Old money

Dear Gala,

One day your mother will put one of her rings in your hand. Another day someone in a nice office will show you a chart of the gold price and suggest you buy some. This letter is about both. It is about the three oldest things people have kept their money in, gold, jewels and paintings, and about the one question that decides whether they belong in your life: what they are for.

A train and a ship

Your great-great-grandfather was a businessman in Prague. He had done well. Then the war came, and he lost everything he had built. Your great-grandmother was eleven. He found a way to get her and her mother out of Europe. He got them out first. When his own turn came, what he had left was the jewelry he had hidden, and he used it to buy his way onto a train and then onto a ship, and he found his wife and daughter again. Later the three of them crossed the ocean to South America, and that passage was paid the same way. They arrived with nothing else. They started again, and they did well again. That is why I was born in Argentina.

I want you to notice what the jewels did and did not do. For years they sat in a drawer and earned nothing. The business earned money every day. The jewels earned nothing at all. And when the business was gone and the bank account was gone, the jewels were what crossed the border. They were small. Nobody had them on a list. That year they were worth exactly what a ticket collector would take to hide your great-great-grandfather on a train.

What gold earns

Now the numbers, because one story is one observation, and I have promised you never to build a rule on one.

Roy Jastram, a professor at Berkeley, spent years building price tables for gold in England back to 1560 and in America back to 1800, and in 1977 he published them in a book called The Golden Constant. The finding is in the title. Over centuries, the purchasing power of gold barely moves. An ounce bought roughly the same basket of goods in the middle of the twentieth century as in the middle of the seventeenth. In between it swung, sometimes wildly, and always came back. That is the whole return of gold over four hundred years: about nothing, after inflation, plus the swings.

Claude Erb and Campbell Harvey took Jastram’s idea apart in 2013 in a paper called The Golden Dilemma. The dilemma is this. If gold keeps its purchasing power over centuries, it should protect you from inflation. But nobody invests for centuries. Over the ten or twenty years a person actually has, they found that the year’s inflation told you almost nothing about that year’s gold return. What told you something was the price you paid. When the real price of gold was high compared with its own history, the next ten years were usually poor. When it was low, they were usually good. The metal that is supposed to sit outside the system obeys the oldest rule inside it: what you pay decides what you get.

Here is what that looks like in a life. In January 1980, with prices in America rising more than ten percent a year and Soviet tanks in Afghanistan, gold touched eight hundred and fifty dollars an ounce. Someone who bought that week, for protection, waited twenty-eight years to see that price again in dollars, and about forty-five years to get the same purchasing power back. Forty-five years is a working life. They bought insurance at the top of the panic, which is the one moment it is worth the least.

Fifteen days

Dirk Baur and Brian Lucey asked in 2010 the question that separates the stories from the evidence: does gold hold its value on the days when stocks crash? They looked at ten years of daily prices in America, Britain and Germany. The answer was yes, on the day. When the stock market had one of its worst days, gold held or rose. Then they kept watching. After about fifteen trading days the effect was gone, and the people who had bought gold on the day of the crash and kept it were losing money on it. Gold is a safe haven for about three weeks. It works the way an umbrella works: in the rain, and for nothing else.

Paintings and stones

Art and jewels are the same idea with higher costs, and the research is newer because the data was harder to gather. In 2013 Luc Renneboog and Christophe Spaenjers built an index from more than a million auction sales of paintings and found that art had gained about four percent a year after inflation over the fifty years to 2007. That is roughly what corporate bonds earned, with the swings of the stock market, and it is before the auction house takes its cut, before insurance, before the years in which you own a painting you cannot sell. Three years later Arthur Korteweg and two colleagues showed that even that number is flattered. Paintings come back to auction when they have gone up; the ones that went down stay on the wall. Correct for that and the return falls by more than two points a year.

Renneboog and Spaenjers also looked at rare diamonds and gems sold at auction between 1999 and 2010 and found good returns over that window, better than stocks. I will not build on that either, because it is one window. What I keep from their paper is the other finding: gem prices rise and fall with the stock market, because the people who buy them are the people who got rich in the stock market. William Goetzmann had found the same for paintings across three centuries. When wealth falls, the price of beautiful things falls with it. The year you most need to sell is the year nobody is buying.

So as investments they are poor. They pay nothing while you hold them, they cost money to keep, they are hard to sell, and they lose value in the bad years. As protection against the ordinary bad year, a crash, a recession, they do not work either; the umbrella closes after three weeks. What they are for is the other kind of bad year, the one where the bank is shut, the currency is gone, and the question is whether you can leave. For that they have one property nothing else has. They exist. You can hold them, hide them, carry them, hand them to someone. Everything else you own is an entry in someone else’s ledger, and a ledger can be closed.

What they carry

There is a second reason old families keep these things, and it is worth more than the money. A ring goes from a grandmother to a granddaughter with the story attached. The jewels that crossed two seas are the only thing our family owned that was there, in Prague, on the train, on the ship. Whoever holds what is left of them holds the story, and the story is the part that cannot be sold.

What I do

I keep a small amount in gold, in jewelry and in art, and I keep it the way my great-grandfather kept his: for the last resort, the day I hope never comes. I value it at what I paid and I never update the number, because a number that goes up and down invites you to think of these things as an investment and to sell them when they are up. They do not appear in the portfolio I look at. Small, because they earn nothing and everything I told you above is true. Kept, because everything I told you about the train is also true.

With love,
Papá