A Love-Hate Relationship with Gold

John Dorfman

March 25, 2024 (Maple Hill Syndicate) –- Ever have a friend you love and hate at the same time? That’s how I feel about gold.

For most of my 24 years as an investment manager, I’ve avoided gold. Unlike Microsoft or Coca-Cola, gold doesn’t generate any profits. So you can’t use standard measures like price-earnings ratios to determine how much an ounce of gold should be worth.

So why is gold worth anything? It’s pretty, especially when made into jewelry. It’s scarce: According to the World Gold Council, all the gold ever mined would fit into the volume of the Washington Monument, with lots of room to spare. Most of all, it’s worth something because people think it is.

To determine whether it’s a good time to invest in gold, I think investors need to look at four factors: Inflation, real interest rates, the dollar, and geopolitics.


Gold has a reputation as an inflation hedge. The theory is that the yellow metal tends to hold a fairly constant purchasing power. If the price of hamburgers and cars goes up, so will the price of an ounce of gold.

To test that theory, I looked at all six years since 1950 when inflation ran at 8% or more. These were 1974, 1975, 1979, 1980, 1981 and 2022.

For those six years, gold’s price increased an average of 25.5%. So gold is a great inflation hedge – or is it? The price of gold actually declined in three of those six years. I’d say the evidence is suggestive but not conclusive.

Real Interest  

Gold competes with other safe-haven investments, notably bonds and bank deposits. Consider a bond that pays a fixed 5% a year. If the rate of inflation is 2%, that would be an attractive investment. If inflation is 8%, the bond would be unattractive.

The amount by which the return on a fixed-income investment exceeds the inflation rate is called the real rate of return. High real rates are bad for gold. Low real rates are good for it.

Right now, ten year Treasury bonds are paying 4.2%. Corporate bonds, somewhat riskier, are paying close to 5%. Inflation, according to government figures, is running at about 3.2%.

So real rates are mildly positive now. However, many people believe that the Consumer Price Index understates the true rate of inflation in the U.S. It that’s true, there’s more chance for gold to do well.

The Dollar

When the U.S. dollar is strong (rising in value against Euros, Yen, and other currencies), gold often does poorly. When the dollar is weak, gold often does well.

If you live in the U.S., you may pay little attention to the dollar. It’s ever-present, like water to a fish. It’s the medium in which you swim.

But if you live in other countries, the dollar (along with the Swiss Franc) is often viewed as a safe haven. So the dollar is a competitor to gold for the dollars of conservative (or scared) investors around the world.

My guess is that the dollar will be weak over the next year or two. I expect U.S. interest rates to decline, which may lessen demand for dollars abroad. Also, I expect Congress to engage in partisan fights that may make it hard to pass a federal budget.


One more influence on gold is geopolitical tension. Broadly speaking, peace is bad for gold; war or the threat of war is good. For example, the price of gold rose sharply after the terrorist attack on the World Trade Center in 2001, and in the latter years of the Vietnam War.

For that reason, I would have expected gold to do well in the wake of Russia’s invasion of Ukraine and the war between Hamas and Israel. Gold is up about 13% since Russia invaded Ukraine on Feb. 24, 2022, but that’s less than I expected.

Gold’s Performance

According to Statista, a research service, gold had average annual returns of 7.98% from January 1971 through to March 11, 2024. For the same period, according to Ned Davis Research, the annual return on the Standard & Poor’s 500 Total Return Index for stocks was 10.83%.

In the past decade, the gap has been wider. Gold has averaged less than a 5% annual return, while stocks have averaged close to 13%.

All in all, I don’t think gold is an investment for all seasons. But right now, I think it’s sensible to hold some gold, mainly because two wars are raging, and the dollar might be weak.

Disclosure: Personally and for most of my clients, I own shares in SPDR Gold Shares ETF (GLD), an exchange traded fund that represents ownership of a fraction of a large store of physical gold.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. He or his clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.

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