Why Tiffany Beats Gold as an Inflation Hedge
By Dan Ferris
December 16, 2006
If you’ve been a long-term holder of gold bullion, you have my sympathy.
Gold has been a terrible long-term investment. Since the gold window closed in August 1971, gold has risen about 8% a year. It ran up like crazy, from $42 an ounce to $850, between 1971 and 1980. But then it headed south for a long, long time. Gold bottomed at $252 an ounce in 1998. Now it’s around $624 an ounce.
Shares of Tiffany & Co. (TIF), the world-famous luxury retailer, have consistently blown gold out of the water. Tiffany is up 25-fold since 1987, the earliest Tiffany share price data I can find. That’s roughly 18.5% a year, in average annual pretax compounding, for 19 years. That kind of track record would make any money manager a hero.
Gold hasn’t even doubled since 1987. Were I forced to choose between gold bullion and Tiffany as an inflation hedge, based solely on this information, I’d have to take Tiffany. Tiffany is up about 300% since gold bottomed at $252 per ounce. Gold itself is up roughly 150% since then.
Tiffany can mark its gold up well over melt value, simply by changing its shape and maybe giving it a good polishing. Anyone who’s ever bought a pair of wedding bands has firsthand experience with this. Tiffany’s gross margin is more than 60%. It carries $1.2 billion in inventory, which it turns once every 384 days (less than once a year), but it does $2.5 billion in sales. Now that’s a markup.
Gold bullion, on the other hand, sells for whatever price the market sets. Tiffany has pricing power you simply cannot get with any commodity. Wouldn’t you rather have a hard asset that’s got some pricing power attached to it as well?
It helps, too, that we’re talking about one of the world’s all-time great business franchises. Next year, Tiffany will celebrate its 170th anniversary in business. It’s got 154 stores worldwide and sells through catalogs, online, and business-to-business. It doesn’t just sell jewelry, either.
It sells all kinds of Tiffany-branded merchandise, including timepieces, sterling-silver goods, china, crystal, stationery and fragrances. It just signed a 10-year licensing agreement to put its name on designer eyewear, starting in 2008. The eyewear company is Luxottica, the Italian company that makes RayBans.
If you perceive Tiffany primarily as a brand-name luxury retailer, I certainly won’t argue with that very accurate perception. But it’s also got a nice big pile of hard assets that should hold their value quite well over time. That can’t hurt.
If you’re worried about inflation and want to buy precious metals, you should consider buying Tiffany shares for at least some portion of your assets. At 14.5 times pretax earnings, a business owner might think of Tiffany as the rough equivalent of an inflation-protected bond, currently yielding 6.9%.
Gold bullion can’t buy back stock, and it can’t pay you a dividend. Tiffany does both. If a one-time, bad-but-solvable problem ever hits Tiffany, I’ll write you a letter telling you to pile your money into it.
The only time I’d want to have gold bullion in my hands is if the U.S. dollar suddenly fell to its intrinsic value, which is zero. At that point, the price quote on my NYSE-listed Tiffany’s shares might experience some volatility since they’re priced in dollars. And let’s face it. If it’s a full-blown social crisis with fighting in the streets of New York, then your Tiffany investment will be the least of your worries.
But if it’s a mere devaluing of the U.S. dollar, I don’t think that would be a big long-term problem for Tiffany’s.
The lower the dollar goes, Tiffany’s jewelry prices will rise in relation to it. And, no matter what we end up using for currency, Tiffany’s business would still be a great one.
I’m not saying run out and buy Tiffany shares, and they’re not a holding in the Extreme Value portfolio. But if you’re interested in a good inflation hedge, you can do much better than gold.
Good investing,
Dan Ferris
