Will Gold Shine As An Investment?
It has often been said that a “complete” portfolio should consist of various asset classes, such as equities, real estate, bondsm and commodities. The most precious commodity – which has been traded for thousands of years – is gold. It has been used as the standard of value for many centuries, even before the era of fiat money (i.e. currencies).
But does gold really constitute a good investment?
Gold is traded on commodity exchanges, and its price is usually quoted in US dollars per ounce in financial articles.
At the time of writing, the price of gold is hovering around US$1,200/ounce. At its peak back in late-2011, the price of gold was around US$1,900/ounce and it has since declined by around 40%. So what determines the price of gold and will it make a good investment within a portfolio?
The investment characteristics of gold
The legendary investor Warren Buffett famously said that he would rather own great businesses than invest in gold. This is because gold, by definition, has no intrinsic value as it does not produce cash flow. Therefore, an investor would not be able to value gold in the same way he values businesses, as there are no future cash flows to discount to the present when it comes to the precious metal.
Gold, however, does act as a good store of value during times of turmoil and upheaval. When economies are in trouble, and when war breaks out, people tend to flee to gold as a safe-haven asset. Therefore, I would argue that gold acts more as a type of currency rather than as an investment. Its price fluctuates according to macro-economic events, much like the way the US dollar also fluctuates depending on the state of the global economy, as it is the world’s reserve currency).
Looking at gold from this perspective, I conclude that gold acts as a good store of value in tough times, but it functions poorly as an investment as it does not generate a return and its value cannot be reliably measured.