I have written about gold several times on this blog and despite the investment being so simple, I’m still unable to get my head around it. Think about it, when I am buying a stock I feel like I’m buying a stake in a company that will be earning money for decades. Some of those earnings are usually eventually paid out as dividends. Thus, the value of those stocks is quite simply the future value of those dividends and earnings (for companies that are too stubborn to pay out dividends.. Apple AAPL anyone?). What can influence the stock is extremely large, it can be growth, competition, costs, technology changes, etc. Some analysts work full time on researching a handful of companies.
Bonds have different characteristics and certainly have fewer components but the future value of cash flows can certainly become complex as is the ability of companies/governments to pay back bondholders.
Then there is Gold
Gold has became much more popular in recent years. Why? Because it’s seen as so many as the best (hardly perfect, but the best one available) hedge for inflation and as governments such as the US and European ones continue to lack the urgency to fix their growing levels of debt, it’s the belief of many that gold should be part of any long term portfolio of investments. I’m not there yet. I know of so many that are putting significant amounts of money into gold. Others are simply buying a few % of their holdings, every year into physical gold. Why? It’s their belief that if the system collapses in some way, and that assets such as US dollars end up losing a lot of value, the value of gold will hold up. To be fair, that has been largely true throughout history.
I would imagine that at any period in time where the value of other assets becomes more questionable, gold’s value would rise and with everything going wrong in the world right now, many are starting to worry about the assets that had been seen as safest, such as US dollars, bonds issues by the biggest countries of the world, etc. Could we be at risk of losing much more than is possible to imagine? What if the end of Europe is near and that could bring massive issues to the US and others? Of course, these are very pessimistic scenarios and I would not consider them anywhere near likely but would not trying to protect against such a scenario be irresponsible?
There is one big problem with gold though and I had trouble putting it into words but Warren Buffett said it well recently when he said that gold had little to no value to him. Why? First it has no “inherent” value, it does not produce anything. Sure there is some jewelry made of gold but that is responsible for such a small portion of gold’s value. Why is gold worth close to $2000? Its value is mostly driven by perception. That creates huge issues for me. See, that “perception” can change so quickly, and it could just as easily drop down to $1000 as it could rise to $5000 as some predict it will. I’m not nearly smart enough to have a strong opinion on the direction of gold prices. Thus, it becomes very difficult for me to pull the trigger. Having decent protection in case all goes to hell? Yes! But buying gold today at these prices? I’m just having trouble with the concept.
That being said, I will likely be buying some gold in the next decades, as a very small percentage of my portfolio, just “in case”. Crazy? I guess time will tell.
What are your thoughts on gold?