Legendary investor Warren Buffet, chairman of Berkshire Hathaway, was asked about investing in gold, and he was perplexed by the question. His response was that gold (unlike investments in stocks and bonds) doesn’t build value in the economy, doesn’t generate annual dividends or interest, and generally relies on finicky investor sentiment to move its price (and value) up or down. He wondered what one would do with a nest egg in gold other than admire the sheen and periodically polish it.

But gold investors today are pretty happy with their returns – 29% in the first three quarters of 2024 – which has pushed the annual return since 2010 up above 10%. The reasons for gold’s advance are not clear, but gold’s popularity tends to rise during periods when people are worried about the government’s ability to pay back its debts – and over the last eight years, total U.S. government debt has risen above $35 trillion, or about 122% of the current GDP. The train of logic suggests that the government would, in desperation, devalue the dollar so it could pay back its debts off of the printing press.

Alternatively, people who believe in a catastrophic future will focus on a diversified portfolio of gold, canned food and water, and a cabin off the grid deep in the woods. This appears to be a growing percentage of the population.

There’s nothing wrong with owning gold in a diversified portfolio, but the precious metal does tend to be an inefficient holding. As mentioned above, it won’t generate any dividends or interest, and the taxation of gold’s returns, unlike traditional investments, is somewhat punitive: investors are taxed at ordinary income rates rather than (lower) capital gains rates if the traditional investments are held for more than a year. Moreover, gold provides a somewhat wilder ride than traditional investments; its standard deviation is 18.07%, which means that two-thirds of the time, the price will bounce from +36% to -36%.  

The downside volatility tends to be emphasized after a significant runup like the markets have recently experienced. Absent a global flare-up of inflation or warfare, the downside is probably more likely than a great deal more upside.

Is there room on the downside? It’s perhaps worth noting that, despite the high gold prices today, the cost of producing an ounce of gold – which might be a clue to gold’s natural or intrinsic price – averages around $1,345, which is considerably lower than the $2,700 per ounce that gold is currently trading at.

Disclosure Notice: The Wealth Conservatory® is a Registered Trade Mark of Comprehensive Planning Associates, Inc. - a Registered Investment Advisor with offices in New Hampshire, California, and Missouri. The Conservatory is not licensed to and does not engage in the practice of rendering legal or tax advice. Any discussion of either is for informational purposes only and you are strongly encouraged to seek appropriate counsel prior to taking action. The Conservatory and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC Registered Investment Advisors by those states in which the Conservatory maintains clients. The information contained herein should not be construed as personalized financial or investment advice unless the recipient has an executed and active client or member engagement with the Conservatory. The Wealth Conservatory® is a Registered Trademark of Comprehensive Planning Associates, Inc. Thank you.