Examining Gold’s ‘Store of Value’ Reputation

People say society isn’t too forgiving these days, yet a Wall Street Journal piece Monday reveals some people are quite eager to extend a gracious pardon … to gold. The article, which explored retail investors’ growing fondness for the yellow metal, included some choice quotes from people who ditched stocks for gold after experiencing market downturns. These folks were quick to absolve gold of any penalties for its own downturns, instead calling them a win-win because it meant being able to buy at a discount. The same behavior that was such a deal-breaker with stocks became a purported benefit with gold. Fascinating! We can’t be sure why this is, but we suspect it lies in another sentence from the same article: “Gold has been prized for centuries as a store of value by everyone from King Tut to Christopher Columbus.”^[i] We have seen this claim sooooooooo many times, in articles and gold ads alike. “Stable store of value” is such an appealing phrase … and, in our view, a meaningless one. We suggest not basing investment decisions on empty euphemisms.

“Stable store of value” or even just “store of value” implies something that doesn’t move too much and doesn’t lose its worth in the long run. But by that simple logic a dollar bill would qualify. If you found a dollar printed in the 1980s between the sofa cushions today, it could buy the same pack of gum that a fresher one with Steve Mnuchin or Janet Yellen’s signature can. Yet most people wouldn’t give the dollar the store of value honor, since everyone knows that old bill with James Baker’s signature would have bought more like three packs of gum back in the day. A dollar may still be a dollar yesterday, today and tomorrow, but its purchasing power wanes over time. Inflation eats into dollars too much for simple paper money to get the stable store of value nod.

So maybe a store of value is something that doesn’t fluctuate much and keeps its purchasing power in the very long term? Well, problem: That is basically saying it both grows and doesn’t lose value. Capital preservation and growth, one of the most pernicious fictions in the entire investing world. No asset can claim to target both simultaneously. Growth requires risk, which requires the possibility of declines. But if an investment declines, it has not preserved capital. It really is that simple.

Let us put gold under this particular microscope. Exhibit 1 compares gold’s price return since 1974, when it finally began trading freely, to the Consumer Price Index. When the line is rising, gold is returning enough to stay ahead of prices. When the line is falling, prices are outrunning gold. When the line is below 1, gold is behind prices on a cumulative basis since inception.

Exhibit 1: A Shiny Store of Value?

Source: FactSet and St. Louis Fed, as of 8/7/2023. Month-end gold price and consumer price index level, December 1974 – June 2023.

A few things here. One, as the text and arrows call attention to, there were long stretches when gold wasn’t storing value effectively. Two, it has outpaced consumer prices in only a handful of relatively short bursts. Three, setting aside the whole store of value part, gold was anything but stable. To show this more clearly, Exhibit 2 presents gold’s raw price movement using a logarithmic scale to equalize the visual impact of percent-based moves.

Exhibit 2: A Shiny Stable Thing?

Source: FactSet, as of 8/7/2023. Month-end gold price, December 1974 – June 2023.

Is that big cumulative decline between 1980 and 2000 stability? What about that drop in the first half of the 2010s, which upended everyone who bought gold as insurance when Standard & Poor’s downgraded the US’s credit rating from AAA? Was gold stable during the global financial crisis, when it tumbled from Bear Stearns’ collapse through Lehman Brothers’ implosion? Or during the stagflationary mid-1970s? (Note, too, that if we are being technical and literal, those big rises are the antithesis of stable.)

Our guess? The many riffs on the store of value theme seem to harken back to gold’s longstanding role in human history and culture. But one shouldn’t conflate this notion with actual stability in purchasing power on a nominal or inflation-adjusted basis. However, our experience suggests many do just that, with “store of value’s” nebulous meaning masking its actual history: It is an asset more volatile than stocks with lower returns. Whether gold actually stored value for anyone in real life depended entirely on when they bought and sold (and their definition of the term). Stability? Well, no.

So when choosing investments, always look beyond slogans and euphemisms. Consider instead what your long-term goals and needs are, then determine which assets carry the highest probability of reaching them for as long as you need to be invested. Let the facts (historical returns and volatility) carry the day, not feelings inspired by squishy words.