A "Sober Second Thought" For Gold Bugs

It's a short one, but worth a linger over: buying gold at the 1980 peak, and holding on to today, would have earned a lesser return than leaving the money in a checking account.

Gold bulls shouldn't be too surprised at this calculation. Several of them have already said that the 1980 peak was well below even last Thursday's record price, once inflation is taken into account. The original calculation comes from a Bloomberg article which is balanced, not only in terms of quoted opinion but also in alternate scenarioizing. Gold bought in 1971, right when Nixon closed the gold window, would have matched the S&P 500's performance in the same timeframe.


And, of course, buying gold in 2001 - or even 2002, right around the end of the last bear market in U.S. stocks - would have handily beat any of the three major averages. But who was buying then? And, of them, how many sold into earlier rallies for a then-unbelievable gain? Perhaps sadly, buy timing is often secondary to blind faith when realizing a gain from the bottom.

I should know. I sold a turnaround stock earlier this year, after buying it in the middle of last year's financial crisis, for about a 25% profit. I then saw the thing increase far more than tenfold subsequently. I lacked that faith. What I had instead was frustration (as it went nowhere when the general market was surging up in Dec. '08-Jan '09) and later relief (as it finally jumped up in April.) That relief and the 25% profit impelled me to sell, to a subsequent opportunity detriment.

One nit I gotta pick with the checking-account comparison: tax consequences. A checking account yields taxable interest each year; the S&P yields taxable dividends, plus capital gains when one stock's replaced by another. Anyone who bought gold in 1980, or 1971, and held on to all of it would not have paid a cent in tax; there'd just be a potential long-term-capital-gain levy. In accountant's jargon, the tax would be an accrued but not a cash liability. (The same accrual status applies to the unrealized capital gains portion of S&P 500 stocks.) Taxes on interest and dividends would be cash liabilities for the tax year they were received.