Metal, Money, and the Measurable Value of Gold

Advanced, Featured, Theory

Buried in an otherwise mind-numbingly boring regulatory filing released recently was a seemingly innocuous line item that most people would not give a second thought. Sometime in the second quarter, Berkshire Hathaway invested a comparatively tiny 0.3% of their total portfolio into just a single new company. No big deal, right?

But it wasn’t just any company. After spending decades as perhaps the most respected and widely-cited critic of gold as an investment, Warren Buffett bought 21 million shares of Barrick Gold — one of the largest gold mining companies in the world. It was so out of character that the financial world immediately did a huge double-take. The headline from Bloomberg pretty much speaks for itself:

Berkshire Makes a Bet on Gold Market That Buffett Once Mocked

As one might expect, investors on both extremes of the gold-appreciating spectrum are furiously debating what this all means. Buffett’s closest gold-averse followers are circling the wagons and dealing with a lot of cognitive dissonance, while gold bugs are enjoying dishing out some playful jabs after years of being on the receiving end. Lost in the middle is a vast sea of normal investors watching the news and searching for actionable information.

This article is for that last group just wanting to know the truth about gold and what it can (and can’t) do for their own portfolios.

For some reason gold often becomes a strangely emotionally-charged topic, and frankly both the gold lovers and haters spread lots of objectively false and misleading information in support of their preferred positions. Unfortunately those flawed arguments are sticky, and gold is so commonly misunderstood that even smart, educated, and otherwise level-headed investors often have no idea what they’re talking about. So in honor of the shiny metal again making headlines, I thought I’d consolidate some of the most common questions about gold to help sort the truth from the fiction.

Frequently Asked Questions


Are bullion and miners interchangeable?

One of the defenses I’ve seen for Buffett’s apparent change in philosophy is that it isn’t a change at all. Paraphrasing this perspective:

Sure, Buffett has ridiculed gold for decades because he doesn’t see it as a productive asset. But he didn’t buy gold! He bought a company that mines gold, and companies are productive.

It’s true that gold and gold miners are two very different assets whose prices are driven by different factors. Gold reacts to things like inflation, interest rates, and overall economic uncertainty, while gold miners also are affected by things like technological innovation, extraction costs, and corporate competition. And comparing the returns of Barrick Gold and the underlying metal side-by-side, you can see that the divergence is way more than simple tracking error.

Image courtesy of

That said, I do find the deflection a bit disingenuous as the top profit driver of any gold miner is the market price of the bullion itself. Barrick can do absolutely nothing differently in terms of new investment or operational efficiency, and profits can still change drastically based on the value of its sole product. So as the Bloomberg headline accurately implies, a bet on a miner is absolutely a bet on the outlook for the gold market. Warren Buffett is a very smart man, so it’s not surprising that people might pay close attention when he makes a move like that especially considering his long-term distaste for the product that Barrick produces.

For clarity, all of the gold data on Portfolio Charts tracks the raw bullion and not miners. And when people in the financial media talk about gold, they’re generally also talking about bullion. For everyday investors, that usually means either physical gold coins that you can hold in your hand or ETFs like GLD, IAU, and SGOL that own vaults full of the stuff.

Is gold a reliable hedge against inflation?

The most common explanation for the role gold plays in a portfolio is that it’s a store of value that protects your savings against the wealth-eroding effects of inflation. Famous investors like Harry Browne and Ray Dalio (whose Bridgewater fund also just bought an additional $340mm in gold ETFs, by the way) have often recommended gold as a hedge against inflation, and it has become somewhat of a mantra for the asset.

Gold critics, however, have pointed out that this assertion is not actually backed up by the historical data. Honestly, they have a point. Here’s how the growth of the consumer price index compared to the growth of gold since 1970.

Yeah, that’s a problem. It certainly doesn’t look very convincing.

The relationship gets a little more interesting if you look at annual inflation rates instead of CPI growth, but the comparison after 2000 still goes off the rails.

So are the gold supporters wrong? If you’re only focusing on the superficial inflation claim, then the CPI data clearly suggests that gold is not a reliable inflation hedge. But Dalio is no fool, and the annual inflation data does hint at a deeper relationship under the surface.

You see, while inflation alone does not explain gold price movements, it’s a very important ingredient in a different metric that does — real interest rates. For this exercise, let’s compare the inflation-adjusted interest rates on 3-month T-Bills to the price growth of gold.

I’ve highlighted in gray the timeframes where real rates were less than 1%. While there are a few notable exceptions (like the early 1970s where gold corrected after coming off the gold standard — more on that in a minute), the relationship between the gold price and real interest rates is fairly strong. When real rates are sufficiently positive, gold does poorly because investors prefer assets that pay interest. But when real rates are very low or negative, gold does well because investors prefer not to lose purchasing power on a “safe” investment.

So personally, I would argue that the inflation-hedging properties of gold are often misunderstood by both gold bugs and gold haters. The gold price is driven by a myriad of macroeconomic factors including real interest rates. Because real interest rates are affected by inflation, gold does indirectly protect against very sharp inflation that craters real rates. But it also can respond strongly even in times of low inflation as rates fall to particularly low levels like we’re experiencing today.

Why are the long-term returns for gold so low?

Forged in the explosive final moments of only the largest stars, gold is the rare asset that predates the very existence of our planet. And valued by humans for centuries, the tombs of the greatest pharaohs were lined with the same golden treasure that modern investors covet for their own reserves. When it comes to history, gold has it in spades.

So when smart investors look to backtest portfolio ideas including gold, it’s only natural to take advantage of that long history and utilize as much information as possible. Gold is one of the few modern assets that has more than a few decades of reliable data, so very long backtests are a rare luxury.

It’s especially appealing to prospective retirees researching safe withdrawal rates who tend to hold very long histories starting in the late 1800’s on a pedestal as required tests for any long-term retirement strategy. Plug gold into your favorite SWR calculator, however, and the results often disappoint. Or at the very least, they look way lower than the numbers you find here at Portfolio Charts. What gives?

Here’s the thing — gold has a very unusual relationship with currency itself that is completely unique to the asset. So in order to properly interpret any historical returns including gold, it’s absolutely critical to educate yourself on how gold is priced and how those rules changed over the years. It’s all about the history of money.

Paper money is only as valuable as the underlying promise it represents, and by the late 1800’s the majority of developed nations utilized a gold standard where each country valued their currency based on a fixed weight in gold. For example, for the century in the United States from 1834 to 1934, the gold price was legally set at exactly $20.67 per ounce. Gold was literally considered money, and paper bills were directly exchangeable for gold at the established rate. So when you read stories about the California Gold Rush in the late 1800’s, picture the ground filled with huge piles of $20 bills and you can certainly understand the excitement.

No government policy is ever set in stone, and the gold standard did experience a few tweaks over the years. In 1934 the US upped the conversion value to $35 in order to deliberately devalue the dollar while also banning the private ownership of gold bullion. Most of that gold turned over to the government in exchange for paper cash was stored in the newly created United States Bullion Depository, commonly referred to as Fort Knox. With a currency backed by gold, Fort Knox literally protected the wealth of a nation.

In 1944, 44 countries got together and hashed out a treaty known as the Bretton Woods Agreement. Bretton Woods was designed to set global monetary policy based on a worldwide gold standard. All individual currencies were priced in a set amount of dollars, which in turn was backed by a fixed amount of gold. So in effect, the investment return of gold was set by treaty worldwide to exactly 0% per year with only very minor changes as countries haggled over negotiated exchange rates.

Well all of that changed in 1971 when Richard Nixon eliminated the convertibility of cash to gold and subsequently ended Bretton Woods. While the gold standard technically continued for a few more years and private ownership wasn’t fully legalized in the US until 1975, the cat was out of the bag and that initial decoupling of the gold price from the dollar created what is known as “fiat currency”. Ever since, the price of gold has been able to free-float and finally act as an independent source of investing income with all of the wild volatility that we see today.

So what does that mean for backtesting? Let’s summarize all of that information into one chart depicting the nominal gold price over time. Note that while it’s not immediately obvious from the labels, the vertical axis is a log scale that accurately shows relative percentage gains and losses.

Data courtesy of

Here you can very clearly see the problem with mixing gold datasets before and after 1971. They may both be called “gold” but they track completely different assets following very different rules. If you really want to model gold behavior under the gold standard and Bretton Woods into the modern era, you can simply set the annual return to a flat 0% with no inflation adjustment. Of course, that’s not how gold works today! And if you want to model modern gold behavior prior to 1971, a reasonable proxy might be a similar volatile commodity like silver that had no price controls. Which would look absolutely nothing like the gold performance found in the historical record.

So long story short, mixing the historical returns for gold before and after 1971 is extremely misleading because the rules governing gold behavior completely changed. Doing so will indeed lower the long-term returns for gold, but understand the history and you’ll realize that the old numbers are irrelevant to modern investors. While using as much data as possible is usually a good thing in an analysis, basing decisions on data that no longer applies to you just isn’t a constructive idea. I believe educated investors should take any portfolio analysis including gold prior to 1971 with a huge grain of salt.

For the record, all data here on Portfolio Charts goes back to 1970. While that timeframe is simply a result of overall data availability for the many assets I track, a nice side effect is that the dataset accurately reflects gold performance in the modern era.

Are the gold returns after 1971 repeatable?

Astute observers who understand the history of gold occasionally look at that last chart and ask a very good question. In fact, some form of this perspective is often cited as a reason to distrust all backtests including gold.

If the gold price was artificially fixed for so long and suddenly set free, wouldn’t that initial price surge seeking the “true value” of gold represent a massive, unrepeatable return that skews any analysis?

For reference, the real gold price quadrupled between 1971 and 1974 after Nixon killed the gold standard before cooling off and falling 38% over the following two years. Looking back at a previous chart, that explains why gold took off early on even with positive real rates. Check out the out-of-character rise in price in the white column on the left.

But that initial correction sorted itself out relatively quickly, and gold has proven to be just as volatile even far past the initial boom. Big gains and losses responding to certain economic conditions are just how gold operates.

That said, it’s absolutely true that if you’re just looking at the long-term average starting in 1970, the initial correction will bump the numbers unrealistically high. So I can understand why people might question the data for portfolios including gold over that timeframe.

Cherry-picking start dates is a huge pet-peeve of mine, too, which is why I created an entire site dedicated to correcting this common analysis error. For a longer explanation of how unrepeatable bubbles are handled with the Portfolio Charts tools, be sure to give this article a read:

How to Study Portfolios When the Data is Full of Bubbles

But for a quick example pertinent to this discussion, let’s look at the asset allocation with the highest percentage of gold on the site — the Permanent Portfolio. With a database starting in 1970, many people expect the returns of a portfolio containing 25% gold to unfairly benefit from the initial gold level-finding after Bretton Woods ended. To visualize that possibility, here’s a Portfolio Growth chart for the Permanent Portfolio. Like all of the charts on the site, this does not simply show growth starting in 1970. Instead, it shows the returns for every possible annual start date since 1970.

Note that I took the liberty of highlighting in red the five lines starting in 1970 through 1974 that benefitted from the early gold correction. Having trouble picking them out? While you’re looking, think about how the tight bunch of blue lines also includes the start dates beginning right at the 1980 peak for gold before it cratered for two decades. Some portfolios are simply way more consistent than others and are not affected by asset bubbles in the same way.

So while single long-term averages starting before 1975 may certainly be skewed by a one-time surge in the gold price for reasons that won’t repeat, the increase was not that unusual historically and many portfolios containing gold did just as well after it ended. It’s definitely important, however, to take a big-picture view that looks at all start dates (including ones after 1975) to understand the uncertainty involved with any portfolio including gold. And that’s a challenge that Portfolio Charts is uniquely designed to handle.

Are gold profits really taxed at 28%?

Many people on the fence about investing in gold are scared off by the tax implications. I can’t speak for tax laws in every country, but gold in the United States is definitely taxed differently than stocks and bonds so it’s important to understand what you’re getting into. The topic is admittedly difficult to navigate, but not because it is particularly complicated. The problem is that the information you find online is so often wrong, and I’ve even seen a surprising number of CPAs who don’t understand the rules. So let’s clear things up.

Search for information about gold taxation in the US, and you’re very likely to find results that indicate capital gains are taxed as a collectible at a flat 28% rate. Luckily that’s a gross over-simplification, and for most people your taxes will be much lower than that!

It’s true that gold (including bullion-backed ETFs) is taxed as a collectible and does not benefit from preferential long-term capital gains tax rates like stocks and bonds. And it’s also true that the maximum collectibles tax rate is 28%. But that’s the maximum rate. Gold profits are actually taxed as ordinary income with a cap of 28%. So your capital gains taxes on gold will fall between 10% and 28% depending on your tax bracket.

As I said before, there’s a ton of contradictory information out there from respected authors so I don’t blame you if you are hesitant to simply take my word for it. For more info, here’s one of the better explanations I’ve found. And for guidance directly from the IRS, here’s the money quote from Publication 550, page 67, pertaining to maximum capital gains rates for collectibles:

Example. All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. If you are otherwise subject to a rate lower than 28%, the 28% rate does not apply.

And importantly, the same strategies used to minimize capital gains in stocks and bonds can also be used to minimize them in gold. Hold a gold ETF in a retirement account and capital gains are tax-free. You can also offset your capital gains in gold with capital losses in any other asset, reducing your total tax bill to zero. And to minimize capital gains in accumulation, simply rebalancing your portfolio by investing new money into the lagging asset rather than selling gold at a gain is always a tax-efficient plan.

Combine a few simple tax management strategies with the fact that gold has no forced taxable distributions in the form of interest or dividends, and gold can actually be quite tax-efficient when handled properly. So while you should absolutely educate yourself on taxes before getting in over your head, don’t be scared off by the naysayers. The measurable benefits of gold in a portfolio can far outpace the small amount of extra work you need to do to minimize the potential taxes.

Should I include gold in my own portfolio?

I’ve covered a lot of ground in this discussion including miners, inflation, interpreting data in historical context, one-off price spikes, and taxes. Hopefully you found it educational! With all of that under our belts, and swinging back to the goal of explaining gold to neutral people not dug into a position on any one extreme, that leads us to the final inevitable question — is gold worth buying?

Anyone who has read my work over time or studied the Golden Butterfly probably knows that I’m a fan of gold as part of a well-diversified portfolio of stocks, bonds, and other real assets. I believe the data clearly indicates that gold is somewhat unique in its ability to react strongly and carry the day when nothing else does. And as a result, portfolios containing gold are often the most consistent performers of all of the asset allocations I study.

But I’m also not one of those blowhards you often find in the gold debate who will argue on either extreme that you’d be a fool to own it or not own it. It’s just one tool at your disposal, and there are plenty of excellent portfolios that contain no gold at all. The best portfolio in the universe will do no good if you sell it at the first sign of trouble, so it’s important to invest in something you truly believe in and can stick with in both good times and bad. And if gold just doesn’t work for you, then don’t force it!

So while I hope that this article will help clear up any of the misconceptions about gold that may be holding you back from giving it an honest evaluation, I’m definitely not pushing anyone to add it to their asset allocation. No matter what portfolio you choose, my hope is simply that you’ll feel great about your decision because you made it using all the best information. With the above background and the supporting tools, it’s all here. So check it out and decide for yourself.

When even Warren Buffett comes around to the idea of dabbling in the gold market, consider that a good time to reevaluate your own assumptions. When is the last time you thought beyond stocks and bonds to the potential value of gold in a portfolio?

Did this article teach you something new about gold?