I keep coming back to the prospect of adding gold to diversified portfolios. It seems so tantilizing. The enduring popularity of gold as an investment has to do with its tangible nature. Unlike a stock or a bond, you can feel and touch golden coins and larger ingots. And, it appears such a good diversifier. It tends to react in the opposite direction to economic changes as many other asset classes. The problem with such tangible assets, of course, is that there is nothing alive about them; that is, there is no claim on the fruits produced by the labor of thousands of workers, in the form of dividends or growth of the enterprise. As Warren Buffett famously pointed out, if you owned all the world’s gold, you could mainly polish it and admire it in your front yard.
Even so, with all the uncertainty in the Middle East, Brexit and the tumultuous U.S. election, investors piled into gold this year, and have been rewarded with roughly 18% returns so far. Why do I remain so hesitant? Alas, they are now learning that gold is one of the most volatile of all assets. Prices have fallen dramatically in the last month, including a 4.5% drop in one week alone. (see chart)
Experts are saying that if the Federal Reserve Board raises interest rates, that could trigger a further plunge, since investors could park their money in relatively safe investments which (unlike the recent past) paid returns. Gold was competitive with bonds when bonds (like gold) were paying nothing. We may be about to see what happens when there’s a difference in yield.
Adding asset classes to a diversified portfolio is tricky business. We are always on the look-out, researching new opportunities. So far, we have just been unable to turn the glitter of gold into a gleam in our eyes.