#TBT: Is Gold Really Important For My Portfolio?

It happens all the time: people are finicky about the current state of the world, in terms of politics and currency, and the stock market making wild swings so they ask me: is NOW the time to buy gold?

The answer is more complicated than you think.

Investing in physical gold is one of the oldest investment strategies on Earth. Just think of how many new lands were discovered and battles were waged over access to gold. It has always had value and rightfully so: gold is a finite element, we cannot create it, we can only find it and mine it. Since the Earth's supply of gold is limited, and the demand is so high, we can say it has intrinsic value. This is essentially how currency was created.

However, in the end, gold is just a yellow metal. It's atomic number 79 on the periodic table of elements, it is one of the softest metals, in fact one ounce can be beaten out into a 300-square-foot sheet. The same could be said about diamonds: it's just pressurized carbon atoms that can actually be duplicated in a lab today.

So why do diamond rings fetch thousands of dollars while gold is priced around $1,000 now? Gold, like anything else, is only worth what someone else is willing to pay for it.

Should I Stockpile Gold In My Portfolio?

No. You should never stockpile anything in your portfolio. Most people add gold to their investments as a way to feel better knowing they can physically hold a bar of gold rather than a piece of paper that says they own 100 shares of Microsoft's stock. But this is not a good enough reason to dump your entire life savings into something you can hold.

The other reason is using gold as a hedge against inflation. A "normal" annual rate of inflation in a developed economy like the United States is roughly 2%-3%. In order for gold to be an effective "hedge" its value would have to steadily increase by more than 2%-3% every year in order to cancel out inflation and then some.

A hedge won't make you money. It will just stop you from losing money. And this is the purpose that gold serves.

If you look the following chart of the price of gold (per ounce) over the past 20 years, you'll notice and interesting pattern. It's value really only took off after 9/11 and then steeply after the economic recession in 2008-2009. Why? Because gold is a hedge against volatility. When the state of the world, both economically and geo-politically looks more and more unstable, investors will turn to gold for safety.

The biggest take away from this chart should be that gold prices rise and fall with the rest of the stock market and in times where the stock market is high, gold falls. We are entering a period of market strength thanks to cheaper oil, however impending higher interest rates will make the rate of inflation rise. Gold prices may rise, but they will not replace stocks to give your portfolio growth over time.

By all means, add gold to your portfolios, but plan to hold it for years and only a source of liquidity in trying market times. It's hard to really get rich investing in gold alone.

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