Is this a sign of the times?

With all the turmoil in the markets these days many investors are turning to gold and other commodities as a means to protect their assets.  It used to be that investors sought protection in commodities against inflation but today it seems that they are seeking protection against market meltdowns and in some extreme cases against government meltdowns.  Whatever the intent, investing in gold and other commodities can offer a degree of diversification not found elsewhere but also may not offer the returns found in traditional investments.

Let’s focus on gold.  Gold has been a prime commodity and a store of value since the dawn of time.  Even as recently as the last century gold was the means by which currencies were valued.  Until President Nixon removed the direct convertibility of the dollar into gold at $35 per ounce most currencies were effectively tied to this exchange rate through the U.S. dollar.  Tying a currency to a gold standard was done for many of the same reasons investors put a portion of their wealth into the commodity today – as a source of value, a source of protection against inflation, and as a means to value their currency.

While these reasons may be valid, how has gold stacked up as an investment?  According to research done by economist Peter Bernstein as reported on, gold returned 1.9% per year from 1802 through 2008 while stocks returned an average of 9.6% per year.  Other measures show similar returns although in the past few years gold has outperformed other investment vehicles as investors have sought a source of protection against market volatility.

Gold funds and mining stocks have been the primary means to invest in gold.  What these vehicles lacked, however, was the ability to invest directly in gold as even gold funds are primarily invested in mining stocks.  In recent years, investors have been able to invest in gold exchange traded funds that directly bought gold bullion.  By purchasing shares in these ETF’s, one owns bullion but doesn’t have to worry about shipping and storage costs.  Today, however, many investors want to hold the bullion itself as a means of protection against the issues discussed above.  Is the market volatility and lack of confidence in central governments leading to this new phenomenon?  Time will tell.


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