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Gold As An Investment

In the last 30 years, I have only missed my annual Canadian fishing trip twice. What does this have to do with gold as an investment strategy? Read on.

The first time was when I was 19 years old, and I had recently gotten a summer job that did not allow me to take time off. The second time I missed this trip was this year due to the Covid lockdowns. The lake that our group fishes in Canada is near a city in Ontario named Red Lake.

Red Lake, Ontario, is home to one of the largest gold mines in the world. This mine has produced billions of dollars of gold over the years. Several years ago, my fishing partners and I had the opportunity to get to know one of the local miners. This local miner was named Jacques, pronounced Jack. He was originally from Quebec and had a distinct French-Canadian accent, especially after he would kindly help himself to some of our Canadian Club.

After sitting around a campfire one night, we ended up having an in-depth conversation with Jacques regarding his mining job. Jacques would take an elevator over one-quarter mile below the earth’s surface every workday. The temperature this far down in the earth’s crust was consistently around 65 degrees Fahrenheit regardless of the time of the year. Jacques’ coworkers would drill holes in the granite near a gold vein that his company was following. Jacques would later stuff these holes with a mixture of diesel fuel and fertilizer that would be ignited to create an explosion. Fertilizer was used as an explosive because it was cheaper than dynamite.

The rock fragments created from the blast would be loaded into a dump truck and transported to the onsite processing facility where the gold was extracted from the rock fragments. This particular gold mine had a road system that was large enough to drive full-sized dump trucks and other heavy machinery through. The only way to get heavy machinery into the mine was by sending it piece by piece down the long elevator shaft because this machinery was far too large to fit in the elevator. Once each piece was delivered to the base of the mine, the pieces would be reassembled.

The Red Lake mine is certainly a massive operation. The gold extracted from the mine is used for several different reasons, including jewelry, electronics, dentistry, and bullion for investment purposes.

Gold vs Bonds

Gold’s popularity as an investment always seems to peak during times of uncertainty. Still, historically it has not been a good long-term investment relative to other asset classes unless you have had a crystal ball that enabled you to purchase and sell it at the right times.

The following graph illustrates the total performance of gold versus bonds and stocks since 1974.

Source: Fisher Investments 

The graph clearly illustrates the lackluster historical performance that gold has produced since 1974, relative to the performance of stocks and bonds. In addition to the poor relative performance, the risk has actually been greater than both stocks and bonds.

One measurement of risk includes volatility. Volatility can be measured by standard deviation. If one investment has a higher standard deviation than another investment, that means that it has a higher risk. The standard deviation of gold has been 24.6% vs. only 16.1% for stocks and 9.6% for bonds.

Source: Fisher Investments 

Even though gold has been underwhelming as a long-term investment, it has had moments of greatness. The following chart illustrates periods of strong performance for gold.

Date Range Gold Return
8/25/1976-1/21/1980 721.3%
7/20/1999-3/17/2008 300%
10/24/2008-9/6/2011 166%
12/17/2015-7/7/2020 70.5%

Unfortunately, these moments of greatness have been overshadowed by significant declines which have led to lackluster long-term results. A few of the significant declines are listed below.

Date Range Gold Return
12/31/1974-8/25/1976 -44.5%
1/21/1980-7/20/1999 -70.3%
3/17/2008-10/24/2008 -29.5%
9/6/2011-12/17/2015 -44.6%

As you can see from the chart, there have been numerous declines in gold since 1974. One notable decline includes the 20 years starting in 1980 and ending in 1999, where gold lost over 70% of its value.

Source: Fisher Investments; FactSet, as of 7/9/2020. Gold price percentage change, 12/31/1974 – 7/7/2020.

Use Caution When You Invest In Gold

The reason that I am choosing to share this with you now is because gold salesmen frequently emerge during times of heightened uncertainty. The current level of heightened uncertainty has spawned a plethora of gold investment advertisements. The words that are used for these advertisements will sound very compelling to those who take the advertisement’s message at face value.

Unfortunately, I find these ads to be excellent at highlighting the small positive pieces regarding gold while quietly sweeping the bad stuff under the rug. Hopefully, the content provided in this article will encourage you to see the big picture regarding gold as an investment. I also hope this helps encourage you to never accept what you are told about investments at face value unless there is empirical proof confirming what you have been told.

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Fortunately, you can always lean on Bernicke Wealth Management with your investment questions, as we truly enjoy deeply researching the investments that we recommend. Schedule a consultation today to learn what we can do for you and your money.

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