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Does Gold Make a Suitable Investment?

Through the course of 2011, one of the major themes of investing was whether precious metals should be included in a portfolio and if so, to what extent. Gold was pushing to great heights around the $1900 per ounce level before dropping off the top to current levels in the $1500-1600 range. The investment news media was all over gold as it seemed to have endless momentum on the way up and has cooled off its coverage since the metal has hit a bump in the road.

The problem I have with people viewing gold as an investment is that through history it really has not had much in the way or real gains. What investors need to understand is that gold does not have sales or revenues or anything to really drive its price aside from people agreeing upon a price that it is “worth”. Gold is not a company, it does not have customers, and it provides absolutely no income or dividends in and of itself (though gold can be traded in ways to produce income if someone is willing to speculate on its price movement).

Gold is often used by investors or speculators as a trade on fear. When bad news comes out about worldwide currencies or there is an unstable geopolitical environment, gold tends to rise. When people are content and the coast seems to be clear, gold tends to go down. I feel comfortable with precious metals as part of a balanced portfolio on the basis that they are used as a hedge against inflation and not with an eye to market beating returns. Buying gold in the hopes of above-average returns is a speculative play and not an investment.

When investing, the question must always be asked, “What’s in it for me?” With gold, the only real answer I can find is that it has proven to be a hedge against inflation over time. It tends to roughly keep its value/price/relationship to dollars through the years. Keeping a very small portion – no higher than 10% - of a portfolio in gold is reasonable, in my view, as a way of protecting one’s purchasing power.

Remember, the value of an investment is the cash flow that it produces. If an investment does not provide cash in your pocket on a regular basis, at some point you will have to part with it in order to realize or unlock the value. I don’t like the idea of destroying my base of assets to get my money out. I’d rather let my investments grow over time while at the same time realizing regular returns in the form of dividend, interest, or royalty payments (preferably tax free when sheltered properly, but that’s another topic entirely).