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September 30, 2020

All That Glitters…

Author: Kristopher W. Carroll, CFA®, CFP®

We have spent so much time during 2020 discussing the extreme moves in the stock market and particularly tech stocks, but we haven’t talked much about gold. The price of gold hit its all-time record value rising over 30% and breaking through $2,000 per ounce in 2020. Then, rather abruptly and unexpectedly, gold suffered the biggest daily decline in more than seven years.  Today, gold is trading back just slightly below the $2,000 mark.

So what’s going on?  Gold has long been considered by many investors to be a hedge against uncertainty.  Some believe it’s a store of value when other assets are subject to downward pressures and also as a last resort if there is a total societal collapse and fiat currencies lose value or become worthless.  The less you trust the stability of the economic system, the more of a lure there is to put more of your money into something tangible with a gleaming luster.  You can simply put your net worth in a very strongly reinforced pocket and rule the apocalypse… We have never really subscribed to this idea. Perhaps we are too optimistic to see planning for the end of the world as an investment strategy.

Typically, gold is expected to rise when we experience any of the following scenarios:

  1. High inflation
  2. The U.S. dollar begins to lose its value
  3. The government runs high federal deficits (thereby cheapening the value of the dollar)
  4. The global economy is ravaged by something such as the COVID-19 pandemic

We have always been suspicious of gold’s effectiveness as an inflation hedge and research supports that it does not work well.  It’s simply too dependent on market whims. In fact, its price fell 45% during the benign economic climate between 2011 and 2015. 

In January of 1980, the precious metal closed at a then-record of $850 an ounce.  That would represent about $2,800 an ounce in today’s dollars, which is well above today’s sub-$2,000 price.  Many people who invested in the last high lost their shirts. That same $850 in January of 1980, would have been enough to purchase seven shares of an S&P 500 index fund.  Today, those seven shares would be worth more than $22,000.

This does not mean that one should never own gold as an investment. There are times when fear rules the markets and if you believe that the current pandemic will get worse, gold may be a good holding to protect against that kind of move. You do have to be ready for volatility if you are wrong and we do not generally believe that gold is something to leave in a portfolio for decades.

Bottom Line: I expect there will be more commercials out there trying to sell gold as an investment. Know what you are getting into, why you are getting into it and make sure it works with your portfolio. As a stand-alone investment over a long period of time, there are probably better options.

Market Volatility

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