Asset allocation
45-years to recover
In over 50 years of investing, I have never put a penny of our family’s retirement savings into gold. Based on what I write below, I don’t intend to.
I last wrote about gold five years ago. In my post Gold is not an investment I wrote in the conclusion: “I came at this post with some preconceived notions about gold. I have tried to re-examine my thinking in light of everything I have read and experienced. I still can’t find any place in our family’s portfolio for gold. Nor can I find any place for Bitcoin.”
With gold pushing $3,500 an ounce I thought it wise to revisit this subject. Many readers will know that my basic asset allocation is to stocks. Readers wishing to dig into the rationale behind this might look at these posts: My thoughts on asset allocation; and Warren Buffett’s approach: Asset allocation out of step with modern investment management
Things to think about
I propose to look at two aspects of gold. First, what we can learn from charts of gold prices. Second, something from the fundamentals.
The story in pictures
Charts are a marvelous way of conveying the meaning behind data. They can also be very misleading, either intentionally or very often through ignorance. See my post Chart distortions that drive me crazy
Let’s start with a chart of gold prices since 1973. The chart shows a vertiginous rise in gold prices in the last couple of years. There are a couple of problems with this chart. First, it is not inflation adjusted. That is, it does not show the ‘real’ price of gold, only the ‘nominal’. Second, it is arithmetic on the y-axis rather than semi-log. A nominal $500 rise in price in 1980 is the same as a nominal $500 rise in 2025.
I particularly invite you to compare the rise of gold prices in the 1970s with the rise over the last ten years. The 1970s rise looks miniscule and very tame. It wasn’t. It was a massive bubble.
Inflation adjusted and semi-log
Let’s look at an inflation adjusted chart of gold prices on a log scale y-axis. This is more informative. There was a true gold bubble in the late 1970s. Gold went from a nominal $35 per ounce in the early 1970s to a nominal $500 per ounce in 1979 ($800 inflation adjusted). These two changes to the chart make something very clear. There was a major gold bubble in the 1970s, comparable to today’s bubble, and it has taken 45 years for real gold prices to get back to the peak of 1979.
To bring the 1970s into clearer focus, let’s look at a chart of gold prices from 1977 to 2011 (2011 dollars). This would be the view of a gold investor in 2011 looking back from 2011 over the previous twenty years and wondering when their 1979 investment in gold might get back to what they paid for it. It’s rather a depressing perspective. The chart is not semi-log which tends to exaggerate the bubble. But serious bubble it was.
The message
The clear message is that after a gold bubble it can take a very long time to recover. If the current gold bubble bursts, as the 1970s gold bubble burst, it might take decades for gold investors to recover their investment in real terms, without any dividends or interest payments along the way. The following post is self explanatory: Use of charts and statistics to identify bubbles
Something from the fundamentals
The world is not running out of gold. There is an element of supply and demand involved. As prices go up, gold mining companies increase production. They do this by finding new deposits and also by expanding production of deposits that were not profitable at lower prices.
Some brief research on the internet suggests the current worldwide cost of production is in the order of $1,400 per ounce. This is the all-in sustaining costs (AISC) number. Apparently, AISC is a comprehensive metric used by gold mining companies to report the total cost of producing an ounce of gold, encompassing both direct and indirect costs associated with maintaining current mining operations.
If you add something for selling costs and profit, the AISC acts as a long-term anchor on prices. Trees do not grow to the sky.
Conclusion
I’m not saying gold couldn’t go a lot higher than it is today. My thought, very simply, is that bubbles on gold can occur and that the chart today looks very bubbly. Gold investors who have forgotten, or never knew about the 1970s bubble, should realize that history can repeat itself, and probably will. At these nosebleed prices and with the shape of the inflation adjusted semi-log chart suggesting bubble, I suspect pain lies ahead. Just about everything I have written above about gold also applies to crypto.
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