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Chalk Talk: April 2016

“Gold gets dug out of the ground in Africa, or someplace.  Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.  It has no utility.  Anyone watching from Mars would be scratching their head.”

– Warren Buffett

Take a look at this chart that was produced by State Street Global Advisors, who is the sponsor of a fund that holds physical gold bullion. The fund charges a management fee and the product is marketed as an efficient way to get exposure to physical gold itself (and as far as that claim goes, it is).  But observe what is shown here, the case is being made that gold is a better hedge during times of market stress than some of the alternatives like equities, commodities, real estate, and US Treasuries.  Gold is represented as the gold bar on the left side of each “event”.  And in 5 of the 7 events, gold delivered positive returns while equities, real estate, and other asset classes were mostly down.

Gold as a Strategic Hedge in Tumultuous Times

Gold as a Strategic Hedge in Tumultuous Times

Image source: State Street Global Advisors

But wait, what’s that gray bar on the far right? It’s the old fashioned diversifier: U.S. Treasuries.  In every one of these 7 periods chosen, Treasuries delivered a positive return.  I’ll take that one, please.

If you’re in the business of hawking gold, you’re in the business of selling fear, which of course is a popular business model. The problem with gold as an investment strategy is that it’s a speculative bet at best, or an indication of extreme pessimism and the apocalypse-is-coming mentality at worst.  Some will argue that gold should be used as a hedge against inflation.  While that sounds about right intuitively and has proven true to an extent, plenty of actual research shows that stocks and real estate are better inflation hedges.  What’s more, gold is highly volatile and prone to huge moves driven by speculation around cataclysmic events.

Another consideration is that if you’re a believer in gold coming to the rescue as the savior in a doom and gloom scenario or a runaway inflationary environment, then you have to own quite a bit of it in relation to everything else. It wouldn’t do much good if it’s 2% of the portfolio while everything else is crashing.  Is there anything wrong with some gold bars in the backyard?  Probably not, but don’t get carried away.  It will only reinforce skepticism about the future, and nobody has ever won betting against long term progress and prosperity.

As always, thank you for your trust and confidence in us. Your feedback is always welcome.

Michael Traynor CFA®

Chief Investment Officer