For the past several years, the drumbeat of the goldbugs has continually gotten louder. For a variety of reasons, the precious yellow metal has become the investment of choice for a plethora of different groups. You have the anti-Federal Reserve group, the Armageddon/Survivalist group, and of course the world to hell in a hand basket group. Here is why I don’t fall in any of these groups and am not a huge gold fan.

Cash Flows Are Everything

During the formative years of my financial education, I was consistently taught that cash flow and specifically free cash flow was the mother’s milk of corporate health, future prospects, and investment value. Even if earnings were growing, it didn’t matter unless a corresponding gain in cash flow was achieved. Here is where gold has problems for me. It has no cash flows.

Without cash flows, it is impossible to determine a true intrinsic value by using a discounted cash flow analysis. One can only speculate that gold is going higher or lower based on external events, whether they be monetary or geopolitical. This kind of pure speculation makes me uncomfortable because I like to know at least an approximation of what the underlying value of a given asset is.

It is not enough for me to say that the financial system will crash, so it’s time to buy gold bars. If the whole system crashes, buying gold will likely be a distant thought on people’s minds due to the other immediate consequences of that event.

Gold is also different from other commodities because it has little practical use in the industrial world. On the other hand, oil is almost ubiquitous in our daily lives. What would these folks do with their gold if others say it’s not worth that much? If anything, gold is big game of the greater fool theory in my opinion. It’s only basis of value is what others think it’s worth as opposed to something with intrinsic value.

All that being said, I think gold should be a part of your portfolio for its diversification benefits. I think some people put too much faith in the yellow metal without realizing it has actually not been a great investment over time. Keep a bit in your portfolio, but look for something else to save you come Armageddon.

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