Since my beat is income, I don’t touch on gold very often. But we’re starting a new decade, so I’m giving gold a closer look.
Though the precious metal doesn’t pay an income, it’s not unreasonable to include it in a retirement portfolio because it tends to have a low correlation — or even a negative correlation — to other investments.
For example: inflation is death to bonds, but gold tends to do really well during inflationary periods.
Gold had an epic run following the 2000 tech bust that continued all the way to late 2011. But the yellow metal has traded mostly sideways for most of this decade, which is curious.
The 2010s have been called the decade of the “Everything Bubble,” as easy money from the Fed, European Central Bank, and Bank of Japan helped to inflate the prices of virtually all assets. Stocks, bonds, real estate, Bitcoin, private equity… the prices of virtually everything has exploded higher over the past 10 years.
Yet gold has very conspicuously missed the party.
What’s the Deal with Gold?
It’s hard to say precisely why, but I’d argue that it comes down to valuation.
Gold rose too far too fast from 2000 to 2011, aided by a flood of new ETFs and other retail investment products that made it easier for investors to dip their toes into precious metals. The market needed time to digest the explosion of new investors interest while gold was sharing the spotlight with Bitcoin and other alternative currencies. Add to this a general slowdown in commodity consumption by China, and gold never really had a chance.
But here’s the thing… the conditions that inflated the “Everything Bubble” are still in place. In fact, they might actually get worse.
The next crisis won’t come from the banking system like the 2008 meltdown.
It will come from the central banking system when investors lose faith in central-bank-driven capitalism. The idea of Fed centrality will join communism, fascism, and a host of other “isms” as failure.
Will it play out exactly like that? Frankly, only time will tell.
I know that if goes down like that, I’d want to own some gold. And I think you’re going to see a lot more investors hedging their bets with a little gold, particularly given that other inflation and currency hedges like real estate are looking stretched.
Why Gold Matters
Gold isn’t an “investment” in the classic sense. I want to be clear on that.
With stocks, you’re getting a piece of a business.
With bonds, you’re buying an income stream.
With real estate, you’re generally getting a little of both.
Even most commodities have an industrial purpose and can be loosely thought of as investments.
Gold is different.
It has very little practical value. In a stable, healthy financial system, it should actually lose worth. You don’t buy gold because you expect it to rise in value over time. You buy as insurance… just in case.
I don’t recommend keeping a lot of money in gold for all the reasons I discussed. But I think it’s reasonable to keep somewhere between 1% and 5% of your portfolio in the “barbarous relic.”
As for the best way to own it, stay away from gold promoters or elaborate gold “investment” schemes. The cheapest and safest way to own it is by buying gold coins at your local collectibles shop or by buying a cheap gold ETF — such as the SPDR Gold MiniShares (NYSE: GLDM).