Gold: The Pros, Cons, & Our Philosophy

Precious metals are on the rise again. With the price of gold hovering around $1,300/ounce, we are getting a fair amount of inquiries about investing in it (and other precious metals). Generally, these questions arise when these asset classes are on the rise or when there is a lot of global uncertainty.  These days we have a bit of both, so it’s a great time for some clarity on the question. Let’s start with the Pros and Cons of investing in the gold (and other precious metal) asset class.

The Pros:

1. Perhaps the biggest Pro of buying gold is to hedge against deflation, while also helping a portfolio fight potential inflation. There are studies that show gold historically grows with inflation, with the 1970s often given as a prime example. Investors, rather than parking a large sum of money in a bank account that will generally grow less than inflation, will purchase gold to maintain one’s buying power.  Subsequently, during deflationary times when consumers lose faith in government and the economy, they flock to a proven store of value in gold (e.g. the Great Depression).
2. Gold is generally viewed as a safe haven investment because of the days where the US dollar was fully backed by gold. During times of extreme market uncertainty, a huge influx of money flows into gold (which tends to lead to appreciation or “supply equals demand”).  Although there is substantially more US currency than gold these days, the old mentality as a safe haven remains.
3. Gold is a tangible investment which generally holds its intrinsic value. The notion is: if the global economy collapses, gold (and other metals) will hold their value.
4. Gold is another way to diversify a portfolio and act as an equity hedge.

The Cons:

1. In the doomsday scenario of a global economic and currency collapse, who is to say metals will be the default currency? What if “value” is determined by bitcoin or barter?   This is the common doomsday rationale of heavy metal investors.
2. Investing in gold will not produce any income (such as interest from bonds or dividends from stocks).
3. As a stand-alone investment, it is highly inefficient. The long-term expected return of gold is right about at inflation. But, it comes with a disproportionate amount of risk.
4. For the return, gold has a high amount of volatility. Usually, for the conservative investor, this is tough to stomach.  It’s very common to see a 10-15% swing in either direction.

Our Philosophy

Diversified has a high concentration of 50+ year old clients. We often find their needs and goals lead away from investing in gold.  Our philosophy has always been to diversify.  Risk is managed depending on each client’s specific needs, goals, and tolerance. In our experience, the needs of an investor as they approach and live through a prolonged retirement extend beyond an asset class like gold. We fully believe that there are ways to hedge against equities that yield better long-term growth potential and provide investment income with a lower amount of risk. This is not to say that the benefits of owning physical gold listed earlier aren’t valid, but we feel there are more efficient and less volatile ways to accomplish those objectives.