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It might come as a surprise, but the single most difficult concept to impart to my readers, and friends, is that gold is NOT an investment. No matter how many times I mention this in the daily, it seems to fall on (mostly) deaf ears. Let me be clear about this – GOLD IS THE HIGHEST QUALITY FORM OF MONEY! Money is not an investment. One of the most important functions that money can play is to hold its value. If money does not hold its value, then you have to spend it quickly and cannot set it aside and save it.
If your great grandfather set aside a $20 Saint Gaudens (one ounce) and a $20 bill in 1933 for his great grandchildren, today the $20 bill would be worth – well, $20 and the Saint Gaudens (even in the lowest circulated grade) would be worth at least $1,650. Which form of “money” served as “a store of value?”
At the peak of gold’s last bull market, in early 1980, if your father set aside a Saint Gaudens and $850 US dollars for his children, today the $850 would be worth – well, $850 and the Saint Gaudens would be worth at least $1,650.
In 2005, I had a decision to make. We were in the process of finalizing financing on our custom-build home in Wayzata and after the down payment there would be a balance due of $1,000,000. At the time, I was faced with a choice. Should I sell 2,000 ounces of gold (spot was $500 ounce) and own the house outright, or should I take out a 10-year interest-only fixed mortgage? I was convinced that gold was going much, much higher so I took out the mortgage and swallowed a $6,000 a month interest payment. Most of it was tax deductible, so my actual interest cost was around $43,000 a year. I expect gold to be around $2,000 by the end of 2012, so I can pay off the mortgage at the end of the year by selling 500 ounces of gold. That leaves me with 1,500 ounces of FREE gold. The taxes on the gain will run around $270,000 so I will have to sell an additional 135 ounces of gold to pay the taxes. That still leaves me with 1,365 ounces of FREE gold. That represents a profit of $2,730,000! This is not an intellectual exercise, it is actually what happened. It really is best not to sell your gold unless you need it – to pay off a mortgage or for an emergency. Now I could still consider rolling over the mortgage and re-financing it for another decade, and I may still do that, if I believe that gold is likely to reach $3,500 – $4,000 and that is a real possibility. At $4,000, I can pay off the mortgage for just 250 ounces of gold.
What is the moral of this little story? You are far better off holding ounces of gold than dollars. That is especially true now, with the stock market, the real estate market and the bond market ripe with risk. With results like this, it is hard to convince people that gold is NOT an investment. It sure performed like one for me, over the past seven years. People who owned real estate as an investment did not fare very well. At best, their property held its value, but most likely did not appreciate. Dollar investments during this period, even if they earned a compounded return of 10% per year, for the entire seven-year period, only doubled. Gold more than tripled. And who can earn 10% per year for seven years other than Bernie Madoff’s clients?
The cold hard facts are that since 2000 you would have been far, far better off holding ounces of gold rather than interest bearing investments (annuities, bonds, savings accounts, cds) or even real estate and certainly better off than holding stocks which have retuned nothing in a decade. Setting gold (Money) aside worked out as it was supposed to. The buying power was preserved, and at least in this time frame, gold even showed a remarkable gain.
But that’s just my view – and you are certainly entitled to yours.