Faith-based investing part two: The Dollar

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.

So what?
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.


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An investment cannot be made directly in an index. Returns for Dow Industrials do not reflect transaction costs.

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