Last week I talked about faith-based investing as represented by the $9 trillion US Treasury securities market, and the promise to repay backed by the “full faith and credit” of the United States government. This week I would like to note the 40th birthday of a faith-based investment that dwarfs the Treasury market in size: the dollar.
What happened on August 15, 1971, and who cares?
We are coming up on the 40th anniversary of the day President Nixon took the United States off the gold standard. Neither gold nor the dollar has been the same since. On that day, Nixon ended the direct convertibility on demand of the US dollar into gold, due to a big budget shortfall and trade deficit. (Sound familiar?) With this move, no longer was there a real asset behind the dollar. Its value relied on faith that one could take a dollar bill to the store and buy six or seven candy bars. The faith-based dollar era had begun.
What was the big deal about gold convertibility? Purchasing power is the answer. Forty years later that dollar buys one candy bar, and just a few molecules of gold. In 1971, it took $35 to buy an ounce of gold. Today it takes around $1600, or 45 times more dollars. Though paying no dividend or interest, gold has been an excellent store of value, keeping and increasing purchasing power for four decades.
Gold, a metal that is real, tangible, rare, expensive to mine, and pretty to look at, has shot up in value since 1971 (though from 1981 to 2001, it traded in a narrow range with a downward tilt). The dollar, on the other hand, its value based in faith and eroded by busy printing presses at the Fed, has held up like a sand castle in a rising tide.
Many paths to the same end
Most investors would be delighted to increase their capital 45 times in 40 years. Those who bought gold 1971 or in the years that followed (it wasn’t legal, actually, for individuals to own gold in 1971) must be elated. The rise in the price of gold makes it look like the smartest investment ever. But is it?
There was another way to make 45x…53x in fact…between July 1971 and July 2011 – the Dow Jones Industrials. The total return of the index – price appreciation and reinvestment of dividends – equaled 10.44% per year annualized, slightly more than the 10% annual return on gold over that time. A dollar invested in the Dow in July 1971 (if low cost index investments had been invented then) would be worth $53 today.
Many thanks, by the way, to number one son, Max Osbon, the math major who works at Bloomberg, for the calculations and data above.
The point of it all? Diversify! The value of gold and stocks bounced all over in the last 40 years, but they have both produced nice returns. Since we can’t predict which assets will rise or fall, or when, it is good to spread one’s investment eggs across multiple baskets.
This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.
Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.
An investment cannot be made directly in an index. Returns for Dow Industrials do not reflect transaction costs.
delivered to your inbox
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.