The Case for Gold as an Investment: Part I


In the first installment of a three-part series, Les Nemethy and Sergey Glekov of Euro-Phoenix look at just how good an investment gold really is.

The world is a much riskier place than most people realize. A very incomplete list of just some of the possible risks in the global geopolitical system include:

•    China challenging U.S. hegemony

•    Russia trying to regain some of the old Soviet glory by challenging the status quo, from Ukraine to Syria

•    The rise of populism, nationalism, illiberalism, the erosion of tolerance and “win-win” thinking, from Turkey to the Philippines and from the United States to Hungary

•    Global debt levels spiraling out of control (see previous article), with bubbles emerging in China, Japan, Italy, etc.

•    New and previously unimagined forms of hostility, from potentially destabilizing technologies like artificial intelligence or hybrid warfare

•    Brexit

The lives of most well-to-do people (e.g. investors) in the world is enshrouded in normalcy. There is probably a natural human tendency or bias: unless we feel things on our own skin, we tend to ignore them. One could argue that risk in the world is underpriced.

Enter Gold

For centuries, gold has been considered the great hedge. This article will focus on the value of gold as a hedge. My next column will analyze global supply and demand for gold. And the third and last article in the series will look at different methods of holding gold (physical gold, ETF’s, gold miners, royalties, etc.) and summarize the case for holding gold.

Exhibit 1 (the chart above) demonstrates quite graphically that when equity and debt markets are in crisis, gold performs quite well, or at least better:

Gold has low or negative correlation with other major asset classes, such as the S&P500, U.S. corporates, Treasuries, and Commodities.  

Exhibit 2 (the chart below) sets out in easily visible fashion how returns on gold and the Dow Jones Industrial Average differ dramatically, decade by decade, over the approximately last five decades.

For those readers who might not remember, the 1970s was a tough decade, characterized by the oil crisis of 1973, the recession of 1973-1975, high unemployment, and a terrible period of stagflation. In the 1980s the back of stagflation was broken, and the 1990s saw perhaps the most sustained period of growth of the American economy in the modern era.

If you look at the relative returns of gold vs. the Dow Jones Industrial Average since 1971, you can make arguments for either being the better investment, depending on the holding period you choose. Over the last six years gold has clearly been the loser, but over most time horizons since 1971, gold would be the winner.

If you look at the ratio of the DJIA to the price of gold, since the 1920s, you will find a huge variation: from nearly 1 to 1 in January of 1980 (when the price of gold was USD 843 and the DJIA was also at 873), to a high in August of 1999, when the DJIA was 11,326 and gold was only 253 (e.g. a ratio of approximately 45:1). We are currently somewhere near the midrange, of 20:1.

I trust this article makes the case that gold deserves a place in most investment portfolios based on its ability to hedge the portfolio. In other words, with a certain amount of gold in your portfolio, you can enjoy a higher level of return for a given amount of risk.

According to a World Gold Council document called “The Relevance of Gold as a Strategic Asset”, adding up to 10% gold to the average pension fund portfolio would have both increased returns and reduced volatility, resulting in higher risk-adjusted returns. The result would probably be similar for your portfolio too.

Les Nemethy is CEO of Euro-Phoenix (, a Central European corporate finance firm, author of Business Exit Planning ( and a former president of the American Chamber of Commerce in Hungary.

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