Do durable assets create durable returns?
Jason and the Golden Fleece, c. 340 BCE. Source: Wikipedia
Gold and silver are often touted as “alternative” investments. That is, their returns aren’t highly correlated with other, more typical, investments. So they have the potential to diversify an investment portfolio while providing return in their own right. Gold and silver served as a monetary standard for millennia. Are they useful investments?
It’s hard to evaluate the long-term returns of a monetary base. The price of gold was fixed by law for most of the 20th century, and private ownership of gold was outlawed in the US between 1933 and 1974. But the silver-gold price ratio can be used to created a price index, and other durable assets, like diamonds, can also be evaluated.
Source: Christophe Spaenjers, CFA Institute
The results are interesting. Gold, silver, and diamonds combine low returns with high volatility. Significant price spikes are usually followed by a period of declining real values. By contrast, US T-Bill returns have been much more stable over time, although their real value also declined in the ‘30s and ‘40s. Something also to consider is the unfavorable tax treatment that the IRS gives collectable assets: gains are taxed as ordinary income.
By contrast, long-term real returns in US stocks have been about 5.5% over a couple centuries; for bonds the return has been more like 3%. These returns have come about because the capital has been deployed in economic enterprises, enjoying either a senior (bonds) or residual (stocks) claim on operating cash flow. Naturally, the senior claim is less risky.
Source: J. Seigel, Econlib
If we want economic returns, we need to invest in economic assets. Real assets tend to keep their real value – but that’s about all they keep.
Douglas R. Tengdin, CFA