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).
Do other precious metals and commodities fair the same way? Recently, I traveled to Trail, British Columbia where there is a large smelting plant. They often deal with Zinc, Copper and other minerals. I'm visiting with a financial planner in two weeks to review my portfolio and as we discussed before I'm moving around some of my investments and would like to know if I should focus on dividend paying stocks
ReplyDeleteOther factors come in to play when dealing with other metals/commodities, such as housing starts (especially with copper), economic trends, etc.. Each should be taken on their own and analyed despite the fact that some do tend to trade similarly.
ReplyDeleteI prefer dividend paying stocks for my own portfolio, though I do hold some silver as well. Again, dividend paying stocks will provide money in your pocket on a regular basis whether the market is up or down (assuming you've chosen ones with solid fundamentals and a healthy dividend culture), whereas commodities "just sit there" and the most you can hope for is for them to go up in price so you can unload them to someone else.
I've heard a lot of people saying that gold cant go much lower because the cost to mine the stuff is nearly $1200. I don't think I believe that since they were mining the stuff a few years ago at $500. Gold just isn't for me though, it pays no interest or dividends.
ReplyDeleteThe notion that Gold enjoys some sort of price protection or cushion based on the cost of mining it is bogus, in my view. There are many factors involved in the costs of mining Gold (or any other precious metal, for that matter), and I would not want to bet my hard earned dollars on any of them giving me price protection on a speculative Gold "investment".
ReplyDeleteOf course, in saying this, I am not saying that Gold will or will not go below $1,200. I am simply challenging the notion that the cost of mining Gold influences its price in any meaningful way that can be deciphered in advance.
I would view betting on this relationship between Gold and the cost of mining Gold as purely speculative.