Shakespeare may have dedicated a line in The Merchant of Venice to reminding people that shiny things aren’t necessarily valuable, but I prefer the formulation in Led Zeppelin’s Stairway to Heaven (and for you younger folks with strange tastes in music, Smash Mouth’s All Star). So yeah, let’s be sure all that glitters is gold and buy celestial stairways, shall we?
The Case for Gold
Gold, the 79th element and a regularly referenced commodity on this site, is an interesting piece of many investment portfolios. You see, ever since the dollar was un-pegged from gold in 1971 by President Richard Nixon, it’s had quite a ride from $35 an ounce to it’s current level around $1,600 an ounce. Not a bad return if you held on, was it? (And all that in only 41 years).
As the entire world is currently using fiat currency, gold has no official role in monetary systems anymore – although it has historically been a store of value and accepted currency. It finds usage in both industrial processes and jewelry, along with being horded by (forward thinking?) countries in vaults much like this one (and this one).
A Role in Your Portfolio?
Well, instead of hopping on the bandwagon now, allow me to advise that you practice caution when buying gold as an investment. We’ve covered a few reasons to be cautious in a previous article on why to be wary when purchasing gold. Certainly don’t store any significant amounts of gold at home – there is a large case to be made about holding less than a handful of gold coins at a time at your property. If you are going to invest in bullion, look at a company which will warehouse your holdings (and outsource many risks) like bullionvault, or something like a gold ETF (like GLD).
As a commodity, gold is an interesting way to diversify away from the common stocks and bonds of most investor portfolios. As an investment that has historically done well when risks of inflation rear their ugly heads (and at least matched inflation), it may well zig while the rest of your portfolio zags (negative beta, anyone?). Personally, I do have funds in gold, but through gold mutual funds in my 401(k) (which mostly hold gold stocks) and commodity ETFs (which are well diversified across commodities).
So that’s my bottom line – gold has had an incredible run-up, and I’ve benefited a bit. The massive runup in the last few years is reason enough to be wary, so don’t dive in too deeply. I’m not ready to call for bringing gold back into a currency role just yet (and no doubt Cameron would laugh at that suggestion!), but I don’t think there’s harm in carving out a piece of your portfolio for the shiny stuff.
Portions of this article promoted.
Do you hold gold in your portfolio? Do you have a strict limit, say 10%, where you would sell if gold appreciated past that point? What do you think of fiat currency?