Yellowstone Financial, Inc.

Study Gold’s History Before You Invest

Should you invest in gold?

Many investors believe that gold is the best investment of all. Late-night ads for gold are commonplace and GLD is now one of the three largest ETFs. Boulder Valley residents have had an appreciation of gold since the big strike in Gold Hill more than 150 years ago. But what is the case for holding gold today?

Some may reason that as terrorist attacks and global instability continue, gold is a safe haven. Others are more concerned that the federal government is running record deficits with the national debt recently passing $14 trillion. The Fed continues to print money with no signs of abating, even as our economy begins to heat up. You can debase our currency, but you can’t devalue gold, they reason.

For those who think the stock market has become an insider’s game, gold is enduring and egalitarian. It has been a method of storing value since prehistoric times.

You don’t have to depend upon a financial intermediary to keep it for you and it’s not commingled with other investors’ assets. When the Weimar Republic in pre-war Germany deflated its currency through unchecked inflation, gold retained its value.

With some investment managers recommending that two-thirds of your assets be in gold, is it a good idea for your portfolio? It may have a role, but before putting a significant part of your wealth in gold you should consider these points.

Gold’s going up, but for how long? Over the past few years, gold has appreciated at an impressive rate. From 2002, when it surpassed $300 an ounce, gold has now crested above $1,300. This represents an 18 percent annual rate of return. When we look back on this period, the question is whether it is useful for projected future returns or an anomaly.

Gold is more than a creator of wealth. While gold does not move in lockstep with inflation, over prolonged periods there is a strong parallel. One example is the gold-suit rule of thumb. The idea is that over the last hundred years or more, one ounce of gold was enough to purchase a high quality men’s suit.

At more than $1,300 today, this would be a top-notch suit, but it’s close enough to support this theory. In 1900, an ounce of gold valued at $20 would be enough for a nice suit.

Gold prices are volatile and can deviate from inflation in short periods. From its peak in 1980 of around $850 an ounce, gold crashed within three months to below $500. Two years later it closed below $320.

While gold went down more than 60 percent in this period, clearly inflation did not. In fact, even in its recent fabulous stretch, gold has not yet come close to its real dollar high in 1980, which would be over $2,300 today. Also the speed of the crash in 1980 and other times should be warning to those that think they can get out of a falling gold market if it comes.

Gold demonstrates “bubbly” characteristics. Google “gold newsletter” and you’ll find that the gold investment has gone viral with scores of experts willing to take your money for their timing prognostications. It’s reminiscent of the tech days of the late ’90s and the real estate boom of a few years ago.

When an investment technique becomes universally acknowledged as a sure winner, it’s usually a sign that we are closer to the top of that market than the bottom.

Is gold ready for a fall? It’s hard to say. Just remember that those who think gold will march lockstep with inflation, is a stable investment, and will only increase do not have history on their side.

Dave Gardner, for the Daily Camera.