Recently, a newsletter on ETFs began one of its daily pieces with this sentence:
What does it say about the global economy and geopolitical unrest when financial advisors are hunkering down with increasing allocations to gold in client portfolios?
The question has it backward: ‘increasing allocation to gold in client portfolios’ says very little about the global economy and geopolitical unrest, but it does say a lot about the financial advisors. The quote reminded me of an advisor I was interviewing with (I was looking for a job) years ago who asked me what I thought of his clients’ 25% gold position. My answer did not please the listener; I didn’t get the job.
I do not consider gold or any other stake in non-producing activities an investment. An asset maybe but not an investment. Gold price goes up and down, but that’s it and this feature - going up and down in price, with intrinsic expected return below zero because it costs money to hold - does not make it an investment. That goes also for commodities and art and vintage cars and collectibles and watches and many other fashionable things. Something that costs money to hold, does not give a stake on productive activities, and makes money only when someone pays a higher price than you paid for it is called a punt.
Many of the attributes given to gold (protection against inflation, currency devaluation, unstable times, political uncertainty) are not really so in a consistent and stable manner. Take inflation protection; for dollar investors, Goldman Sachs has a graph that shows gold protects less against inflation than intermediate- and long-term Treasuries over any holding period up to 20 years. The argument that its lack of correlation with other financial assets makes it valuable in a portfolio (an argument that also applies to many of the other unproductive holdings mentioned above) is also spurious: diversifying makes sense when using assets with intrinsic positive returns, not holding stuff that intrinsically costs money.
So why do so many people still like gold and use it in portfolios? Beats me. If you want to know more about why humans are attracted to the metal you should read an old memo by Howard Marks, ‘All That Glitters.’