gold in front of IFA

A Difficult Year for Gold and Silver

gold in front of IFA

Although we haven't seen too many of them lately, it is easy to recall the advertisements and doomsday books touting gold and silver as investments that inundated us. Conjuring up fears of a currency collapse accompanied by hyperinflation, they warned us how in an impending societal collapse, those of us without precious metals to barter would face all kinds of hardship. Naturally, many people took the bait, and right now, they are probably feeling rather awful about it. On a year-to-date basis (as of 12/24/2013), gold is down 27.7% and silver is down 35.2%. By comparison, the S&P 500 Index is up 31.2% and IFA's Index Portfolio 100 is up 28.5%. Anyone who bought either of these metals after mid-2010 is underwater.

Throughout all the hype, IFA's position never changed. Gold (and other precious metals) should never be considered in the category of investments because they have no internal mechanism for generating a return. Obtaining a return on investment is completely dependent on someone else being willing to pay you more than what you paid (i.e., the greater fool theory). While having a zero expected real return is bad enough, it gets worse due to the high volatility (standard deviation) of prices.  Over the forty years ending 12/31/2012, IFA found that gold had the same standard deviation as IFA's Emerging Markets Index at 20.7%, and silver had one that was far higher at 33.5%. This belies the argument that precious metals are a good hedge against inflation because inflation itself has only had a standard deviation of 1.3%. The chart below shows where gold and silver fall out among different asset classes.

One noteworthy investor whose position on gold also never changed is Warren Buffett. Below is one of our favorite videos of his where he talks about whether he would rather have all the gold in the world vs. all the farmland in America plus seven Exxon-Mobils plus a cool trillion dollars.

To put it perspective, here is what a 67-foot cube of gold looks like when placed in front of the building that houses IFA's headquarters.

Gold Cube

Naturally, we wholeheartedly agree with Buffett's choice, and here is an article that more thoroughly explains his view of investing as something that should be limited only to productive assets.

Burl Ives may have been onto something when he wrote these lyrics for "Silver and Gold":

Everyone wishes
For silver and gold
How do you measure
It's worth?
Just by the pleasure
It gives here on Earth

IFA has counseled investors not to confuse possessions with investments, and precious metals are clearly in the former category.