Gold's rush falls short on 30-year investment

Gold is a useless asset long term, says Charles Morris, who manages US$2 billion for HSBC in London. Photo / Geoff Dale

Gold's best year in three decades still didn't see it match the returns of an interest-bearing cheque account for anyone who bought the most malleable of metals during the last peak in January 1980.

Investors who paid US$850 ($1174) an ounce back then earned 44 per cent as gold reached a year high of $1226.56 on December 3 in London.

The Standard & Poor's 500 stock index produced a 22-fold return with dividends reinvested, Treasuries rose 11-fold and cash in the average US cheque account rose at least 92 per cent. On an inflation-adjusted basis, gold investors are still 79 per cent away from getting their money back.

"You give up a lot of return for the privilege of sleeping well at night," said James Paulsen, who oversees about US$375 billion as chief investment strategist at Wells Capital Management in Minneapolis.

"If the world falls into an abyss, gold could be a store of value. There is some merit in that, but you can end up holding too much gold waiting for the world to end. From my experience, the world has not ended yet."

While gold's nine-year bull market is attracting hedge-fund managers John Paulson, Paul Tudor Jones and David Einhorn, strategists and fund managers say buy-and-hold investors should not always own bullion. The accumulation of gold is part of a record US$60 billion Barclays estimates will flow into commodities this year.

The SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has amassed more metal than Switzerland's central bank, spurred by a plunging dollar and concern that the at least US$12 trillion of government spending to lift economies out of the worst global recession since World War II will spur inflation. The collapse of US real estate in 2007 froze credit markets and left the world's biggest financial companies with US$1.72 trillion of losses and writedowns, data compiled by Bloomberg show.

The US Mint suspended production last month of some American Eagle coins made from precious metals because of depleted inventories. Britain's Royal Mint more than quadrupled production of gold coins in the third quarter. Harrods began selling gold bars and coins for the first time in October.

Those sales contributed to the big rally in gold last year which saw it beat the 20 per cent gain in the Dow Jones, with dividends reinvested, and a 2.4 per cent drop in Treasuries.

On New Year's Eve gold rose US$3.70 to settle at $1096.20 an ounce on the New York Mercantile Exchange.

Gold is now down 10.7 per cent from the December 3 high but still rose 24 per cent for the year.

A weakening dollar also contributed to bullion's longest winning streak since at least 1948.

The US Dollar Index, a measure against six counterparts, dropped in six of the past eight years, including a 6.9 per cent decline in 2009, bolstering demand for a hedge. Buy-and-hold investors may not have done so well. One dollar put into a US cheque account in 1983 would be worth at least US$1.92 today, based on annual average interest rates from Bankrate.com. The Federal Reserve target rate from 1980 to 1982 was 8.5 per cent to 20 per cent. Banks were paying 5 per cent on the accounts in January 1981, according to a report in the New York Times.

The S&P 500 returned 2182 per cent from the beginning of 1980 through the end of the third quarter last year, according to data compiled by Bloomberg. The calculation assumes dividends reinvested on a gross basis. Treasuries returned 1089 per cent through the beginning of December, according to Merrill Lynch's Treasury Master Index.

"Gold is a useless asset to hold long term," said Charles Morris, who manages more than US$2 billion at HSBC Global Asset Management's Absolute Return fund in London.

"I'm not a gold bug who believes that you want to own this thing in your portfolio at all times. We should own it when the going is good, and the going right now is great."

Those who bought gold when it reached a two-decade low of US$251.95 in August 1999 have seen a 387 per cent return, more than four times the 82 per cent gain in Treasuries. An investment in the S&P 500 lost 0.4 per cent through the start of December. Interest on cheque accounts shrank to 0.14 per cent this year from 0.89 per cent in 1999.

"There are people that just stayed in very conservative investments in cash and government bonds," said Larry Hatheway, global head of asset allocation at UBS AG in London, who recommends investors hold about 1 per cent of their assets in bullion. "Surely they would have been a lot better off being in gold."

Buying bullion at US$35 when US President Richard Nixon abandoned the gold standard in 1971 would have given a 35-fold return, about the same performance as the S&P 500.

Gold will average US$1070 this year, according to the median in a Bloomberg survey of 19 analysts.

The metal may jump to US$2000 in the next five years, said HSBC's Morris.

Ian Henderson, manager of US$5 billion at JPMorgan Chase, says he is adding to his gold-related holdings because of "the momentum behind it".

Jim Rogers, the investor who predicted the start of the commodities rally in 1999, has said bullion willsurge to at least US$2000 in the next decade.

"Our sense is that this bubble is more at the beginning stages than on the brink of collapse," said Thomas Wilson, head of the institutional and private client group at Brinker Capital in Berwyn, Pennsylvania, which manages about US$8.5 billion.

Paul Tudor Jones, in a letter to clients of his Tudor Investment, said gold is "just an asset that, like everything else in life, has its time and place. And now is that time."

Central banks became net buyers of gold last year for the first time since 1988, according to New York researchers CPM Group. India, China, Russia, Sri Lanka and Mauritius have all added to their reserves.

Gold should be held when governments cease to function and currencies are worthless, or when inflation is surging, said Brian Nick, a New York-based investment strategist at Barclays Wealth, which manages US$221billion.

He does not recommend increasing gold holdings, which are a "very small" part of commodity allocations.

Inflation has yet to accelerate.

US consumer prices will rise 2 per cent this year, the smallest expansion since 2002, according to the median estimate of 63 economists surveyed by Bloomberg. Prices will shrink 0.4 per cent this year.

"People have this knee-jerk reaction and say that you want gold as a hedge against inflation,"said Maxwell Bublitz, who helps oversee US$3.5 billion as the chief strategist at SCM Advisors in San Francisco and recommends investors hold no more than 5 per cent of their assets in the metal. "But the history of gold in regard to inflation shows that it's not a great hedge."

Investors seeking to protect themselves against inflation should buy commodities, which are cheaper than gold, said Wells Capital's Paulsen.

Copper, after more than doubling last year, is still 28 per cent away from the record US$8940 a metric tonne reached in July 2008.

"Theoretically, it does have a spot in portfolios, a small one," Bublitz said. "You're probably going to get entry points that are a lot better than where gold is now."

- BLOOMBERG