Gold has always held a certain appeal for humans. Its lustre (due to a lack of oxidation), makes it pleasing to look at and to handle. Yet, it is simply a lump of metal that generates no income and will only be worth what someone else wants to pay for it at any point in time. Given the lack of cash flow, common valuation models are not useful.
Warren Buffett is not a big fan, stating: –
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Gold has suffered lengthy, negative real returns over periods as long as 20 years. Between 1987 and 2017 it delivered an annualised return of just 1.5% p.a. after inflation – around 5% lower than equities – yet with similar volatility. In its favour, gold prices are uncorrelated to equity markets.
Yet many investors seem enamoured by Golds fabled investment properties. So, do these claims stack up?