The Real Diehl is a weekly column by former United States Mint Director Philip N. Diehl, exclusively for CoinWeek ………..
I described in my last article how gold’s core value proposition is as wealth insurance.
In this article I’ll address why understanding gold as wealth insurance, rather than as just another investment alternative, is crucial to understanding why gold should be a part of most people’s financial planning.
How does gold act as wealth insurance? There are countless examples over the centuries, but let’s look at just the past 25 years.
As this graph illustrates, gold has consistently outperformed U.S. stocks, commodities, hedge funds, real estate, and private equity through seven major economic shocks and political crises since 1990.
And in the biggest crisis, the financial meltdown of 2008 - 2009, the most dangerous economic crisis since the Great Depression, gold prices rose while other investments plummeted. This is the role physical gold has in a financial portfolio: wealth insurance that offsets other losses, protecting your wealth.
Gold’s critics will point out that gold prices can fall, and fall dramatically, like they did after hitting their September 2011 peak. Of course, they’re cherry-picking one 18-month period out of the last 30 years. Over the other 28+ years, gold held it’s own, and over extended periods, performed extremely well.
But to understand gold as wealth insurance, think about other forms of insurance: auto, home, term life. What would your insurance agents say if you asked them how much your policy will be worth after 10, 20, 30 years? They’re going to look at you funny and say something like, “Well, nothing, because insurance isn’t about earning a return. It’s about protection.”
If after paying premiums for 20 or 30 years you’ve never made a claim, you don’t lament spending all that money on insurance. You count your blessings.
The recent decade-long bull market has led us to forget this essential role of gold in a portfolio. Now we think of it solely for its profit potential rather than as wealth protection.
But understanding why gold should be part of a financial portfolio, it’s important to recognize that gold is wealth insurance -- with a bonus.
Unlike other forms of insurance, gold not only holds at least a major portion of its value, it can appreciate in value. If you bought gold as wealth insurance 40 years ago, the value of your “policy” today would be worth 12 times what you paid for it. If you bought gold as wealth insurance in 2001, today, your policy would be worth five times what you paid for it, even after the price decline off gold’s 2011 peak.
Except for one three-year period over the last 50 years, anyone who bought and held gold is in a profit position today. Said another way, if you bought gold in any of 47 out of the past 50 years, you’ve made money. Your gold insurance is worth more than you paid for it—probably much more.
Critics of gold talk as if gold is the only asset class that experiences price declines. Of course, that’s not the case. Stocks, bonds, real estate—all investments--rise and fall in value, and none of them are immune to bubbles.
But gold is different; it has never lost its entire value. Gold doesn’t go “bully up”.
Philip N. Diehl was the 35th Director of the United States Mint and a former chief of staff of the U.S. Treasury. He has written about gold markets for The Wall Street Journal and Institutional Investor and currently serves on the boards of the Industry Council for Tangible Assets, the Coalition for Equitable Regulation and Taxation, and the Gold and Silver PAC. He was recently named president of U.S. Money Reserve. Be sure to check out Philip's blog.