March 8, 2019
When It Makes Sense to Invest in Gold (And When it Does Not)
By Vance Albitz, CFP®

We often look to Warren Buffett for investing advice. When it comes to gold (and other precious metals), it is clear Buffett does not own any in his investment portfolio.

According to Buffet:

“For every dollar you could have made in American business, you’d have less than a penny of gain by buying into a store of value which people tell you to run to every time you get scared by the headlines.”

He added:

“While businesses were reinvesting in more plants and new inventions, you would…look into your safety deposit box, and you’d have your 300 ounces of gold. And you would look at it, and you could fondle it, I mean, whatever you wanted to do with it. But it didn’t produce anything. It was never going to produce anything. And what would you have today? You would have 300 ounces of gold just like you had in March of 1942.”

The “March of 1942” Buffett is referencing is the example he recently used at an annual meeting. He compared the growth of $10,000 invested in gold vs. $10,000 in stocks starting in March of 1942 to demonstrate why he’s bullish on buying the latter. His example showed that $10,000 invested in an S&P 500* index fund then (there were none at the time, he noted) would be worth $51 million today.

However, $10,000 invested in gold would be approximately $400,000. Wonder why he’s more bullish on stocks?

His point is well taken, but gold can be used in portfolios in a strategic way. Like Buffett argued, gold may not pass on dividends to shareholders, but its massive price appreciation during different time periods cannot be ignored. Here are three situations that have historically been good for gold investing:

During Times of Inflation

Gold has historically been an excellent hedge against inflation, appreciating when the cost of living rises. Gold prices tend to do well while most company’s earnings erode during high-inflation years.

Geopolitical Uncertainty

Gold retains its value during times of geopolitical uncertainty. It is often called the “crisis commodity,” because people flee to its relative safety when world tensions rise; during such times, it often outperforms. For example, gold prices experienced some major price movements last year in response to the crisis occurring in the European Union. Its price often rises when confidence in governments is low. In February, Venezuela sought out its gold reserves during political turmoil, bringing attention and increases in price to the gold market.

Weakness of the U.S. Dollar

When the value of the dollar falls against other currencies, investors have secured tangible and finite assets like gold. The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008 and nearly doubling between 2008 and 2012, hitting around the $1800-$1900 mark. The decline in the U.S. dollar occurred for a number of reasons, including the country’s large budget and trade deficits and a large increase in the money supply.

Bottom Line: Gold has convincingly underperformed stocks in the long-run, but it does make sense to hold in an investment portfolio during certain economic and geopolitical situations.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

*The S&P 500 Index is a capitalization-weighted index made up of 500 widely held large-cap U.S. stocks in the Industrials, Transportation, Utilities and Financials sectors.