Gold As An Investment

Ty A. Bernicke CFP® | Posted: October 26, 2020

In the last 30 years, I have only missed my annual Canadian fishing trip twice. 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’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.

 Gold vs Bonds Returns since 1974

Source: https://www.fisherinvestments.com/en-us/retirement/investing-for-retirement/retirement-asset-allocations/gold

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 https://www.fisherinvestments.com/en-us/marketminder/gold-climbs-still-isnt-a-good-long-term-investment

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.

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 for 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 newsletter 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. Fortunately, you can always lean on our firm with investment questions as we truly enjoy deeply researching the investments that we recommend.   

About the author

Ty A. Bernicke CFP®

Ty Bernicke is the President of Bernicke Wealth Management and serves as a Senior Wealth Manager. Ty currently works with a limited number of clients that require wealth and/or investment management services. His research on investment management, retirement planning, and tax minimization strategies have been published or recognized by The Wall Street Journal, Forbes, The New York Times, Futures Magazine, and many other well-known national and international publications. Ty Bernicke and Bernicke Wealth Management give back to the community and environment through numerous charitable endeavors. Ty spends his free time with his wife, two daughters, and one son. He also likes to fish, golf, and exercise.

Certifications, Licenses, and Registrations

  • Registered Principal with LPL Financial, Member FINRA/SIPC
  • CERTIFIED FINANCIAL PLANNER™ professional
  • Accident, Life, Health, Property, Casualty, and Variable Life/Variable Annuity Insurance Licenses

Education and Training

  • Series 7, 66, 63, 24
  • Bachelors Degree - Finance; University of Wisconsin-Eau Claire
  • College for Financial Planning graduate

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