Gold: Not So Precious? Part 1

Posted In: Bonds, Commodities, Currencies, Diversification, Dollar, Gold, Housing, Inflation, Speculators, Stocks, Taxes

Last summer, I came across an article in the Wall Street Journal that talked about diversification in an investment portfolio. On August 15, Jonathan Burton wrote in “What Your Portfolio Really Needs” that stocks and bonds are essential to a diversified portfolio. He also suggested that real estate would be “nice to have.” On real estate, he recommended that investors think globally, as “the world is getting wealthier, and as the saying goes, they’re not making any more land.” I used to hear that one a lot during the housing boom. Actually, if you really think about it, that statement isn’t necessarily true. Look at Dubai’s Palm Islands. Anyway, before I go off on a tangent, Burton continued to say that for diversification purposes, don’t bother with sector funds, gold, and other commodities, as they are things you “don’t really need.” On gold, he said:

It insures against financial catastrophe and marches to its own drum. But as an investment, short-term risk is high and long-term reward is marginal. If you want gold, buy jewelry.

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“I agree…fool!”

Just this past Tuesday, another Journal reporter talked about gold’s investment attributes (or lack thereof). Eleanor Laise wrote in “How to Survive the New Gold Rush” that even though the yellow metal has been on a tear lately, “it also carries substantial risks for investors.” She pointed out the following drawbacks:

• At the price that gold commands today, investors may be paying too much for any diversification benefit.
• Gold hasn’t always performed effectively as a hedge against inflation.
• The metal has extremely volatile price movements.
• Many gold investments come with significant tax consequences.
• Because it’s seen as a safe-haven, gold attracts “emotional, speculative” investors who “can amplify its price gyrations.”
• The dollar’s long decline may be near an end, which could hurt gold.
• Some advisers are no longer recommending gold to their clients.
• Gold doesn’t always perform in a crisis. A recent study by Trinity College in Dublin found that, while gold generally holds up well when stocks decline substantially, the effect is short-lived.

Laise threw in some traditional arguments as to why the yellow metal is a bad investment:

• “Yet gold doesn’t produce earnings or pay dividends, and its returns over the long haul often look less enticing.”
• “What’s more, gold has failed to keep pace with inflation in recent decades.”

Tomorrow, we’ll take a closer look at the allegations being made against the yellow metal in part two of the three-part series.

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