The speculative public is incorrigible. It will buy anything, at any price, if there seems to be some “action” in progress.
– Benjamin Graham, The Intelligent Investor
Jonathan Chevreau has written a couple of columns (here and here) and blog posts (here and here) on the place (or not) that gold has in a portfolio. As gold recently crossed the $800 (US) per ounce threshold, gold bugs are coming out of the woodwork saying “I told you so!” and putting a “target” of as much as $2,500 per ounce.
Gold enthusiasts (including a self-serving recommendation from the Millennium BullionFund that gold should make up 50% of a portfolio) correctly point out that gold is poorly correlated with other asset classes. True enough but correlation isn’t the only reason to add an asset to a portfolio. More importantly, every asset class should provide an expected positive return by holding it over the long-term. Gold fails this test miserably. It provides no ongoing income in the form of dividends or interest and in fact, costs money to store and insure. The best that can be said about gold’s price over the long-term is that it can be expected to keep pace with inflation.
Fortunately, there are some sane voices in the growing chorus for buying gold. Mr. Chevreau quotes financial advisor Fred Kirby who points out that real return bonds and REITs share some of the correlation characteristics of gold while providing an expected positive real return over the long-term. Also, if you must have bullion in your portfolio, there are better ways that buying the Millennium BullionFund. There is no ETF that tracks the price of platinum that I know of but streetTRACKS Gold Shares ETF (GLD) tracks the price of gold for a MER of 0.40% and iShares Silver Trust (SLV) tracks the price of silver for a MER of 0.50%. Note that both GLD and SLV trade at a discount or premium to the price of the underlying commodity. The precious metal ETFs charge significantly less fees than BullionFund’s MER of 2.25% plus a front-end load of 5%.
