowment).
Asked why, Bass said “Buying gold is just buying a put on the idiocy of the political cycle. . . . Capitalism without failure is like Christianity without Hell. You have to have atonement for ridiculous levels of spending both the U.S. and Europe have gone through. The spending idiocy of the world is going to catch up to itself. And that’s where we are today.”
Perhaps McLennan and Bass have a point. In a world of undercapitalized banking systems, overleveraged sovereigns, credit-rating agencies of questionable credibility, and a surfeit of political ineptitude everywhere one cares to look, perhaps it is rational to allocate a portion of one’s capital to an asset that is not someone else’s liability.
At the same time, the memory of holding my first Krugerrand reminds me, perhaps to Munger’s point, that gold can be an emotional investment, with a mystique deeply rooted in human history and culture, and it is probably wise to be conscious of that when considering whether, or 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, nor do the opinions expressed necessarily reflect the views of CFA Institute.
Gold coin (1978 Krugerrand) image from Shutterstock.