Should You Now Own Gold for Retirement?

Gold as a retirement investment? If you ask ten people, you may hear ten different answers. Gold has one thing going for it: it’s an investment that will do well when the world is in crisis. Almost any kind of global calamity or economic bad news will trigger a spike in gold prices.

But gold is extremely volatile. Do baby boomer investors really want or need a volatile asset that is most valuable during scary times? Perhaps. But for retirement investors, it helps to look at gold performance data and to compare it to other asset categories, e.g., stocks and bonds.

The last big peak in gold prices occurred in January 1980, at $850/ounce. Gold prices subsequently reached a record of $1226.56/ounce on December 3, 2009. If you had purchased gold in January 1980, you would have earned 44% total on your investment through this record high.

During the same period, the S&P 500 stock index achieved a 22-fold return (with dividends reinvested). U.S. Treasuries increased 11-fold.

Cash in the average U.S. checking account increased by 92%.

Clearly, gold got its you-know-what kicked by other asset categories during this period.

Taking into account inflation, investors who bought gold in 1980 are still 79% away from getting their money back!

Of course, because gold is so volatile, choosing a different starting date will significantly affect the performance data.

Investors who bought gold at its two-decade low of $251.95 in August 1999 have realized a 387% return, more than four times the 82% gain in Treasuries. During this same period, an investment in the S&P 500 index lost 0.4%.  Interest on checking accounts declined to 0.14% this year from 0.89% in 1999.

Since the S&P 500 peaked in October 2007, investors in that stock index lost 25%, holders of Treasuries made 16% and gold buyers gained 64%.

What does this tell us about gold as a retirement investment? It tells me that gold is not suitable for a stable, long-term buy and hold investment plan. To make gold really work, you would have to buy on good news and sell on bad news, assuming that you could predict the news. In other words, gold is more for speculators than for long-term retirement investors.

A small allocation in gold could help support your portfolio when everything else is down, but over the long run, what good is that? Do you ever sell the gold for income? Or is it just there to make you feel less bad when the rest of your portfolio is in the tank?

Some who use gold as a portfolio stabilizer swear by Harry Browne and his Permanent Portfolio Allocation as follows:

25% – Stocks (S&P 500 Stock Index Fund)

25% – Long Term Bonds (US Treasury 30 Year Bonds)

25% – Gold (Physical Gold Bullion)

25% – Cash (Treasury Money Market Fund)

So how did the Permanent Portfolio do in 2009? Assuming that you created the portfolio using typical low cost exchange traded funds, this is what happened:

25% Vanguard Total Stock Market ETF: +28.9%

25% iShares 1-3 Year Short Term Treasury Bond ETF: +0.25%

25% iShares 20+ Year Long Term Treasury Bond ETF: -21.8%

25% Gold Price appreciation for 2009: +24%

Total Permanent Portfolio Return for 2009: +7.8%

This is mediocre performance to be sure. On the other hand, it’s only a one-year snapshot.

My personal view: Unless and until someone devises a strategy of how a retiree can reliably use gold to generate retirement income without having to buy and sell on good news/bad news, I would invest in gold only as part of an overall commodity or natural resources fund, such as T. Rowe Price New Era.

Have any of you successfully used gold in your retirement portfolio?

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