# Gold As an Investment. **URL:** \ **Category:** Great Debates\ **Created:** [April 10, 2013, 11:12am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312 "2013-04-10T11:12:39Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [April 14, 2013, 8:17pm UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/41 "2013-04-14T20:17:50Z")
I quote myself: > [@Is there a GQ response to the right wing marketing of gold?](https://boards.straightdope.com/t/is-there-a-gq-response-to-the-right-wing-marketing-of-gold/517433/31): > > Let’s do the comparison. One dollar invested in the S&P 500 in January 1, 1978 would be worth $24.60 in Dec 31, 2008. [Cite](http://www.moneychimp.com/features/market_cagr.htm). Note that I picked an endpoint during one of the worst bear markets of the post-war era. > > An oz of gold was worth about $170 on Jan 1, 1978 and $875 at the end of 2008, coming off of the worst post-war financial crisis when gold should be worth zillions. Dividing, $1 of gold bought in the beginning translates to $5.14 now. > > 5.14 \<\< 24.60. > > ## Hey, gold might be a terrific investment going forward. But it sure has been a dud in the past. > > **What do baseball cards, art and gold have in common? They’re _really really_ cool** > I would expect gold to have lower returns over the long run. Like art, people like to hold the shiny metal, while investing in x share in Big Corp is boring. So they have to pay a premium for it, translating into lower returns. Add in conspiracy fantasies and gold’s allure becomes overwhelming. > [@Is there a GQ response to the right wing marketing of gold?](https://boards.straightdope.com/t/is-there-a-gq-response-to-the-right-wing-marketing-of-gold/517433/37): > > As an investment, gold (or gold certificates) have a property that offsets its high volatility and low long-run returns. It might be negatively correlated with the stock market, such that it “zigs” when the stock market “zags”. In the technical parlance it may have a negative beta. (The paper below attacks this hypothesis, but it at least finds that gold is a near-zero beta asset.) > > For those interested in investing in gold… I’d recommend other investments. But if you’re really really adamant, you should at least read about its properties from someone other than a salesman or political commentator, right? Here’s a link: !PDF! : deepblue.lib.umich.edu/bitstream/2027.42/63919/1/fei\_fan\_2009.pdf The author characterizes gold as just another foreign currency, albeit one that doesn’t pay interest. The author also debunked the notion that gold is a particularly good hedge against inflation: it isn’t. Previous threads: [Is there a GQ response to the right-wing marketing of gold?](http://boards.straightdope.com/sdmb/showthread.php?t=539805) [Why do ultra-right-wingers flip out over gold?](http://boards.straightdope.com/sdmb/showthread.php?t=539805) I predict: One year after the Fed funds rate hits 3.75%, gold will be worth less than it is worth now ($1561 on April 11). (Also the Fed funds rate will hit 3.75% some time in the next 10 years, possibly as soon as late 2016 or more likely 2017.) ---
**Author:** ![astorian](https://avatars.discourse-cdn.com/v4/letter/a/ad7895/32.png) [@astorian](https://boards.straightdope.com/u/astorian)\ **Post date:** [April 15, 2013, 4:18pm UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/42 "2013-04-15T16:18:12Z")
Well, at the moment it appears that the people who believed they had to invest in gold because the world economy was about to collapse were RIGHT about the problems, but absurdly wrong about the solution. The prices of gold and silver have dropped dramatically of late! This is the equivalent of a 1929 stock market crash for gold holders. > **[Gold Investors Exit Amid Price Collapse](https://abcnews.go.com/blogs/business/2013/04/gold-investors-exit-amid-price-collapse/)** > > Get breaking national and world news, broadcast video coverage, and exclusive interviews. Find the top news online at ABC news. Many of the people who invested in gold did so because they ASSUMED gold would only get more valuable as nations around the world went broke. What most never considered was that nations going broke might have to start selling off their own stores of gold, leading to a severe DROP in gold’s value. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 15, 2013, 6:55pm UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/43 "2013-04-15T18:55:47Z")
> [@septimus](#): > > Question: Is there some (possibly leveraged) portfolio of stocks (e.g. gold mining stocks) and stock derivatives (but not commodity futures or derivatives) which will roughly track the price of gold? If so, what is it and does it under- or out-perform gold itself? [Market Vectors Gold Miners ETF - GDX](http://www.vaneck.com/market-vectors/equity-etfs/gdx/holdings/) might be close to what you’re looking for. It holds a portfolio of gold mining companies from around the world. Over the past ~7 years gold mining companies have drastically underperformed relative to gold prices. [Here’s](http://i.imgur.com/8c5Q3Z5.png) a quick chart I threw together showing the relative underperformance of GDX vs. GLD. ---
**Author:** ![Wesley\_Clark](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/wesley_clark/32/20581_2.png) [@Wesley\_Clark](https://boards.straightdope.com/u/Wesley_Clark)\ **Post date:** [April 15, 2013, 10:23pm UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/44 "2013-04-15T22:23:26Z")
> [@astorian](#): > > Well, at the moment it appears that the people who believed they had to invest in gold because the world economy was about to collapse were RIGHT about the problems, but absurdly wrong about the solution. > > The prices of gold and silver have dropped dramatically of late! This is the equivalent of a 1929 stock market crash for gold holders. > > [Gold Investors Exit Amid Price Collapse - ABC News](http://abcnews.go.com/blogs/business/2013/04/gold-investors-exit-amid-price-collapse/) > > Many of the people who invested in gold did so because they ASSUMED gold would only get more valuable as nations around the world went broke. What most never considered was that nations going broke might have to start selling off their own stores of gold, leading to a severe DROP in gold’s value. Glenn Beck’s audience must be livid at socialist Europe right now. All the better to distract them with. I do feel sorry for all the elderly people who jumped on the precious metals bandwagon near the end and probably lost a mint. ---
**Author:** ![Ludovic](https://avatars.discourse-cdn.com/v4/letter/l/7ab992/32.png) [@Ludovic](https://boards.straightdope.com/u/Ludovic)\ **Post date:** [April 16, 2013, 12:19am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/45 "2013-04-16T00:19:43Z")
I’m _almost_ kicking myself for not buying put futures in gold when it was up in the $1900-2000 range. Thankfully, I would have taken out a 2 year contract, but I would have been buying the future at $1700 so I would barely be in the money now after the price and fees. I’m just hoping it doesn’t continue to plummet or I will definitely feel regret. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [April 16, 2013, 2:44am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/46 "2013-04-16T02:44:56Z")
> [@Trom](#): > > [Market Vectors Gold Miners ETF - GDX](http://www.vaneck.com/market-vectors/equity-etfs/gdx/holdings/) might be close to what you’re looking for. It holds a portfolio of gold mining companies from around the world. Over the past ~7 years gold mining companies have drastically underperformed relative to gold prices. > > [Here’s](http://i.imgur.com/8c5Q3Z5.png) a quick chart I threw together showing the relative underperformance of GDX vs. GLD. Thank you – at least someone understood my question. 🆒 If I could nitpick, the graph would be much more informative if GDX and Gold were both shown – not just their ratio – and more than seven years shown. BTW, one reason my question asked about stocks and stock derivatives rather than commodity derivatives is that the latter often requires a separate broker – inconvenient for low-activity little guys. In hindsight my aversion to commodity trading may have been a big mistake: In the 1990’s I had a strong feeling the dollar/euro ratio would fall, scoured mutual funds looking for an appropriate bond fund, ended up with an investment _which would have been hugely outperformed by Euro banknotes under the mattress_ ! :smack: ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 16, 2013, 3:08am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/47 "2013-04-16T03:08:27Z")
> [@Ludovic](#): > > I’m _almost_ kicking myself for not buying put futures in gold when it was up in the $1900-2000 range. Thankfully, I would have taken out a 2 year contract, but I would have been buying the future at $1700 so I would barely be in the money now after the price and fees. I’m just hoping it doesn’t continue to plummet or I will definitely feel regret. why not just buy put options on something like GLD? ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 17, 2013, 7:09pm UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/48 "2013-04-17T19:09:49Z")
> [@septimus](#): > > Thank you – at least someone understood my question. 🆒 If I could nitpick, the graph would be much more informative if GDX and Gold were both shown – not just their ratio – and more than seven years shown. > > BTW, one reason my question asked about stocks and stock derivatives rather than commodity derivatives is that the latter often requires a separate broker – inconvenient for low-activity little guys. In hindsight my aversion to commodity trading may have been a big mistake: In the 1990’s I had a strong feeling the dollar/euro ratio would fall, scoured mutual funds looking for an appropriate bond fund, ended up with an investment _which would have been hugely outperformed by Euro banknotes under the mattress_ ! :smack: [Here’s](http://i.imgur.com/7V0v3vz.png) a chart of the gold miners index that GDX tracks (red line, right scale) and the continuous front month gold futures contract (blue line, left scale). It appears that the gold miners index was only created around 2005 (or at least my provider only has data back that far). ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [April 17, 2013, 7:35pm UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/49 "2013-04-17T19:35:24Z")
> [@Trom](#): > > [Here’s](http://i.imgur.com/7V0v3vz.png) a chart of the gold miners index that GDX tracks (red line, right scale) and the continuous front month gold futures contract (blue line, left scale). Interesting. GDX seemed to do a fair job of tracking Gold until the 2012-13 plunge. Any explanation? Noting also the plunge and recovery 2008-09, GDX almost seems to leverage on the pessimistic side. Stated differently, shorting Gold and buying GDX might be a good move now, if the pattern continues. (Let’s be clear: I’m not going to do that, and the “advice” here, if you want to call it that, is worth no more than than I’m charging for it. 😛 ) ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 17, 2013, 8:24pm UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/50 "2013-04-17T20:24:34Z")
> [@septimus](#): > > Interesting. GDX seemed to do a fair job of tracking Gold until the 2012-13 plunge. Any explanation? Noting also the plunge and recovery 2008-09, GDX almost seems to leverage on the pessimistic side. Stated differently, shorting Gold and buying GDX might be a good move now, if the pattern continues. (Let’s be clear: I’m not going to do that, and the “advice” here, if you want to call it that, is worth no more than than I’m charging for it. 😛 ) You lost me. GDX plunged right along with gold over the past week. edit: or am I not understanding you again? ---
**Author:** ![Darth\_Panda](https://avatars.discourse-cdn.com/v4/letter/d/ee7513/32.png) [@Darth\_Panda](https://boards.straightdope.com/u/Darth_Panda)\ **Post date:** [April 17, 2013, 9:52pm UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/51 "2013-04-17T21:52:10Z")
> [@Jim\_B](#): > > I’ve often wondered, just how good of an investment is gold? I recently heard a commercial on tv that touted it as an investment that was “never worth zero”. That may be true, but is it really a good investment? Specifically (1) How much of a guarantee is it that it will grow? And (2) How safe of an investment is it otherwise? > > 🙂 Safety and return on investments are opposites. See the efficient frontier on the capital asset pricing model. > **[Modern portfolio theory](https://en.wikipedia.org/wiki/Modern_portfolio_theory#The_efficient_frontier_with_no_risk-free_asset)** > > Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning only one type. Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk ... ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 17, 2013, 10:24pm UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/52 "2013-04-17T22:24:37Z")
> [@Darth\_Panda](#): > > Safety and return on investments are opposites. See the efficient frontier on the capital asset pricing model. > > [Modern portfolio theory - Wikipedia](http://en.wikipedia.org/wiki/Modern_portfolio_theory#The_efficient_frontier_with_no_risk-free_asset) You don’t have to get that complicated. The efficient frontier is really just a measure of optimal diversification for a given level of risk and therefore return or beta. The idea of risk varying inversely with return is much more basic. I actually took Harry Markowitz’s course on portfolio theory, but honestly, reviewing the wiki entry, not much looks familiar. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [April 18, 2013, 2:24am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/53 "2013-04-18T02:24:15Z")
> [@deltasigma](#): > > You don’t have to get that complicated. The efficient frontier is really just a measure of optimal diversification for a given level of risk and therefore return or beta. The idea of risk varying inversely with return is much more basic. I actually took Harry Markowitz’s course on portfolio theory, but honestly, reviewing the wiki entry, not much looks familiar. Wow, Gold is certainly going down the toilet awful fast for 'an investment that never loses it’s value".:dubious: ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [April 18, 2013, 4:26am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/54 "2013-04-18T04:26:07Z")
> [@deltasigma](#): > > You lost me. GDX plunged right along with gold over the past week. > > edit: or am I not understanding you again? I didn’t consider the last week – I looked only at the graph Trom posted, which AFAICT has no clear end date. The “move” I suggested was a _hedge_ – buy one of a pair of correlatees and sell the other. In 2008 both Gold and GDX fell temporarily, but _GDX fell much more_ – I’ve no idea if there was any causal relationship. _Assuming the pattern continues_ ( **an assumption I do NOT make, I was just commenting on the graph** ) one might predict that either (1) Gold and GDX will continue to fall, or (2) Gold will recover, and GDX recover more sharply. I’m sure it was clear from my post that I did not claim the past predicts the future, nor that the causal relationship between Gold and GDX is clear. Given that, and that I’m certain you understand the elementary concept of hedge, Yes, you seem to be misunderstanding me. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 18, 2013, 4:27am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/55 "2013-04-18T04:27:30Z")
> [@DrDeth](#): > > Wow, Gold is certainly going down the toilet awful fast for 'an investment that never loses it’s value".:dubious: It had a [similar drop in 2011](http://www.finviz.com/futures_charts.ashx?t=GC&p=w1) although from a much higher high of near $1900 and still rebounded, but not to its previous highs. Oddly enough, a lot of people are looking at this as a buying opportunity. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 18, 2013, 4:30am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/56 "2013-04-18T04:30:10Z")
> [@septimus](#): > > I didn’t consider the last week – I looked only at the graph Trom posted, which AFAICT has no clear end date. The “move” I suggested was a _hedge_ – buy one of a pair of correlatees and sell the other. In 2008 both Gold and GDX fell temporarily, but _GDX fell much more_ – I’ve no idea if there was any causal relationship. _Assuming the pattern continues_ ( **an assumption I do NOT make, I was just commenting on the graph** ) one might predict that either (1) Gold and GDX will continue to fall, or (2) Gold will recover, and GDX recover more sharply. > > I’m sure it was clear from my post that I did not claim the past predicts the future, nor that the causal relationship between Gold and GDX is clear. Given that, and that I’m certain you understand the elementary concept of hedge, Yes, you seem to be misunderstanding me. There are any number of confounding factors that may have contributed to a divergence 5 years ago. If you don’t understand the rational behind it, it’s not a hedge. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [April 18, 2013, 9:26am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/57 "2013-04-18T09:26:34Z")
Financier Barry Ritholtz: “What are Gold’s Fundamentals?” > [@Barry Ritholtz](#): > > History shows Gold trades differently than equities. Why? It comes back to those fundamentals. > > It has none. > > This is not to say gold is not affected by Macro issues. But that is very different than saying gold has a fundamental value, an intrinsic worth. It does not. That led to this heretical advice: Gold is not, and can never be, an investment. It has no true intrinsic value, no cash flow, no earnings, no coupon. no yield. What people call fundamentals are nothing more than broad macro analysis (and how have your macro funds done lately?). Gold is the ultimate greater fool trade, with many of its owners part of a collective belief theory rife with cognitive errors and bias. [What Are Gold's Fundamentals ? - The Big Picture](http://www.ritholtz.com/blog/2013/04/what-are-golds-fundamentals/) Now actually gold has some minor industrial uses and some larger cosmetic ones. But the lion’s share is as a fairly dubious store of value as well as hundreds of tons owned by governments and subject to their whims. Yet gold retains its allure among the nutters and the rubes. Mr. Ritholtz [elaborates on their thought patterns](http://www.ritholtz.com/blog/2013/04/the-10-rules-of-goldbuggery/): \*\*The 12 Rules of Goldbuggery \*\* …2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of Central Bankers and politicians. Its a conspiracy, and we know who the guilty parties are. … 8. Never admit that Gold is essentially a sucker’s bet: Never discuss how in the last century, gold has run up only be to trounced in repeated massive sell offs (always blame rule #2 for this). Do not discuss how this has happened in 1915-20, 1941, 1947, 1951-66, 1974-76 1981, 1983-85, 1987-2000 and 2008. 1. All Gold discussions must contain ominous macro forecasts: Your description of why Gold is going higher must consist of spurious correlations, unprovable predictions, and a guarded expectation of bad things in the future. _Avoid empirical data at all costs._ My take is that gold can be purchased intelligently, in small portfolio allocations. Can be: I don’t recommend it. And if you encounter someone who appears to be a gold enthusiast, _just smile and back away slowly_. You don’t want to excite them unduly. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 18, 2013, 9:54am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/58 "2013-04-18T09:54:02Z")
That’s all true, but let’s put it into perspective. Take a look at the [CPI for the US from 1950](http://research.stlouisfed.org/fred2/series/CPIAUCSL?cid=9). You’ll see that 1982 is the baseline and =100 or 1 dollar. So 1950 is about 20% of that. [In 1982, the average price of gold was $375](http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx). In 1950 it was about $35 or about 10% rather 20%. Projecting forward, a “dollar” today should be about 240% of 1982 so gold should be $900 per ounce. Obviously we’re off by quite a bit on both ends, but the market isn’t pulling the value of gold completely out of its ass. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 18, 2013, 10:10am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/59 "2013-04-18T10:10:43Z")
After looking at the FRED chart a second time, it seems that the baseline is actually 1982-84 but since the average price of gold swung from 375 to 424 to 360, it should still work out more or less the same for our purposes. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 18, 2013, 11:09am UTC](https://boards.straightdope.com/t/gold-as-an-investment/655312/60 "2013-04-18T11:09:05Z")
At the risk of being tedious, I feel obliged to critique my own critique. If you compare the CPI graph to the Kitco graph, you’ll note that the while CPI prices increase fairly steadily throughout the period, gold prices do not. Rather they are [stagnant and in fact drop in late 90’s and early 2000’s.](http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx) They only spike once you get into the vicinity of the financial meltdown - around 2008-9. This is certainly one argument in favor of the idea of gold not having an intrinsic value however one would also have to look at supply and demand factors to be sure and I suspect there might be some interesting history there. So why the spike in the the 08-9 time frame? One look at a chart I’ve often referenced tells that story - [the fed’s rapid expansion of the monetary base.](http://research.stlouisfed.org/fred2/series/BASE?cid=124) People bid up the price of gold in anticipation of inflation. [Previous page](https://boards.straightdope.com/t/gold-as-an-investment/655312.md?page=2) [Next page](https://boards.straightdope.com/t/gold-as-an-investment/655312.md?page=4)