There was lots of humming and huffing in the Kirk household this week after gold prices hit a record high last Friday. Not that I can afford even the smallest memorial coin. But my wife is a jeweller, so we have skin in the gain.
I rarely comment on gold. When journalists do, insane end-of-worlders leap from their bunkers to scream abuse. Fiat money is a sham. Governments can’t be trusted. Zombies are coming.
And the yellow metal isn’t the most expensive ever. After adjusting for inflation its peak was July 2020, with real prices on a downward path since. But loads of readers suddenly want a column on gold — so here goes.
I’m going to cover the basics first. Then something different. I will explain in a foolproof way how best to invest in gold — at least in my opinion. It’s an approach anyone can take and doesn’t involve theft.
To begin then, what I’ve always found crazy about gold is how little of it we’re talking about. Only 245,000 metric tonnes of the stuff have been discovered. Three-quarters has been mined — the rest remains underground.
All the gold ever dug up would fit inside a 20 by 20 metre box. Good luck moving it, though. Scarcity and weight meant historic prices were either set by governments or a minority of investors. It was an illiquid asset class.
Today, in contrast, anyone can buy or sell with ease. Exchange traded funds alone hold over $200bn-worth of gold. Prices now obey the laws of finance. Sure, gold has its quirks — but what matters is relative value.
Hence gold should be treated as any other financial asset with zero credit risk and constant purchasing power — unlike say a corporate bond, where the company can default and coupons are paid in nominal terms.
Because gold generates no income, therefore, its price should rise when the yields on alternative low-default assets fall, and vice versa. And this is what happens. Gold is closely correlated with changes in real government bond yields.
The value of the dollar also has a part (since gold is mostly priced in that currency) as does demand from market big boys such as central banks. I won’t go into these other factors here, as Unhedged, the FT newsletter, explained them all perfectly on Monday.
What investors should care about though, are returns. And the long run performance of gold is fine, but lagging behind. Over the past century, for example, US equities would have made you six times richer — over the past 30 years, two times.
Still, an annualised real return of almost 8 per cent since I was born is nothing to smirk at. That’s one-third better than emerging market stocks delivered — and double that of cash. Nor are gold bugs completely mad: they at least stand a chance if Martians invade.
Last time the world order collapsed, during the second world war, official US government gold prices held firm at $34 per ounce. Covid resulted in a one-third pop in 2020, while prices rose 6 per cent in the week after Hamas attacked Israel.
So if you believe there is a risk we’re going to hell in a handbasket, or global warming will turn downtown Denver into prime waterfront, it makes sense to allocate a portion of your investment portfolio to gold.
For the rest of us, it is an asset class to trade only — and there are many better things to buy and sell that also give you an income before you lose money. Unless, like my wife and me, you also happen to love gold as ornamentation.
Most people do. Almost 80 per cent of gold consumed annually, either newly mined or recycled, is used to make jewellery. Sure, you can always buy a ETF. For me, however, the beauty of a glistening necklace or bangle is easily equivalent to an extra 5 per cent yield.
But never buy from a shop. The mark-up on high street jewellery is so steep that no rise in gold prices can ever generate a positive return on your investment. And that King Charles III coin I crave from the Royal Mint is priced at a 24 per cent premium to the gold price.
So allow me to let you in on a secret. Here’s how the experts buy gold rings and bracelets for less than the scrap price. It may be too late for Christmas, but there is always next year, and you often have to be patient anyway.
First, sign yourself up to one of the aggregator auction sites, such as Saleroom.com, and search for the kind of piece you’re after — “18 carat, curb-linked ankle chain”. Then weed out all the auctions focused on jewellery. You want to avoid those.
The trick is to find your item within a bulk sale. Of an estate, for example, or a huge auction of random things, from furniture to Victorian toys. These have the least chance of jewellery experts attending.
After hours of bidding, the antique cushion people have left. Those awaiting the cigar lots are nervous and distracted. No one has a clue how to calculate the scrap value of gold except you (weight multiplied by gold price multiplied by carat divided by 24).
Before you know it, the hammer is down. Not only do you have a lovely piece of jewellery for a fraction of what it would cost retail, you’re often invested in gold at less than the spot price, including a buyer’s fee and taxes.
You cannot lose. Lovely to wear. A cheap gift. Sell online for a massive profit or scrap and receive more than your money back — even if prices have fallen some. Pure investment gold.