My portfolio composition has not changed very much over my past six silent months. This deleveraged portfolio, designed for modest gain and low risk during retirement, has returned 4.98% year to date and marked to market. Cash, near cash, and intermediate bonds with an overall total duration of about two years make 60% of assets. The cash portion is about 25% of the total portfolio and is a drag on performance by design. Gold and commodity stocks and hedged stock funds (FPACX, PRPFX, MFLDX) constitute 29% of total assets and gold bullion 11%.
US and Canadian oil and gas income stocks have been an unanticipated disappointment, as have been gold stocks until recently. Gold bullion is up 13% year to date, and the mortgage bond vehicles have combined decent gains with higher income.
As gold seems to be emerging from a year long high level consolidation, one sees a lot more gold chatter, largely by sell-side analysts, perennial gold haters, and the gold bugs. Much of the chatter is therefore self-serving or uninformed. Curiously, gold haters seem obsessed with $1700+ being too high a price for gold even when many tech stocks and now venerable Berkshire Hathaway, class A, are selling for hundreds or thousands of dollars per single share and are much lauded.
Barry Ritholtz has put up a new blog post review of the cheap versus expensive gold question which together with many replies covers the superficial uninformed spectrum one sees everywhere. Ritholtz correctly points how that gold cannot be valued in the same ways stocks or bonds are valued since it never changes and pays no interest or dividends. In truth, gold can throw off or receive a lease rate or have covered calls written on it for income, but it's clearly not a stock or a bond.
Valuation can be approached in many ways, but I think a helpful valuation way for investors is to look at historical price appreciation of gold and equity stock indices over long periods. The US officially went back on the gold standard in 1879 after going off leading up to the Civil War and the "greenback" era. The price was set at the world rate (but in dollars) of $20.67 per Troy ounce where it stayed until the gradual resetting up to $35.00 in 1933-34. The US kept the rate pegged at $35 until 1971 when gold was let free and rose to approximately $200 in 1974. It's clear to me that gold would have risen to $200 from $20.67 from the 1890's or 1913-14 to 1971 had it traded freely.
Thus we can say that gold rose ten-fold over 95 years. There are historical issues with pre-1900 stock index prices, but we know "several" of the serial Dow indices traded as low as 40 in the 1890's as well as 41 in 1932. The 1974 Dow Industrial low was 577, thus we can say the Dow low price to low price from 1879 (40) to 1974 (577) was approximately fourteen fold. (I am leaving dividends, lease rates, taxes, commissions, fees, index deletions, slippage, and other costs out of consideration for simplicity since they would have varied widely among holders.)
After 1974 gold has risen from $200 to as high as $1900 last year for another gain of nearly ten-fold. The Dow has risen from 1974's 577 to as high as 14198 in 2008 for a nearly 25-fold gain. Even if we insist on using a high for the 1970's near 1000, the Dow's gains were at least half again as much as gold's own gains.
At least two conclusions are obvious: 1. both gold and stocks are decent long term inflation and wealth protectors, and 2. stocks are now more "overvalued" than gold since the mid 1970's. A third convincing conclusion is that unless one is a brilliant top and bottom picker it is wise to own both assets over a very long lifetime of investing.
Recent Comments