What is Going on With Gold?

Exactly what has always gone on with gold. It is a commodity. It is extremely volatile. It has always been like this!

As of right now, gold is down 3.46% today, but it is also way down from its all time high. It is too bad a lot of investors are surprised by the sharp drop in gold. Historically it is much riskier than the stock market. I imagine unsuspecting families have lost a lot of money thinking they were going into a safe investment. Most other precious metals, such as silver, are down just as much if not more than gold.

What is the benefit of gold in a portfolio?

Very little. Actually, none. It is extremely volatile. Its returns are expected to average to inflation — although as I wrote before, it is a poor inflation hedge. Some financial advisors believe it is a good diversifier. They are wrong. It may be uncorrelated with stocks, but it is so volatile that it still increases portfolio volatility rather than reduces it.

So why have it in your portfolio? The answer is….you don’t. I don’t use it, and you shouldn’t either. It had a good run since 2000, but all sorts of investments that you shouldn’t own could have a good run for a decade.

The long term perspective for inheritors

Often times inheritors with a very long term investment perspective wonder whether gold should be in their portfolio. Does the long term perspective of an inheritor make gold more or less appealing than it would be to other investors? If anything, it makes gold less appealing. There is extensive data, even going back to the Roman Empire, showing that gold has returns that roughly equate to inflation. This is what you would logically expect. Gold doesn’t innovate or grown like a company or the economy, but it holds its value over the centuries (although over the short term it can be all over the place).

For an investor that is looking at a time horizon of 100 years or more, why would they ever be satisfied with returns that are expected to just meet inflation? You could have invested in the US stock market at the absolute high of 1929, just prior to the Great Depression, and you would still have returns far above inflation 80 years later. I would expect that over a 100 year time period, the worst possible performance in stocks will still beat the best possible performance in gold.

Photo by Mark Herpel