Gold Medals & Gold Investments

By: Michael Foster, CFA, CFP®

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The Olympics have been on non-stop in my house over the last week. I’ve tuned in to the high-profile events (swimming, gymnastics, basketball), but I’ve also found myself enjoying some of the events that aren’t as familiar to me (handball, archery, whitewater slalom). Maybe it’s the pageantry, pride for country, or simple scarcity of only having these events widely broadcasted every four years, but I can’t seem to turn away. One particularly cool thing this year is NBC’s “Gold Zone” on Peacock. It’s a channel that flips between events or shows multiple at a time so you can catch more of the action. If you haven’t had a chance to check it out, I highly recommend it!

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Gold medals are obviously the goal for the athletes in Paris this year. Should gold investments also be a part of your allocation as an investor? Should we also be “going for gold”? You knew the tieback to financial planning was coming at some point!

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There isn’t a perfect answer, and everyone’s needs and goals are different. That being said, we typically don’t think a direct allocation to gold is a necessary part of an investor’s overall portfolio. One of its commonly stated benefits of tracking inflation hasn’t always held true. It also isn’t a business entity or has its own cash flows.

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On inflation, gold has not always lived up to its billing of being a good tracker. Full disclosure, it has performed well recently in this period of higher inflation. Performing well, and tracking inflation don’t necessarily mean the same thing though. It has had relatively large price swings versus inflation over time. The chart below from Dimensional Fund Advisors shows how gold (in yellow) has performed versus annual inflation (in red). You can see that gold’s returns don’t always move in the same direction or even closely mirror inflation. You can find the original of this graphic and associated disclosures here.

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One other reason that we typically haven’t invested in gold for our clients is around the business, or lack thereof, itself. A core belief of ours is that if you give smart people at sound companies money, they will tend to grow that company, and in-turn, your money over time. We don’t know what specific companies will outperform others, so we aim to broadly diversify portfolios in a thoughtful and cost-conscious manner. Gold itself is not a company, doesn’t have cash flows, and is worth whatever the buyers and sellers of it say it is. It doesn’t have the opportunity to innovate, invest in new ventures, gain efficiencies, or market itself that a normal company does. 

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Neither of these are to say that investors should never hold gold in their portfolios. Always review your goals and needs to see what might work best for your situation. We just don’t typically see it as a great inflation tracker or believe that too much wealth should be tied up in assets that don’t produce cash flows.