Is gold a gulag?

Is gold what institutional investors have unfortunately taken to referring to as a 'gulag'?

Sure, it's seen a little bounce back above US$1,300/oz since its June lows, but its still miles off its peaks, when fans of gold were desperately arguing that the price was not a bubble.


Source: kitco

The long term outlook may not be so bad for gold, but there are definitely risks in the short-term.

The risk remains in part because gold production has reportedly not fallen in spite of the lower prices.

Constructing gold mines might be a capital-intensive business, but once up and running the cash costs are relatively low given the high spot price of the mineral. 

Therefore, prices would probably need to fall some way further before levels of production drop off.

Some fund managers used fantastically complex models to determine that it may be worth having 2% of a portfolio in gold as a speculative punt, for precious metals have the potential to jump in price sharply making it worthwhile for funds to maintain a little exposure.

I guess I can't argue against that logic - 2% of a portfolio as a speculative gamble, although I'd rather invest in gold-mining companies or ETFs than the physical commodity.

But to base an entire portfolio around holding a metal such as gold or silver is not smart.

Not only does gold not pay a dividend in the manner of equities products, it also incurs storage and insurance costs. 

So while gold might do better than a share portfolio in any given year, over the long-term gold will struggle to match the performance of a quality share portfolio. 

I thought the first half of Robert Kiyosaki's book Rich Dad Poor Dad was great, explaining how a balance sheet and an income statement work in a simple manner. But his favourite choice of investments (US real estate and silver) have not fared so well.

Better to follow Warren Buffett's lead - wonderful profit-making and dividend-paying companies are a better investment than a lump of metal any day.

No comments:

Post a Comment