Why Gold Prices Jumped Last Week

If you invested $100 in the S&P 500 at the beginning of 2000, you would have about $448.08 through April 10, 2023, if you reinvested all the dividends you received. That’s an impressive of 348.1%, or 6.7% per year.

That performance also substantially outpaced the Consumer Price Index (CPI) in the 21^st century for an inflation-adjusted return of about 156.5% or 4.16% per year.

That’s not a bad return on investment, all things considered.

But there’s an investment that’s done even better so far this century: gold, the metal that economist John Maynard Keynes once called the “barbarous relic.”

If you invested the same $100 into gold on January 4, 2000 (the first trading day of the year), it would be worth $606.07 today. Your money would have grown more than sixfold in those 23 years, for an average return of around 8.1% annually.

Obviously, that’s a far superior return than stocks.

Gold periodically catches the eye of the chattering classes whose eyes are ordinarily glued to their smartphones watching the value of their stock portfolios increasing (or not).

And last week was such a time. In just two days, spot gold prices increased by more than $50 per ounce, peaking (temporarily) at $2,021.76 on Tuesday, April 4.

Since then, the price has fallen a bit, but is still easily within reach of its all-time high of $2,063.20. That’s a far cry from January 4, 2000, when you could buy an ounce of gold for $281.50.

Of course, a lot of things were less expensive in 2000 than they are now. You could buy a dozen eggs for under a dollar, for instance. A pound of bread cost less than a dollar, too. The average cost for a gallon of gasoline was $1.48.

Obviously, you won’t be buying a dozen eggs for anywhere close to a dollar today. Last week, I went to the grocery store and the least expensive eggs were $3.99 a dozen. And I paid $4.69 per gallon when I filled up the gas tank in my car.

We would be the first to observe that gold isn’t a productive asset in the sense that it generates wealth. This is the reason Warren Buffett, perhaps the most successful investor in history, is on record criticizing gold as an investment.

And we agree that gold isn’t a productive asset. While some gold is used for industrial purposes, the vast majority of it sits in vaults.

And the reason for that is very simple. Physical gold isn’t an asset that can simply go “poof” and disappear.

Russia’s central bank learned that the hard way last February. Within days of Russia’s invasion of Ukraine, the United States, the European Union, and other countries froze over $300 billion of its foreign currency reserves. But the 2,300 tons of gold in the vaults of Russia’s central bank remained secure.

Indeed, global central banks purchased a record amount of gold in 2022 – 1,136 tons in all, according to the World Gold Council.

But why, specifically, did gold prices increase $50 per ounce in just two days last week?

A big reason is that the US dollar’s value fell by nearly 1.5% in less than two days, as measured by the US Dollar Index, after news emerged that China and Malaysia were considering the creation of an Asian Monetary Fund to reduce reliance on the dollar.

Last week also brought news that the dollar’s share of currencies held by global central banks fell to 58.4% at the end of 2022. That’s the lowest number since 1994.

Meanwhile, yields on US Treasury bonds fell. Evidently, hedge funds and other mega-investors believe that the Federal Reserve will be forced to halt its campaign of interest rate increases.

In the 13 months, the Fed has hiked interest rates at the fastest pace in 40 years in an effort to quell inflation.

But despite the Fed’s best efforts, the Consumer Price Index inflation is still increasing at an annual rate exceeding 6%. And if the CPI were measured the same way it was 40 years ago, it would show prices increasing at around 14% annually.

At the same time, Uncle Sam is facing an imminent government shutdown, along with an ongoing banking crisis.

In such uncertain times, it’s hardly surprising that investors are turning to gold; an asset with a 5,000-year track record of protecting wealth.

Still, gold isn’t a perfect investment. As Warren Buffett points out, it’s an unproductive asset. And since it’s vulnerable to theft, it needs to be kept in a secure location, which costs money.

That’s why we’re big fans of a concept called the Permanent Portfolio, which we most recently discussed in this article.

Basically, the Permanent Portfolio consists of equal portions – 25% each – in gold, stocks, bonds, and cash.

Over the last 52 years, it’s delivered an average annual return of 8.5% and it’s remarkably done so consistently, although in 2022, its value declined by 11.6% – its worst performance in half a century. But it’s up 6.1% so far this year.

Indeed, we simply don’t know of a lower-risk long-term investment approach. When we consult with clients, we sometimes tell them to split their wealth into two imaginary piles:

1. Wealth they can afford to lose.

2. Wealth they can’t afford to lose.

For wealth you can afford to lose, feel free to invest it in whatever asset class which you feel gives you the best return commensurate with the risks you’re willing to take. But for wealth you can’t afford to lose, the best solution we’ve found is the Permanent Portfolio.