Recently, I have had many conversations with investors discussing gold and its place in an investment portfolio.
I have heard many explanations of gold prices going higher. Here are some of them:
1. “The price of gold has gone up a lot; therefore, it will probably keep going up.”
2. “I will buy gold in case inflation skyrockets.”
3. “If the world economy collapses, at least I can buy things with gold.”
4. “The Pharaohs all loved gold, and we should too.”
5. “Gold is a safe place to ride out this economic storm.”
The facts are: None of those explanations are facts. Well, I am sure the Pharaohs were fond of gold.
The truth is gold has been one of the most volatile investments over the past few years. It’s unlikely that it will be a currency anytime soon, and it’s not been an effective inflation hedge since the gold standard Fort Knox days. Additionally, most investments have some sort of cash flow potential; dividends, coupons and rent are not characteristics of gold.
You can’t eat gold; it doesn’t provide shelter and is not practical or efficient clothing.
I heard somewhere that digging up gold out of the ground, refining it into bars and burying it back in the ground in vaults doesn’t provide any substantial economic benefit to society.
Gold is speculative and should be a small percentage of any long-term investment strategy. Don’t get caught up in the hype about the reasons to own it. Because the global economy is cyclical we will always have some assets in the trough and others will be a “bubble.” And, as we have seen over the past 10 to 15 years, bubbles tend to pop.
William J. Hertzog, CIMA, is first vice president of investments for Wells Fargo Advisors, LLC, in Ahwatukee. Reach him at (602) 952-5133 or www.TheHertzogGroup.com. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Note: Investment and insurance products are not FDIC insured, not bank guaranteed and may lose value.