We’ve all heard and seen the “buy gold” advertisements on radio and television. Usually, a paid celebrity will talk about how “bad” the markets can be and then pitch a gold product. The question is, how much attention should we give to these ads? Is gold a good investment? They tell us if the stock market crashes, this is one investment that won’t go belly up. However, gold is always compared to stocks, not fixed incomes like bonds.
When I hear someone considering gold, it seems they always go to the extreme, ready to place all their money in gold. Investing all your money in any one commodity is always risky business. Opinions on the yellow metal always vary. Some, like Warren Buffett, say it has no place in a modern portfolio. Meanwhile, others say it should be included. So what exactly should you do?
Keep in mind gold doesn’t have any intrinsic value; it doesn’t pay a dividend. I want to stress here that I’m not talking about gold coins or other collectibles, like jewelry. I’m talking pure gold bullion. The best way to make a decision on investing in something like gold is to look at history. According to Money magazine’s March 2017 issue, from 1986 to the present, gold increased by about 200%, with an especially strong showing from 2006 to around 2013 to 2014 (which OnlyGold also shows). The run-up in that time frame was unbelievable. However, if you look at the long-term history of the Dow Jones in that same period, you’ll find it increased by around 900%. That’s a big difference.
That’s not to say you shouldn’t have gold as an investment, but if you’re choosing to do so, you shouldn’t hold it as a physical investment. What I mean by that is do not buy gold bars and stock them away in your house. There’s a whole mess of security issues in doing something like that. Instead, it’s my belief if you’re interested in including gold bullion as part of your portfolio, then you should invest in an ETF or mutual fund that sells gold positions.
The flip side of this is that gold should have its place. Casey Research published an article in 2014 (which is still relevant in today’s market) that took the stance that gold should be a fixed asset in the portfolio. The reason for that is that gold isn’t a liability of any government or corporation. Buyers can invest in gold directly and they’ve done so for decades. The research shows that since 1934, gold’s return is around 5 percent. That’s a decent ROI, especially for a fixed income position. That provides a buffer toward downturn volatility. Their research shows gold outperforming the S&P 500 by just over 5% from 2004 to 2014. The reason for that obviously includes the massive run-up of gold in that period. But here’s the problem with that: Just like any investment that shows a major increase, they will also be a major decrease at some point. So be cautious. When you examine a 30-year portfolio from July 1971 to February 2014, the S&P 500 yielded just over 10%, while gold yielded 9.53%. So say you had roughly 30% of your portfolio in gold, you would’ve yielded almost 10% with a lot less volatility in the marketplace.
Here’s the bottom line: If you’re following a modern portfolio theory, buying stocks and bonds, it may be advisable to put a small percentage of your portfolio in gold for a long timeframe. If you’re using it as a hedge against downside market moments and following the principles of rebalancing your portfolio at key times, keeping good quality investments and not trying to time the market, then gold does have a place in the portfolio.
You can take either position and still come out on top. It’s all about your risk tolerance. Historically you will make more money in a 100% equity portfolio; however, if your risk tolerance doesn’t allow you to do that and you don’t want to place money in traditional bonds or other fixed-income positions, gold may be a good alternative.