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(September 11, 2000) In a complicated universe of financial choices, simplicity stands out. Surprisingly, gold has lately become as simple and predictable as bonds were during the Eisenhower administration. Once thought of as volatility incarnate, gold prices have virtually flat-lined over the past few years. Does that make the most coveted element in the world a failed investment, or something else entirely?
First of all, gold is simply an element - a soft, yellow, noble metal, symbol AU from the Latin word “aurum,” atomic number 79 within group 11 on the periodic table of elements. How it came to be thought of as an investment is a modern mystery. Historically, gold is simply a standard of value, a permanent form of wealth itself. We only think of it as an investment during inflationary periods in which it takes increasing numbers of dollars to buy the same amount of gold.

In the inflationary 1970’s, gold prices soared, while common stocks tanked. But in the last twenty years, gold has become much more affordable in dollar terms, and lately has been the most constant of all financial instruments in terms of its worth versus the dollar.

Remarkably, in 1997, 1998, and 1999, we saw gold prices close on the last day of these years at $289.80, $286.45, and $290.25 respectively. That’s less than a 1.4% price variation from top to bottom – a yawn-inducing performance record, to say the least.

But on the other hand, there’s something vaguely reassuring about gold’s steadiness in this unsteady world. It’s hard to imagine any equity, bond, real estate, or any commodity or financial instrument with this sort of recent track record of unrelenting consistency.

How much of a virtue that might be is debatable, but you have to admire gold’s constancy in a volatile world. Which other of your holdings have that attribute? We hereby challenge our readers to come up with any commodity, stock, bond, mutual fund, or other financial instrument whose year-end value has been so consistent for three years running. If you can think of one, please let us know of it via email.

To look at it another way, gold has reverted to its more timeless status, not an investment but as unchanging wealth itself. Gold has held its place, barely subject to any price fluctuations for over three years now. And owning gold involves no monitoring, management fees or expenses of any kind – it’s a totally low-maintenance holding.

A friend of ours the other day was going on about gold and its virtue of tax efficiency. A rather well-to-do attorney himself, he was bemoaning certain costly complications that came with his wealth – such as paying taxes on “gains” incurred in mutual funds, gains that he didn’t personally experience himself. In other words, he has had to pay taxes on phantom “income” that he never received!

Now, probably our friend will always keep a goodly portion of his assets in mutual funds and common stocks. There’s no denying that the U.S. stock market has had a marvelous run, and equities have certainly been the place to be for nearly two decades now. And the modern joke about gold is that it’s been a perfect vehicle for the avoidance of capital gains.

But, contrasting gold with his more volatile investments, he waxed lovingly about the comfort he derives from his hoard of gold coins – safely put away in a deposit box at his bank, never requiring a moment’s thought or concern. And, of course, his gold never, ever incurs any sort of tax bite whatsoever as long as it just sits there.

“Tax efficiency” was the phrase he used about gold, and all that means is that ownership of physical gold simplifies rather than complicates your financial life. Gold doesn’t generate taxable income, doesn’t require any special record-keeping, and doesn’t even come up as an issue on April 15th. Gold is simply money withdrawn from your taxed and tabulated financial holdings, and put into another, simpler form.

So will gold ever be anything more than just a “place-holder” financially? The answer to that depends on the future strength of the dollar. Should our economy weaken, and the dollar fall out of bed, then it will take more dollars to buy the same fixed amount of gold. When that happens, gold prices will rise, and it will appear that gold is performing well as an investment.

Of course, in real terms, the value of gold itself will actually remain the same – it’s the dollar’s value that will change. And once the markets start to reassess the value of this abstraction called a “dollar” (as they recently have done to the “euro”), then every dollar-denominated financial instrument will come under attack.

When that happens, nearly every stock, bond, or financial obligation of any description will be subject to severe price erosion.

Except gold.

And that’s when gold - simple, steady, and boring - will be the most rewarding element of your entire portfolio.


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