Steve Feldman, former partner of Goldman Sachs, published his position on gold after a number of clients asked Goldman Sachs about adding gold in their portfolio.
Goldman Sach’s Investment Strategy Group or ISG said they are “not recommending gold as a strategic asset class in a well-diversified portfolio.”
They contend that Gold is not a good inflation hedge.
Aside from being a well-written piece, the pieces of information he provided and succeeding analysis were sound. So we would borrow his words. The link to his original pieces is in the description box.
First, Feldman said that he doesn’t see gold as an income producing asset. Gold is a store of value. It is the ultimate form of money. Unlike stocks, gold is not supposed to be an income producing asset or a dividend-generating security.
Therefore, comparing gold to stocks is like comparing apples to oranges.
Gold is more appropriately compared to the US dollar. Like the US dollar, gold is a medium of exchange that is accepted around the world. Like gold, the US dollar pays no dividend.
The biggest difference between gold and the US dollar is that unlike US dollars or any other fiat currency on the planet, the supply of gold is limited.
Right now, the Fed is printing relentlessly. This causes for the value of the US Dollars to go down.
No one can overprint or overproduce gold.
Next, Fedman pointed out that the historical record provides a clear answer on whether or not gold is a hedge against inflation.
Gold outperforms rising inflation. A long-term study show that the gold price has historically risen during periods of high inflation—and the higher the inflation, the more gold rises.
During stretches of inflation that exceed 3%, the return on gold per annum is 8%. That return clearly outpaces the rise in inflation.
In fact, gold’s two biggest climbs in modern history occurred during periods of high inflation or the fear of inflation.
Gold rose 721% during the high inflation period of 1976 to 1980. It rose 170% from 2008 to 2011, when most investors feared inflation would rise from QE efforts but then ISG claims that gold’s “slight edge” over inflation is not attainable due to physical storage or insurance fees and requirements.
That’s beyond ridiculous. Any kind of investment is loaded with fees.
Let’s assume that a hedge fund does in fact hedge risks, then hedge fund investors are paying 2% plus 20% of the profits. That’s way more than the storage fee of gold if you choose to use a custodian of your gold instead of storing it yourself.
In short, gold hedges inflation.
We echo Feldman’s position that gold is not meant to be the be-all and end-all of your investment. No single investment is. Investments need to be diversified and gold should be in the picture.