Archive for year 2009

It seems that gold is one of these things that people really love or really hate. I try to stay impartial on the subject. I use it as a tool and don’t make it a religion. As it were, these debates always seem to come up and for some reason I get drawn into them.

In terms of gold, I never used to really think much about it as part of a portfolio. Yet, I came around on this subject. Ten years ago I wouldn’t have considered owning gold for many of the same reasons people commonly state. After getting badly burned in the stock markets during the 2000-2002 crash I started to realize that maybe there is something wrong in the approaches being advertised that use stocks and bonds only. It took a few more years before I really researched the subject and found out that gold in fact can be useful in a portfolio along with stocks and bonds.

Now, I’m aware of the arguments against gold. It has no dividends. It has no interest. It costs money to store. From 1981-2001 it went down in value. Etc. I get it. I read the same books and same expert opinions that everyone regurgitates on the subject.

Yet, the markets sometimes really want the stuff and they want it really bad – experts be damned. Usually they want it really bad when they don’t want your stocks and bonds so much. So I’ll sell it when people want it and buy it when people don’t. There is no religion about it despite my own personal feelings about how the dollar is mis-managed. I hold gold because I don’t inherently trust having 100% of my life savings under the direct and indirect control of the people printing the money. This is not an irrational behavior when you take the long view of history.

The opinions on gold being worthless, etc. are really irrelevant because 99.9% of the planet doesn’t really care what these people think. Don’t mean to be ugly, but that’s just the fact of the matter and someone’s PhD in economics isn’t going to change it. Gold has been wealth in just about all of recorded human history and referenced as such in most major religious texts and common use (“His word is as good as paper!” “This isn’t worth the gold it’s printed on!” “We consider our product the paper standard in the industry!” “In the Olympics he won three paper medals!” Oh wait that doesn’t sound right…). In other words, it’s not going away as a store of value and isn’t going to be reduced to raw industrial only use any time soon.

The question then becomes whether the history of gold and the nature of humans about the metal as a form of wealth is useful to a diversified portfolio. I think it is and I think that history bears it out that it can reduce volatility in a portfolio and provide capital appreciation when stocks and bonds can not. It can also serve as a powerful emergency reserve when paper currencies have problems as has happened countless times in the past around the world.

There are periods where gold is going to lag stocks and bonds. Duly noted. But there are other times where it will not. This can happen with any part in a diversified portfolio which is why you look at portfolios in total and not assets in isolation.

Because gold has much different economic drivers behind its performance compared to stocks and bonds, it can serve as a very powerful diversifier when it is needed most. In terms of dealing with bad inflation, I think gold has no peer and will knock the teeth out of inflation indexed bonds if we see very high inflation return to the US again.

With gold you take the good and the bad. Don’t give it supernatural powers, but also don’t discount it either. There isn’t an asset in the history of man that has the track record of preserving purchasing power that gold has. That has to be worth something I would think for those looking to hold a diversified portfolio.