REGARDLESS of everything that has changed over the past millennia, gold has maintained its position as a valuable asset.
Today, there seem to be two schools of thought.
One school says gold is an excellent asset to diversify your portfolio and to protect your wealth against inflation.
The other school says gold is an outdated, inefficient asset, without much real utility and with no place in any modern investment portfolio.
What are the pros and cons of investing in gold and should you do it?
The first school of thought argues that gold is a currency in its own right, a hedge against stock market crashes and weak currencies, offers inflation protection and is a way to diversify your portfolio.
It is true that throughout the ages, gold has maintained its value, even though it has very limited intrinsic value, outside jewellery and some industrial processes.
Gold also offers a safe haven when investors face a high degree of uncertainty or fear. Financial crises and military conflicts have been known to push the gold price up as investors flee to assets that are considered ‘safer’ until they have figured out what to make of the situation.
Some have likened investing in gold as going “long” (buying) in fear.
It is clear that super-investor Warren Buffet belongs to the second school of thought.
He described gold investments as the process in which gold gets dug out of the ground, is then melted, and subsequently flown to another place, where it is once again put in the ground with security guards around it.
Anyone watching from Mars would be scratching their heads.
It is true that gold doesn’t pay dividends such as stocks, and doesn’t pay interest like bonds.
There are even additional costs if you decide to hold actual, real gold, such as storage costs and insurance fees.
On top of that, gold prices are quite volatile and can change quickly, dramatically and unpredictably.
It is harder to value and forecast as you cannot perform the analysis (like discounted cash flow) and calculate the ratio’s (such as price-earnings ratio) as you would do with stocks.
I believe a well-diversified portfolio of stocks and bonds will easily outperform gold in the long run.
Gold makes the most sense as an “insurance” for when the economic environment becomes tough and returns on stocks and bonds are abysmal.
In the past, gold performed well when the stock market was horrible and vice versa.
In March 2012, the price of gold per troy ounce was at US$1,668 and rose to a high of US$1,780 in September that year and closed at US$1,234 on Friday.
Given the cost and hassle of actually buying gold bars or coins, it may make more sense to invest in the gold (mining) industry or an ETF (exchange-traded fund) that is backed by gold.
These could also provide a hedge against dark economic – and political – times.
Only if you really believe that (financial) Armageddon is here, does it perhaps make sense to go out and buy gold bars.
But even then, how do you buy bottles of water with a gold bar?
Mark Reijman is co-founder and managing director of https://www.comparehero.my/, dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, personal loans and broadband plans in Malaysia.
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