Gold Investing for Retirement

I often ask myself whether I and other baby boomers should be investing in gold or gold stocks for retirement. On the one hand, a good financial plan needs an inflation protection strategy and precious metals are favorites as an inflation hedge. On the other hand, gold is notorious for being volatile and strangely unpredictable.

A Recent History of Gold and Inflation

Let’s examine what happened with gold in 2008, when inflation fears seemed to reach their peak.

For the year that ended June 2008, the U.S. wholesale inflation rate increased to 9.2%. This was the fastest rate of increase in inflation since 1981. Consumer prices rose by 0.8% in July 2008. This run-up in consumer prices finished off a 12 month CPI inflation rate of 5.6%, which was the largest twelve month gain since 1991. While inflation was peaking, average weekly earnings fell 3.1%, adjusted for inflation. This represented the largest single year decline in employee earnings since 1990.

These inflation and earnings numbers left consumers struggling with higher food and energy prices. At the same time, investors were looking for an asset category to effectively confront the inflation beast. Gold became an obvious consideration as an inflation fighter.

Now let’s look at what happened to gold prices. First, the short term data.

On August 17, 2008, right after terrible wholesale and consumer inflation numbers were released, gold fell 4.2 percent to $772.98 an ounce. That was a drop of $100/ounce after August 1, 2008 and a fall of $260 per ounce (-26%) from the peak gold price in March, 2008.

With that data, it would be hard to conclude that gold was acting as an inflation hedge.

Now let’s look at the long term data. According to a study conducted by Dr. Jeremy Siegel, a finance professor at the Wharton School:

$1 invested in T-Bills in 1802, with interest reinvested, would have grown to $5,061 by 2006.

That same dollar invested in bonds would be worth $18,235 in 2006.

$1 invested in common stocks in 1802 (with dividends reinvested) would be worth more than $12.7 million.

That same $1 invested in gold in 1802 would have been worth only $32.84 at the end of 2006. Not impressive.

There have been periods where there has been some correlation between inflation and gold prices. However, consider the following data:

Gold prices increased from $105 in 1976 to $850 in January, 1980. Consumer prices increased by about 28%.

Gold fell from $850 in 1980 to $256 in 2001. During that same period, consumer prices more than doubled.

Gold prices increased from $256 in 2001 to $1,011 in March, 2008. During this period, consumer prices increased by about 20%.

This tells us me that gold prices are wildly uncontrolled by external factors and with very little correlation to inflation.

Recent gold price data is no more reliable, with prices falling with signs of deflation.

Reasons to Invest in Gold for Retirement

In my view, gold is attractive to some investors because of the “doom and gloom” phenomenon. Gold is a hedge against bad news that brings bear markets. Bear markets trigger interest in gold. However, that bad news may not be accompanied by inflation. There seems to be no cause and effect relationship with inflation.

Gold is a commodity investment but not like oil, wheat, or pork bellies. Gold is not consumed and consumers can simply choose not to use it or not to buy it. Some doom and gloomers, however, will drive up the price of gold on fears that our entire economic system is about to collapse. They seem to think that we all will revert to a gold currency or at least to a gold standard.

To me, the bottom line is that some of us may want to include a small component of gold or precious metals in our retirement portfolio as a hedge against a major bear market. By small, I am thinking 5-10%.

How to Invest in Gold for Retirement

There are several different ways to add gold to your retirement investments. You could buy gold coins or bullion from  a gold dealer. That doesn’t make a lot of sense to me because of liquidity problems. You also have to make arrangements to store the gold.

Another gold investing strategy is to buy shares of an exchange traded fund that goes out and buys the gold bullion and stores it for the benefit of shareholders. The leading gold investing ETF is SPDR Gold Shares (GLD). It is up 4.35% so far this year.

A third gold investing option is to own individual gold mining stocks. This is too much work in my opinion and is not worth the risk because mining stock prices won’t always track gold prices.

Yet another way to invest in gold for retirement is through a precious metals mutual or exchange traded fund. There are a handful of those that seem to provide decent performance at relatively low cost. One of the best is USAA Precious Metals & Minerals (USAGX).

Finally, for more diversity and less reliance on gold or precious metals specifically, you can invest in a commodities fund that includes precious metals as well as other commodity sectors. I have done this in two different funds, T. Rowe Price New Era (PRNEX) and Powershares DB Commodity Tracking ETF (DBC). Both of these have been terrible performers in the past year but we continue to own them as part of our overall asset allocation strategy.

Final Comments on Investing in Gold for Retirement

I have never been completely sold on gold as an investment. I’m still not. In fact, I will probably sell all of our holdings in precious metals and commodities as I get closer to deciding when to retire. At that point, we will be relying more on I-bonds and similar investments as an inflation hedge.

What are your thoughts on making gold part of your retirement investing?

Image credit: Thomas Hawk

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