Wednesday, 31 July 2013

Investing in Gold

I have written several times about gold.

In The New York Times an article by Harvard professor N. Gregory Mankiw appeared:

"Budging (Just a Little) on Investing in Gold, should gold be a part of my portfolio?”

Here are the main points of the writer:

The World Gold Council estimates that all the gold ever mined amounts to 174,100 metric tons. If this supply were divided equally among the world’s population, it would work out to less than one ounce a person.

Warren E. Buffett has a good way to illustrate how little gold there is. He has calculated that if all the gold in the world were made into a cube, its edge would be only 69 feet long. So the cube would fit comfortably within a baseball infield.

Over the long run, gold’s price has outpaced overall prices as measured by the Consumer Price Index — but not by much. In another recent N.B.E.R. paper, the economists Robert J. Barro and Sanjay P. Misra reported that from 1836 to 2011, gold earned an average annual inflation-adjusted return of 1.1 percent. By contrast, they estimated long-term returns to be 1.0 percent for Treasury bills, 2.9 percent for long-term bonds and 7.4 percent for stocks.

Mr. Erb and Mr. Harvey presented a novel way of gauging gold’s return in the very long run: they compared what the Roman emperor Augustus paid his soldiers, measured in units of gold, to what we pay the military today. 
They report remarkably little change over 2,000 years. The annual cost of one Roman legionary plus one Roman centurion was 40.9 ounces of gold. The annual cost of one United States Army private plus one Army captain has recently been 38.9 ounces of gold.

Gold may offer an average return near that of Treasury bills, but its volatility is closer to that of the stock market. That has been especially true since President Richard M. Nixon removed the last vestiges of the gold standard. Mr. Barro and Mr. Misra report that since 1975, the volatility of gold’s return, as measured by standard deviation, has been about 50 percent greater than the volatility of stocks.

n important element of an investment portfolio is diversification, and here is where gold really shines — pun intended — because its price is largely uncorrelated with stocks and bonds. Despite gold’s volatility, adding a little to a standard portfolio can reduce its overall risk.

Some comments by me:
  • Its return is small: this is measured against the S&P 500 from the US which has performed very well over the long run; however, most other share markets all over the world haven't returned that much, I think only the Australian market has beaten the US over the very long run. One example is the Chinese market, although the economy has boomed tremendously over the last 10-15 years, a foreign investor would not have made much money at all (one possible reason being the low standard of Corporate Governance, capitalism is still too young in China)
  • Since abandoning of the gold standard, as could be expected (without the restriction that each USD had to be backed by gold) the US government embarked on a money printing campaign that increased in recent times since the 2008/9 global crisis; we might not yet have seen the end of this, which makes a decent case to hold gold since its supply is limited, while governments ability to print money out of nothing isn't
  • The writer recommends to hold 2% of ones assets in gold, Marc Faber recommends a clearly higher percentage, more like 5-10% (possibly in combination with other precious metals)

I think gold (and other precious metals) should be a part of a diversified portfolio which contains (global) stocks, cash, short term and long term bonds and property (or land). At the moment the future returns for long term bonds do not look well, so its allocation should be minimal.

No comments:

Post a Comment