Or: Gold, what is it good for.
You’ve heard of gold’s great run lately. I’ve never seen such a large concentration of “buy gold coins” ads in my life. Heck, in Germany, they now have vending machines that sell gold at the airport! Glenn Beck recently found himself in hot water for pumping gold on his radio and TV shows while a gold-selling company listed him as a paid sponsor (it turns out they were merely one of his top advertisers).
But enough with the preamble. It might seem reasonable to include gold in your portfolio as an inflation hedge, currency devaluation hedge, or economic holocaust hedge. I happen to disagree. Here’s why.
Problem number one: What are you supposed to do with it?
I once spoke to a mutual fund manager who at the time had 25% of his clients’ money in gold. I’ve always been something of a gold skeptic. After all, it’s not really good for anything, right? It doesn’t generate income. It doesn’t have a significant scientific or industrial use. Its value is completely beholden to society’s perception of its value. The mutual fund manager said something like this: “I don’t know why people value gold or why its value rises during inflation. It just does. It always has. That’s good enough for me.”
That kind of talk makes me a little nervous. Gold as a status symbol has staying power. Some families in India keep most of their net worth in gold jewelry. But if investors at some point did decide to invest in something more, well, useful, it wouldn’t be the first time an inexplicably favored asset turned south.
In the mid-1600s, Dutch investors became enamored with the tulip, which was recently introduced from the Ottoman Empire. Tulip bulb prices went wild, and at its peak, they reportedly sold for 10 times the annual wage of a skilled craftsman. Then, in the span of a few months, bulb prices fell more than 90%. It seems someone woke up and realized they were just flowers.
I know it’s a bit unfair to compare gold bugs to tulip lovers. The tulip craze lasted a year, whereas our obsession with gold has lasted generations. But I’d argue there are plenty of similarities. You can’t eat gold or tulips. You can’t do anything particularly extraordinary with gold or tulips. One day someone might wake up and realize gold’s just a yellow metal.
So what should you do with it?
My honest and short answer is “nothing.” I don’t see any pressing need to have it in a portfolio. You can get inflation protection more directly with I-Bonds or TIPS. If you want commodities exposure, you can invest in stuff industries actually use, like oil, silver, or (what the hell) timber. At least we consume trees! And if you’re afraid of the Armageddon, I truly find it less crazy to store dried food in your basement than I find it crazy to stock up on gold bars. Forget the “golden rule.” In the face of nuclear holocaust, I predict we will live by the rice rule. He who has the rice, makes the rules.
But if you insist on putting some of your portfolio in gold, I’d treat it the same way you treat the rest of your play money. Don’t give it any more than 10% of your money, and hopefully less than 5%. Forget the TV ads soliciting you to buy gold coins and the ads that will no doubt appear in Adsense next to this story. The pricing you’ll get from those guys when you buy will be bad, and the pricing you’ll get from a gold dealer when you sell will be worse. Storing the gold in a safe place will also be a pain.
It’s much easier to get direct gold exposure through an ETF like GLD. Each share represents about 1/10th of an ounce of bullion. As far as I know, you can’t actually redeem your shares for the physical gold. But frankly, if you found an ETF that did let you redeem shares, I doubt there’d be an orderly line at the Swiss vault to redeem them when doomsday arrives.
But by all means, if that day does come, bring your gold bars over to my place. I’ll make dinner with my rice. You can use your gold bars to…I don’t know…build a chair.