You Need Income, So You Shouldn’t Invest in Gold? Right or Wrong?

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(July 2012)

I think this preconception should be examined more clearly. Let’s assume you had $100,000 to invest in, say 2001. You could have invested in short-term T-Bills, or money markets, or 30 year T-Bonds. But because you wanted the income, you probably also needed the liquidity of T-Bills or a money market, even though they yield less than a 30 year T-Bond.

Let’s compare investing your savings in gold with placing your savings in T-Bills. But let’s not make this a fair comparison; let’s use a worst case scenario for gold against a best case scenario for T-Bills.

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Assumptions

  • In 2001, you invested $100,000 in gold and another $100,000 in T-Bills at the same time.
  • The commission on gold was 5% (way too high) and the commission on T-Bills was zero.
  • You bought gold at the WORST time for the entire year – at the highest daily price in 2001.
  • The T-Bill yield for every year is the very best T-Bill yield at any time between your investment date and the present – June 2012.
  • You sold some gold on September 30 of each year to create the income equivalent of the decade’s best possible T-Bill income.

For example: You invested $100,000 into T-Bills in 2001 and continuously received the best interest rate paid on T-Bills in any month between 2001 and present day. That rate was 4.68% at some point during 2006 and less before and after. (The average for the decade was approximately 1.81%.) In comparison, $95,000 in gold was purchased at the highest daily price during 2001, and enough was sold to create $4,680 each year thereafter on (for example) September 30 through 2011.

Remember, this is a worst case scenario for purchasing gold and a wildly unrealistic scenario for T-Bill yield for an entire decade! And, the results are:

Purchase gold and T-Bills in 2001, and receive a total of $46,800 in interest from the T-Bills and a total of $46,800 in cash out from gold sales on September 30 of each year from 2002 through 2011. At the end of the decade (9/30/2011), the T-Bills are worth $100,000 and the remaining gold is worth approximately $305,800. So, even in this completely lopsided comparison, gold was a far better investment than T-Bills for that decade.

This comparison certainly would not have worked out in gold’s favor from 1980 – 2000, so perhaps this was not representative for other years during this decade. To determine if 2001 was different, we take the same assumptions (including purchasing gold at the highest daily price anytime during the year being examined) and calculate the comparisons for each subsequent year after 2001.

The results are:

Conclusion

Gold generates no income, and yet under the worst of assumptions for gold and the best for T-Bills, gold was a much better investment for capital gain while producing the same income via periodic sales on any given year between 2001 – 2007.

Even though you need income, perhaps an investment in gold makes sense. Currently, money markets are paying near zero interest, Certificates of Deposit are paying some tiny amount, like 1% – 2%, while gold has been increasing over 15% per year, on average, for the past decade. Since the rally in gold is likely to continue, gold looks like a better investment for both capital gains and income.

Of course, past investment results are no guarantee of future investment returns. But, gold has been rising in price because of massive US government deficits, interest rates that are below the real rate of inflation, rapidly increasing National Debt, rising commodity prices, particularly food and crude oil, and easy monetary policies of the Federal Reserve.

Is it likely that US government deficits will decline, interest rates will be allowed to rise, crude will fall in price, or the Federal Reserve will tighten the money supply? I doubt these will happen anytime soon; and, as long as the fiscal and monetary conditions strongly favor gold (as they currently do), then gold will continue to rise, especially in comparison to other financial assets, such as T-Bills, T-Bonds, and most stocks.

It has been said that the best time to plant a tree was 20 years ago, and the second best time is today. Clearly, most of us "missed the boat" if we did not buy stocks in 1982, buy gold in 2001, sell stocks in late 1999, and sell houses around 2006.

Have we missed the final opportunity to buy gold? Probably not! The conditions, as mentioned above, that cause currencies to devalue and gold to increase in price are still in effect. Nothing of substance has been fixed in our financial system since the 2008 crash, and savers (including pension plans) are being punished by low rates. Gold and silver are still shining and will continue to do so as long as our fiscal and monetary policies remain stuck on "more of the same." Call it "inflate or die," or "money printing," or "bond monetization," or "Quantitative Easing to Infinity," or "financial repression," or whatever you wish, but the future result is the same: weakening currencies and higher gold and silver prices.

GE Christenson
aka Deviant Investor

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