Gold’s investment merit

By Dan Hallett, CFA, CFP on September 27th, 2010

I recently challenged gold bulls to ask themselves tough questions before devoting significant dollars to the yellow metal.  A related topic – the investment merit of gold – was the topic of discussion on our panel on The Early Shift this morning on CBC Radio One (Windsor).

During the discussion I repeated Warren Buffett’s great quote on gold.  I knew that I couldn’t remember it verbatim so the actual quote, from a 1998 talk at Harvard University, is below:

It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

In the interest of fairness and disclosure, I authored a detailed quantitative report on gold on March 24, 2009 in which I warned that gold’s very volatile price often leads to disappointment (particularly when purchased after a strong rise).  Since that time, the closing price of SPDR Gold Shares has risen 17% in Canadian dollars (or 39% in U.S. dollars).  I also note that a global unhedged diversified stock portfolio (i.e. 34% in Canadian stocks, 33% in U.S. stocks and 33% in overseas developed stocks) more than doubled gold’s performance over the same period.

Only time will tell if my cynicism about gold is right or not.  However, our March 24, 2009 bulletin did conclude that investing in gold as a portfolio diversifier has been very effective – a role that I continue to believe is valid.  My concern is more focused on how carried away investors can get with gold in terms of unusually high allocations and expectations for this often-debated commodity.