Gold seems to be the “it” investment of late given all of the uncertainties around the globe and the Federal Reserve’s insatiable desire to fire up the printing press and flood the world with dollars. I have seen several commercials about the “can’t-miss” nature of gold and how to cash in. As you can probably tell, I am not “all in” on the concept of buying gold. There are several reasons for this and I will give you a few.


First of all, how do you value gold? The normal way to value an asset is to discount the expected cash flows back to the present using a discount rate. But how do you do that when the asset in question does not throw off any cash flows? This makes it impossible in my opinion to value in terms of putting an instrinsic valuation on it. Stocks pay dividends and the businesses themselves generate cash flows. Real estate investments provide rental income, but gold falls flat in this case. I don’t feel comfortable owning something that can’t be properly valued.

Secondly, there are costs to storing physical gold. Many people invest in the yellow metal because they want that real, physical asset in case the whole financial system goes to Hades in a handbasket (which it almost did). One could buy a gold ETF, but I think people want to be able to physically have it in their possession. It is possible to lose gold coins or have them stolen as well.

Lastly, while it’s not useless, gold has less practical uses than many other metals. If gold didn’t have perceived value, it wouldn’t do much except look nice and shiny. It is used in jewelry, is a decent conductor of electricity and is malleable, but other metals do all these things and more. Some people complain that paper, or “fiat” money is worth whatever people say it is. I don’t see how gold is any different in this case.

I am not saying gold is worthless or doesn’t belong in your portfolio. I am saying that I don’t think it is a panacea for investors for the above reasons. It is a nice way to diversify some of your assets, but it shouldn’t be the focal point of your portfolio.

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