Dear Qins,
with all the interesting fundamental discussions around equity investments: dividends vs. growth, single stocks vs. ETFs, B&H vs. timing, one asset class that is very interesting in my opinion has hardly been considered so far: Gold.
When this topic comes up at all, it often gets emotional. Either gold is vigorously criticized (Coiner, DivInvestors) or vehemently defended (Goldbugs). In my contribution, I want to promote a sober approach to the topic and take a closer look at the most important arguments for and against it.
1. what are the reasons against gold?
2. what are the arguments in favor of gold?
3. how to invest in gold?
4. conclusion
1. what are the reasons against gold?
Contra argument 1: Gold is an unproductive, useless stone.
Gold generates no income, no dividends, no interest payments. Classical valuation models of productive assets do not work (discounting of future profits, for example). Thus, gold has no value from an income perspective.
Gold is a largely useless metal: too soft, too rare, too expensive. Only 8.2% of annual gold production is demanded by industry. The rest goes into vaults as bars or to people as jewelry.
Counter-argument 2: Gold is a risky asset class.
Gold ownership was banned in D 1936-45, in GB 1966-71 and in USA 1933-73. Even if it is not likely and other asset classes are rather regulated before, it can happen again.
Gold is at all-time highs right now. From highs it fell 52% in 1980-82 and 42% in 2011-2015. Drawdowns like that happen with stocks, too, but....
Contra argument 3: Gold has a poor risk-reward ratio.
Basically, gold brings the return of bonds with the risk of stocks. A backtest of the 50-year performance of U.S. stocks, U.S. government bonds and gold shows what is meant by this:
Backtest 1973-2023:
US Stock Market: 10.2%pa, -51% maxDD
US Intermediate Treasury: 6.50%pa, -14% maxDD
Gold: 6.80%pa, -62% maxDD
2: So what else is in favor of gold?
Pro-argument 1: Gold is a good crisis protection.
In times of crisis gold often rises and cushions losses:
a. 1974: S&P500: -30%; Gold: +66%.
b. 2002: S&P500: -23%; Gold: +26%
c. 2008: S&P500: -39%; Gold: +4%
d. 2022: S&P500: -19%; Gold: +0.5%.
Pro Argument 2: Gold is a very good diversifier.
Gold is almost uncorrelated to stocks and bonds. Therefore, adding gold improves the risk-reward ratio of almost any portfolio.
Below I did two backtests with a stock portfolio and a stock-bond portfolio to which I added gold in different ratios.
Backtest US Stocks, Gold 1973-2023 (=50 years!)
100% Stocks 10.19%pa, -50.9% maxDD
90% Stocks, 10% Gold 10.32%pa, -45.4% maxDD
80% Stocks, 20% Gold 10.34%pa, -39.6% maxDD
70% Stocks, 30% Gold 10.24%pa, -33.5% maxDD
Backtest US Stocks, Bonds, Gold as of 1973
60% stocks, 40% bonds, 0% gold 9.15%pa, -28.0% maxDD
55% stocks, 35% bonds, 10% gold 9.29%pa, -24.5% maxDD
50% stocks, 30% bonds, 20% gold 9.36%pa, -21.0% maxDD
50% stocks, 25% bonds, 25% gold 9.46%pa, -21.4% maxDD
45% Stocks, 25% Bonds, 30% Gold 9.26%pa, -19.0% maxDD
The optimal ratio of gold to the portfolio is therefore 25-30%. This means that the same return can be achieved in both variants with significantly reduced risk. The usually recommended 5%-10% have no significant effect. One can only guess why this is recommended anyway.
Pro-argument 3: Gold trading is tax exempt in Germany.
For tax purposes, gold is considered money in Germany. Physical purchase of gold is VAT exempt. After one year all profits on physical gold or corresponding certificates (Xetra Gold/ EuwaxII Gold) are tax free. With a weighting in the depot of 30% this can become quite significant!
Pro-argument 4: Gold is universal money.
All people understand gold as a child: it is beautiful, it is finite, it is useless. Therefore, it has always been the ultimate currency in all cultures of mankind for over 5000 years. Even today, gold can be exchanged for local currencies and goods all over the world. Those who have to flee war or the like can build a new life with a few grams of gold.
Physical gold is the only liquid tradable asset without counterparty risk. It can be viewed as an interest-free, default-proof bond with an infinite maturity.
Bitcoin is referred to as digital gold, not vice versa gold as analog bitcoin! I wonder where the "coin" in the name comes from? This alone gives an idea of what the measure of all (stock exchange) things is.
3. how to invest in gold?
Forms of investment: Physical and paper
Essentially, there are two ways to invest in gold: 1. physical gold in the form of coins, bars, jewelry. 2. purchase of entitlements to physical gold in the form of Xetra Gold, Euwax II Gold (only these two are tax-free tradable in D).
Disadvantages of physical gold:
Storage. A safe hiding place has to be found or a safe has to be bought or rented. No problem with XetraGold.
Security: Physical gold can be physically stolen. For example in case of a burglary or during physical trading. The latter can be solved with a trustworthy gold dealer, but is basically no problem with XetraGold.
Authenticity. The authenticity of physical gold must be assured by reputable traders. No problem with XetraGold.
Premium. The spread between the buying and selling price of common coins is usually 1-2%, but can increase significantly in times of crisis. No problem with XetraGold.
Advantages of physical gold:
Anonymity: Gold in private possession cannot be traced, so to speak. It is therefore a store of value that is largely beyond the reach of the state. Unlike a deposit or account or XetraGold.
Storage costs: The storage of gold basically costs nothing. Every other form of investment has storage costs.
Transportability: Gold is highly transportable due to its value density. Most people should be able to carry the gold weight of all their assets (cash, stocks, house, paintings) without any problems. Impossible with XetraGold.
Access: In case of a serious crisis, one has immediate access to a store of value. Inaccessibility of the broker, closed banks can at least be cushioned with physical gold.
Aesthetics: A gold coin in PP or a gold ring is simply prettier to look at than an entry in the deposit.
Investment strategies: Passive and active
The optimal form of investment depends on your own investment strategy. For passive strategies (buy-and-hold) physical gold is the best form, because then there are no ongoing costs (offers no other asset). With an active strategy paper gold is suitable, since here a fast and favorable trade of also larger quantities is possible.
Buy-and-hold offers itself, if one understands gold as financial crisis insurance or life insurance without current costs. Active strategies are suitable if one tries to improve the portfolio performance with timing. For example, gold tends to rise above the 200-day moving average or when the yield curve is falling. Gold has followed an 8-year dollar cycle since 1971/72. If you had always invested in that, you would have gotten to about 17.5%pa. Or: integrating gold into GTAA improves the return by up to 1%pa.
4. conclusion
Gold will probably always arouse emotions. However, taking a sober look at it as one asset among many can be worthwhile. As an admixture (25-30%), gold can dramatically reduce the risk of the portfolio and at the same time offer a millennia-old insurance against crises of all kinds.
Have I forgotten another important argument? Do you disagree or do you find gold interesting as an admixture as well? I look forward to a lively discussion!
Addendum 1: If paper gold, then Euwax2 Gold. Is like XetraGold tax-free, but costs no TER! Thanks for the hint @InvestmentPapa justetf.com shows this wrong.
Addendum 2: The backtest is with annual rebalancing, which can be difficult with physical B&H. Thanks for the hint.@DonkeyInvestor But if you save anyway, you should be able to solve this easily. One backtest without rebalancing and one with a savings plan can be done quickly by anyone with two clicks.
Link to the backtest:
