Gold can be included under the umbrella of a larger asset class known as commodities. Think of commodities as items used to make or produce other items – such as gold is used to produce jewelry, circuitry and coinage, while timber is used to make lumber and paper, while coal is used to make electricity and disappoint not-so-good kids on Christmas morning (sorry, couldn’t resist).
Getting back to gold: the reason an investor may want to consider it as part of their portfolio is because gold is correlated differently from the stock market. Simply put: its pricing moves differently relative to the stock market. This does not mean I’m recommending investors buy gold. Here’s why.
Imagine a lump of gold sitting on your kitchen table. What does it do? Nothing. It simply sits there. It produces no income, and according to a 2013 article in the Financial Analysts Journal, there was little evidence that gold was a hedge against inflation.
Even the great Oracle of Omaha, Warren Buffett has this to say about gold:
“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.”
My personal and professional opinion is that if an investor is bitten by the “gold bug”, consider putting your emotions aside and ask yourself why you want to invest in gold. Is it because everyone else is doing it, or is it because you know something the market doesn’t (likely rare)? I have joked with clients and students saying that if there’s an absolute “black swan” and the entire US and World economies collapse, what good is gold going to do us? We can’t eat it, can’t drink it, and it produces nothing in and of itself. Time to grow a vegetable garden as food will be a more valuable commodity at that point.