Should you have gold in your portfolio ?

Jason Zweig from the WSJ published a column titled « Gold is still a pet rock » and its a great read (and obviously JZ is not ‘a moron’ as he calls himself)… He reminds us that if gold is a good « insurance against chaos », its value fluctuates so much it’s a poor protection of purchasing power for short periods of time.

Plus it doesn’t earn anything in terms of income. If you buy gold, it’s basically only because you think it’s a anti-‘end of the financial world as we know it’ tool but while you hold it, you have to make sure the opportunity cost is acceptable. Over the last 10 years, there have been times when it made sense to hold gold and over when it didn’t. But trying to time gold (as the market) is futile.

Source: Federal Reserve of St Louis

Source: Federal Reserve of St Louis

Little after having published his column, Zweig updated it with a quote from Ben Graham:

“The near-complete failure of gold to protect against a loss in the purchasing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation by putting his money in ‘things. »

If you want to reflect on gold, you can also go to Warren Buffett who did some comments on gold in his 2011 annual letter. Here’s an extract of what he says about it:

« Gold (…) has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling.

But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.” »

So to answer the initial question: should you have gold in your portfolio ? If you think the end of the world is coming, then holding gold might make sense as a risk diversifier. But if you think the economy will at some point keep calm and carry on, you probably have other better places to go.

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