Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head. – Warren Buffett
Many of our clients and prospects have asked us about the increasing presence of “invest in gold” messages. The gold pitch goes something like this: “the economy is uncertain, governments around the world are carrying massive debt, inflation looms, stocks have performed poorly and gold has gone through a huge run up in value. It is the perfect hedge for investors in these uncertain times. You should get on the gold bandwagon.”
There is a lot of truth in the statements used to promote gold investments. But it’s a tougher call to determine where gold fits in anyone’s investment strategy.
From a financial planning perspective, we do not think that it is a good time to emphasize gold. In fact, we don’t think there is ever a need to have gold-specific investments in a diversified strategy. Here are the issues as we see it:
1. Investing in a broad collection of commodities (with no more than 10% of a portfolio) can reduce risk and may be a good counter to the global economic conditions. But investing in any one commodity concentrates risk rather than diversifying it.
2. Choosing how to participate in a gold investment isn’t easy. Do you buy bullion, coins, exchange-traded funds (ETFs), or mining stocks? How do you determine when gold is overvalued and right for sale? How much utility does gold have as an investment?
3. After watching a significant run up in the price of gold, the likelihood of experiencing more return potential with this asset than is available with other assets is minimal. There’s no reason to buy high and get little reward for it.
4. Gold is not the only inflation hedge available. Treasury Inflation Protected Securities (TIPs), broad commodities exposure and stocks are more likely to create real return beyond inflation over time.
5. Estimates suggest that as many as two billion people throughout the world are in transition from “third world” status to “middle class.” In so doing, they are expected to eat more protein and consume more fossil fuels and natural resources. They will create demand for these commodities but they won’t have any real use for gold.