Comments on: The End of Cheap $1000 Gold? http://livingoffdividends.com/2009/03/26/the-end-of-cheap-1000-gold/ Join me on my journey to achieve financial independence through dividends, passive income and investments Sat, 15 May 2010 01:48:25 -0800 http://wordpress.org/?v=2.8.1 hourly 1 By: Brian http://livingoffdividends.com/2009/03/26/the-end-of-cheap-1000-gold/comment-page-1/#comment-41913 Brian Fri, 10 Apr 2009 21:30:12 +0000 http://livingoffdividends.com/?p=1026#comment-41913 Nirav, Bruce's case for gold is off base. I do agree that gold is a good diversifier in the short term. But its benefit is to protect against an economic calamity, not to provide a long term gain. By going back to 1932 and $20 gold (which became $35 gold in 1933), Bruce just makes the case against owning gold, not for it. Had one bought the Dow index as stock in 1932, denominated in US dollars, that stock would have appreciated as an asset from $40 at its low, to $8000 today, which is almost 10 times the dollar return of gold (had one been really fortunate or very good at trading, that stock could have been sold for $14,000 in 2007, but that is a different story). In addition, dividends on the Dow index would have returned another 5% annually on average, which over 80 years provides another multiple return of 32 times, using the Rule of 72 for compounding. This makes the total appreciation of Dow stock, 32 x 200 = 6400 times return while gold returned 40 times. The reason for this discrepancy: Gold is a non-productive asset and does not generate any dividends or interest. In fact, physical gold must be stored and protected and can actually cost from 1-2% of its value every year. So, the long term (80 year) case for gold is very poor. Even a high degree of inflation will be adjusted over time by equally higher wages (wages are a component of inflation, after all). Other assets, like real estate, commodities and stock will also adjust to offset the effects of inflation over time. But I do acknowledge that there is a prospect of inflation in the near term that might provide a case for gold as a Speculation. That is much different than gold as a diversifier. I do not begrudge anyone their pleasure. If owning gold gives pleasure, then buy some. But it should not be mistaken as an investment because it is not. We are just now getting into a position to have something of a repeat of the 1932 to 2007 equity scenario after suffering the greatest economic decline since the Great Depression. Now would be a great time to put everything into stocks. And if one is worried about inflation, skew the asset allocation towards Basic Industrial Materials, Energy and Ag Commodities, all real assets which will appreciate at least as fast as inflation. Nirav, Bruce’s case for gold is off base. I do agree that gold is a good diversifier in the short term. But its benefit is to protect against an economic calamity, not to provide a long term gain. By going back to 1932 and $20 gold (which became $35 gold in 1933), Bruce just makes the case against owning gold, not for it.

Had one bought the Dow index as stock in 1932, denominated in US dollars, that stock would have appreciated as an asset from $40 at its low, to $8000 today, which is almost 10 times the dollar return of gold (had one been really fortunate or very good at trading, that stock could have been sold for $14,000 in 2007, but that is a different story). In addition, dividends on the Dow index would have returned another 5% annually on average, which over 80 years provides another multiple return of 32 times, using the Rule of 72 for compounding. This makes the total appreciation of Dow stock, 32 x 200 = 6400 times return while gold returned 40 times. The reason for this discrepancy: Gold is a non-productive asset and does not generate any dividends or interest. In fact, physical gold must be stored and protected and can actually cost from 1-2% of its value every year.

So, the long term (80 year) case for gold is very poor. Even a high degree of inflation will be adjusted over time by equally higher wages (wages are a component of inflation, after all). Other assets, like real estate, commodities and stock will also adjust to offset the effects of inflation over time. But I do acknowledge that there is a prospect of inflation in the near term that might provide a case for gold as a Speculation. That is much different than gold as a diversifier.

I do not begrudge anyone their pleasure. If owning gold gives pleasure, then buy some. But it should not be mistaken as an investment because it is not. We are just now getting into a position to have something of a repeat of the 1932 to 2007 equity scenario after suffering the greatest economic decline since the Great Depression. Now would be a great time to put everything into stocks. And if one is worried about inflation, skew the asset allocation towards Basic Industrial Materials, Energy and Ag Commodities, all real assets which will appreciate at least as fast as inflation.

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