What Makes Gold A Useful Investment?

John Osbon - September 5, 2017

Gold is on the rise again. At $1340 per ounce, it’s up a sharp 23% from 2016 and a solid 11% since March of this year. What’s going on and why should you care? Very simply, gold is an investment solution for many problems.

It’s like cash

Some investors consider gold to be like cash, a readily available and widely accepted store of value for purchase or exchange. Before the banking system became widespread in this country in the last 50 years — and still in large parts of the world today where there is no banking system — gold is like cash. With a clear price at any moment in time, it’s a ready medium of exchange. At Osbon Capital, we typically hold 6-12% of client portfolios in gold, a traditional cash-like investment, albeit one that changes in price.

It ignores the news

The press is turning itself inside out trying to explain the sudden advance in gold. Gold’s rise has been attributed to North Korea’s missile testing, inflation’s potential return, Washington gridlock, uncertainty about global trade and the lack of safe bond returns above 3%. These reasons make for good copy but have nothing to do with the change in price. In fact, there is no reliable correlation between the news and the price of gold. For evidence, try to explain gold’s 400% increase from 2002 to 2010. There is no simple explanation; gold advanced without a direct reason.

That’s why gold is valuable in a portfolio – it simply acts differently than the fundamentals driven stock and bond markets.

It’s a disaster buffer

Gold does seem to be a haven during the worst of investment times. In modern times — since 1971 in the US, when it became legal to own it – gold has been tested repeatedly by crashes and disasters.

Through thick and thin, gold has compounded since 1971 at 8% per year (10% if you use 2014’s peak price of $1838 per ounce). Shorter measures can show negative or positive return, but the long term record is there for all to see. It’s a high single digit return, even during a period that has included multiple recessions, the financial crisis, 9/11, the dot-com bubble, wild fluctuations in real estate markets and other real and perceived disasters.

It’s a little bit of everything

How does gold remain a store of value when it doesn’t pay a dividend and is hard to transport in large amounts? The best explanation I can offer is that gold is part inflation hedge (+3%), part money transfer system (+2%), and part scarcity value (+3%). Investors always need to solve those problems and gold fits the bill. Consider it a financial swiss army knife. (To bring those figures together, 3% + 2% + 3% = 8%, the annual growth rate for the past 40 years).

It’s an anti-taxing option

Gold does not always go up. Like all asset classes, it can experience big swings in both directions. When the price of gold falls, it often does so when stocks and/or bonds are on the rise. That offers the opportunity to take some losses in gold to offset gains in other investments, thereby reducing your tax bill. This technique is commonly called tax loss harvesting. We prefer the term anti-taxing, because that’s exactly what it does.

Since our establishment in 2005 gold has been a reliable portfolio component. This year, gold is bumping overall returns up nicely. Gold belongs in our portfolios for all the reasons described above; it’s a versatile tool that can do many jobs.

John Osbonjosbon@osboncapital.com

You might enjoy reading this article on the investment journey because it also discusses the Osbon philosophy.

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