Gold as an Investment

I just finished writing an article on gold. You can find it on the CWM web site. I have been thinking about gold for several years. None of the CWM portfolios contain gold. Frankly, I have never considered it a serious asset class.

But, in light of ongoing market turmoil, I decided I needed to take a good hard look at gold. Is it truly an attractive investment? What are the benefits of investing in gold? What are the detriments? What are the returns relative to the risks? Does it belong in a low-cost, passive portfolio?
Here’s an excerpt from the article:

People have invested in gold for literally thousands of years. From what does gold derive its value?

Gold is valued because of its physical properties (an attractive yellow metal with a relatively high density) and its scarcity compared to many other physical objects. People have long considered gold precious and it is this quality that gives gold its value.

It is interesting to note that unlike many other conventional investments, gold produces no income for those who hold it. Many investments are valued based on the income they create. Examples include stock dividends, bond coupons, rental property income, etc. We can readily value these investments by determining how much income they are likely to produce and when it will be received.

Investments that do not generate income are more difficult to value, because the valuation process is far more subjective. These investments are worth whatever someone will pay for them. Think of art, antiques, stamps, baseball cards and other collectibles. These items are perceived by their collectors as valuable because of their uniqueness. A non-collector may well find no value in these items.

Gold is worth whatever the market determines. But understanding the basis for the value of gold is alchemy by itself.