Precious Metals, Inflation Hedges

Alternatives to Common Stocks as Inflation Hedges The standard policy of people all over the world who mistrust their currency has been to buy and hold gold. This has been against the law for American citizens since 1935-luckily for them. In the past 35 years the price of gold in the open market has advanced from $35 per ounce to $48 in early 1972-a rise of only 35%. But during all this time the holder of gold has received no income return on his capital, and instead has incurred some annual expense for storage. Obviously, he would have done much better with his money at interest in a savings bank, in spite of the rise in the general price level.

The near complete failure of gold to protect against a loss in the purchasing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation by putting his money in “things.”* Quite a few categories of valuable The Investor and Inflation

• The investment philosopher Peter L. Bernstein feels that Graham was

“dead wrong” about precious metals, particularly gold, which (at least in the years after Graham wrote this chapter) has shown a robust ability to outpace inflation. Financial adviser William Bernstein agrees, pointing out that a tiny allocation to a precious metals fund (say, 2% of your total assets) is too small to hurt your overall returns when gold does poorly. But, when gold does well, its returns are often so spectacular-sometimes exceeding 100%objects have had striking advances in market value over the years-such as diamonds, paintings by masters, first editions of books, rare stamps and coins, etc. But in many, perhaps most, of these cases there seems to be an element of the artificial or the precarious or even the unreal about the quoted prices. Somehow it is hard to think of paying $67,500 for a U.S. silver dollar dated (but not even minted that year) as an “investment operation.”

We

acknowledge we are out of our depth in this area. Very few of our readers will find the swimming safe and easy there.