Golden goose or black swan?

Of the many asset classes available, commodities was one of the least popular amongst FI bloggers. Investing in gold, the archetypal commodity, divides opinion and there are staunch supporters on both sides. We’ve had trouble deciding on the optimum strategy for investing in gold, especially with a plethora of (often contradictory) information flying around. To cut through the noise, and also to crystallise our own thoughts, we’ve distilled out a few key considerations from our research on investing in gold. 

Camp Auric

Of the arguments for investing in gold, the one made most frequently is its ability to act as a counterbalance in a portfolio. Holding gold seems to be a panacea for failures elsewhere. It’s lauded variably as a “uniquehedge against inflation/paper currency/the government and as the “ultimate insurance policy“. These claims stem from both the ability of gold to hold its value over the long run and a historically poor correlation between gold and equities1. In theory equities and gold might act as two children on either end of a see-saw: as one goes up, the other comes down. Some studies show gold is poorly1 or negatively2 correlated with equities. In one analysis it counterbalanced falling equities 83% of the time; in another holding gold improved portfolio return during UK equity market drawdown in two-thirds of cases. Gold features in three-quarters of Portfolio Chart’s ‘recession-proof’ portfolios. 

Adding to the allure of gold is its track record. Having been used as some sort of currency for over 2,500 years, gold’s history, familiarity and ‘safety’ is attractive for many investors. Some see it as the holding in the event of a financial system meltdown or other cataclysmic event. If the collapse of the government or even global society doesn’t get the ‘aluminium foil hat’ juices flowing, physical gold can act as an anti-microbial – it may come in handy in a post-antibiotics bacterial apocalypse!

What about the returns on an investment in gold? Gold went up in value every year from 2000 until 20113. One 10 year retrospective analysis of a physical gold ETF demonstrated a cumulative 96% increase in value (2009-19), though we note this pales in comparison to the 214% increase in global equities. Gold’s annualised nominal return was 7% from 1972 to 2018 and 12% over a shorter, more recent time period (2011-17). Others have found that the price of gold, which increased 591% between 1999 and 2009, outstripped both returns on the S&P 500 (229%) and the stock price of Berkshire Hathaway (536%). 

The price of gold ($/oz.) in the past 20 years. An investment in gold over this time period would have gained nearly 500% as the price rose from $266.7/oz. to $1567.85/oz. From: Bullion By Post

Though the numbers above are enticing, it doesn’t help us understand how much gold to own. As ever, the make-up of a portfolio will depend on a whole host of personal factors and there’s no ‘one size fits all approach’. Various sources recommend ~10% of your personal wealth is held in gold3, though you can find advocates of it being up to a quarter of your portfolio.

Camp Pyrite

Those who doubt the gilt-edged nature of gold investments can count investment heavyweight Warren Buffett amongst their number. Buffet has had some choice words to say about gold over the years, articulating some of the main points against investing in gold. 

There’s a body of evidence that gold is not quite the hedge it’s made out to be. It was found to only be a hedge against equity market downturns in the very short run (i.e. days, not months or years) and that this depended on owning gold prior to the crash. Indeed in the midst of the global financial crisis both the S&P 500 index (40%) and gold (30%) were down in value at the same time. Gold’s strength as an inflation hedge also wilts under close scrutiny.

In modelling our experimental average investing portfolios, gold correlated positively with global bonds, global equities (ex-US), REIT’s, inflation and US equities in decreasing amounts. It was only (extremely weakly) negatively correlated with cash. Indeed, it seems the data contradicts the claims that gold acts as a good hedge against inflation and/or currency. The price of gold is also highly volatile, which belies its purported role as a steady holding in a portfolio.

The performance of asset classes 2005-2019. The returns on commodities are volatile and poor compared to equities. From: JP Morgan Asset Management.

Gold doesn’t garner interest; its returns often lag behind those of global index trackers as it cannot generate income to be re-invested. This is well known, but there are also thoughts that gold is unlikely to provide strong investment returns in future. Indeed one analysis suggested that the real annualised return on gold in the next decade, regardless of inflation, is -4.4%4 (if gold declines to a calculated ‘fair’ value). Unlike other assets establishing what this fair value is, and whether the price of gold is ‘high’ or not, is complex 4,5. This is in part due to gold’s value relying heavily on secondary market sentiment. This often leads to the ‘gold is only valuable because people think it is’ argument, though we don’t find it the most compelling one.

A consequence of gold’s lack of income provision is that it has a negative carry cost; it costs you to own it. To borrow Warren Buffet’s analogy, gold is a “goose that just sits there and eats insurance and storage”. In other words, gold is an expensive insurance policy.

Coronavirus: A Case in Point

December 31st 2019 marked the first reported cases of COVID-19, the ‘Wuhan Coronavirus’. It has now joined SARS, MERS, H1N1 influenza and Ebola on the list of 21st century viral epidemics. We’ll skip over the medical and other socio-political impacts of the disease; they fall beyond the scope of this post. Instead, let’s look at the price of gold.

The price of gold since the start of the COVID-19 outbreak (marked with the black arrow). From: Bullion By Post

Since the outbreak began, gold has risen in price by ~7% ($1515/oz. to $1626/oz.). Increasingly, anxious investors have flocked to gold once again during a time of (economic) uncertainty. Comparing the S&P500 to the price of gold demonstrates this perfectly:

The price of gold (green line) vs. the price of the S&P500 (blue line) over the past three months. Black arrow denotes first reported cases of COVID-19. From: Yahoo Finance

As the angst (read: hysteria) rises so does the appetite for and price of gold. In comparison, the S&P500 lost nearly 13% of its value between the 19th and 28th of February 2020. That’s a lot of fear! The rationale of those in Camp Pyrite is still sound, but we couldn’t pass up this highly contemporary example of the arguments made by those in Camp Auric. With the whole affair set to drag on, we’ll be watching that space for sure!

Final thoughts

The inferiority of gold as an investment compared to others means it’s unlikely to make up a significant chunk of our portfolio anytime soon. The start of the accumulation phase of FI is the hardest – partly because your invested wealth is at its lowest – why hamstring it further? Having said that, we do want a diversified portfolio. Gold is definitely a bit different and (dare we say it) exciting. 

There are a number of ways of owning gold beyond the small exposure we have through global equity funds. We’d probably opt for physical gold or maybe a physical ETF, but shy away from synthetic ETFs and mining equity. As a satellite investment, we think up to 1 or 2% is an appropriate allocation for now. 

As always our post is designed to inform your own FI journey, rather than push one point of view or another. We hope this summary will help you cut through the reams of information on gold out there, whilst providing suitable resources if you wanted to wade through yourself. In the end we all want to have the Midas touch when it comes to our investments, but that doesn’t mean they all have to be golden.


Mr. MedFI

1 – Erb, CB. and Harvey, CR., The Golden Dilemma (2013). Financial Analysts Journal, 69(4): 10-42. Available at SSRN: 
2 – Baur, DG. and Lucey BM., Is Gold a Hedge or a Safe Haven? an Analysis of Stocks, Bonds and Gold (2009). Available at SSRN:
3 – Craig, A. (2019). How to Own The World: A Plain English Guide to Thinking Globally and Investing Wisely (3rd ed.).John Murray Learning. 
4 – Erb, CB. and Harvey, CR., The Golden Constant (2016). Duke I&E Research Paper No. 2016-35. Available at SSRN:
5- Erb, CB. and Harvey, CR., An Impressionistic View of the ‘Real’ Price of Gold Around the World (2012). Available at SSRN:

7 thoughts on “Golden goose or black swan?

  1. > In comparison, the S&P500 lost nearly 3000% of its value between the 19th and 28th of February 2020

    Shurely shome mishtake 😉 Either that or you are shorting it something rotten!

    A squint at the S&P on Google gives me 3386 on the 19th and 2954 on the 28th, a loss of about 13%


  2. Yes thank you! My weekend brain had taken in: “a drop to ~3000 points (12.8%)” and output “a drop of 3000%”. That would be a remarkable tank in value!


  3. I don’t favour gold because it has no income. I’m keen to have a high and growing natural income yield from my portfolio so any exposure to assets without income will hinder that.


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