by Edwin C. Ciskowski, CPA, Senior Vice President
Senior Portfolio Manager, The Sanibel Captiva Trust Company
“Gold is money, everything else is credit,” legendary banker and financier John Pierpont Morgan is reported to have said in 1912 when asked about the difference between paper money and the metal. In a mere seven words, J.P. Morgan captured the essence of money. Since that time, gold’s function has morphed into an investible asset class with respectable long-term performance. As the following chart shows, gold’s value has risen faster than prominent stock indices the past 20 years.
In fact, since 1971, when the gold standard effectively ended, gold has appreciated approximately 8.3% per year. A 2019 Willis Towers Watson pension study found that on a risk-adjusted basis, owning gold slightly adds alpha to any portfolio.
So, gold is money, it generates long-term returns, it improves portfolio performance, it’s generally negatively correlated to stocks during times of stress, it’s a hedge against inflation and depreciating currencies and it provides liquidity on a global basis with no credit risk. This makes gold a unique “asset.” How? Why? Principally, it’s a function of scarcity. Unlike fiat currencies, gold can’t be printed in unlimited quantities. Whatever is in the ground is the total available market (TAM). In the last 20 years, production has increased about 1.5% per year, and all the gold known to exist would fill approximately two-and-a-half Olympic-sized swimming pools. Based on recent above-ground estimates, about 47% of known gold is held as jewelry, 20% is bars and coins, 17% is held by central banks, and the remaining 15% is held by ETFs, or others.
Gold is a hedge against depreciating currencies. We don’t advocate buying gold to try to outperform stocks. Rather, it should be owned if you think currencies will continue to decline in value due to the printing of money and inflation. When we note gold has appreciated 8.3% per year, that’s another way of saying how much currencies have been debased.
So, what’s the downside to owning gold? There’s an adage in the metals markets that says, “if you don’t hold gold, you don’t own gold.” Hold is an operative word. We can own gold several ways, but do we hold it? Many investors buy gold ETFs to “own” their gold, but in reading the fine print of the prospectus, it makes clear some of the ETFs own futures contracts on gold or have borrowed the gold from large owners of bullion and must keep proper daily accounting of the amounts borrowed and repaid. The investor in those ETFs has no claim on actual gold. Here, the ETFs serve more as a trading vehicle than a depository.
Second, you could buy specifically allocated amounts of gold and hold it at mints (e.g., U.S., Canada, Australia). While this is an improved form of ownership (specifically allocated serial numbers of gold bars), you are depending on the mints to hold your gold under all circumstances. Lastly, you could own gold physically.
Bottom line, gold is money and a unique asset. Like many unique assets (e.g., cryptocurrencies), it’s something best owned outside your Trust Company account due to the limitations associated with holding it. The same basic notions apply to silver, platinum, copper, etc.