Ramblings of a Portfolio Manager or “No Mr. Bond, I expect You to Die”
Auric Goldfinger It was unfortunate that we had to pen last week’s Ramblings prior to seeing the full results of the Monterey Classic Car auctions. Scanning the full data, we noted that a 1965 Aston Martin DB5 coupe sold for $341,000. Not even close to sharing the rarified atmosphere with the likes of original Shelby’s and one-off Ferraris, the Aston owns its own pedestal for having been 007 James Bond’s ride of choice in several bond films, most notably the iconic Goldfinger, released in 1964. We are unaware of any machine guns or ejector seats in the $341k recent sale but what we do know, if our HP12-C is correct, is that an owner of the vehicle, had he/she purchased it new and held it 45 years, would have gotten approximately an 8% annual return on that “investment” ignoring insurance, maintenance and storage costs. Not so spectacular for a car once named “The Most Famous Car In The World.” 007’s nemesis, Auric Goldfinger, would have scoffed at such meager returns…or would he? Americans were not allowed to own gold for investment or speculative purposes in 1964, when Bond thwarted the destruction of Fort Knox, but at the time the US Government had fixed the price of gold at $35/ounce. Plugging that number into our trusty HP and using today’s price of roughly $943/oz, we get, hmmm, about an 8% annual return, also ignoring storage and insurance costs! Over the same period, using the Dow Jones Industrial Average, the US stock market returned, a slightly better 9% including dividends but excluding taxes.* US retail price inflation for the last 45 years was half the return of these assets at 4%. The conclusion: over the long run stocks aren’t such a bad place to put your money. However, as we have noted, you can’t wear your portfolio or show it off on Main Street on a hot August night.
What prompted this simple analysis is a perpetual gold bug/market bear’s appearance on CNBC touting the yellow metal as the “best investment” over the long run. His thesis was simple: in his opinion, gold prices are perfectly negatively correlated with the US dollar and perfectly positively correlated with the inflation rate. He further forecasts that massive Government spending is pushing us into a period of hyper-inflation, which will erode the purchasing power of the dollar thereby making gold the perfect investment. In his world, Mr. Bond (US, that is) truly must die and Auric will prevail. Without commenting on his dire prediction, we do note that, as an inflation hedge, the data does support the attractiveness of gold as an investment. However, the storage and insurance costs of holding the physical asset cannot be ignored and we estimate that these would have eaten up close to half of your annual return over the last 45 years, based on current costs, meaning at best you would be tied to slightly ahead of inflation. In addition, physical gold does not trade like stocks in that there is no liquid market where bid and ask prices are readily available. That means your purchase price, even today, is subject to the retail markup of guys like those you see on TV and that you will pay more than the spot price quoted in the Wall Street Journal on the way in and will have to accept a discount to the reported spot price on the way out. Putting it all together, you would be lucky to keep even with inflation in a buy and hold strategy employing gold as a physical asset. Luckily, today we have a gold ETF that is supposed to track the spot prices of the metal, without the direct costs of illiquidity and physical storage. The ETF, however, incorporates all the costs associated with holding the physical commodity (someone has to hold it—there is no free lunch) so the security doesn’t track the spot price of gold exactly. Since the returns we reported above include periods of high inflation as well as stagflation (there hasn’t been a period of deflation since 1964) and even before transaction and holding costs gold still underperformed stocks, we suggest investing in paper rather than metal…unless, of course, your metal of choice is an aluminum-bodied DB5 with Pussy Galore as your chief mechanic. But, of course, there are other costs associated with that form of investment…
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