This article appeared originally in the September 2012 Levitt Letter.
Only one of three reasons for owning gold holds water, according to business columnist Will Deener. Below are excerpts from his article in which he analyzes their merits. Deener's entire article is posted at http://wp.me/pieUD-1mt …. Mark
About a year ago, as gold prices were hitting record highs, gold bugs were brimming with I-told-you-so bravado. Not so much now. After topping out at ~$1,900 per ounce in August 2011, gold prices currently hover 15% lower at ~$1,600.
Those who buy gold as a hedge against the end of the world should remember that it will end only once, so their timing had better be right. Truthfully, my position on investing in gold has been consistently inconsistent.
Let me make three observations:
First, people often tell me they own gold as a hedge against a falling stock market. Unfortunately, the correlation between stock returns and gold prices is essentially nil. According to Eric Weigel, senior research analyst at the Leuthold Group, a Minneapolis investment research firm, bonds would be a better hedge against a volatile stock market.
Second, gold investors seek protection against inflation. However, the correlation is not as strong as they believe, and there are better inflation hedges than gold. For example, Weigel advises anyone concerned about inflation to invest in Treasury Inflation-Protected Securities (TIPS).
My third and final observation is back on the side of the gold bugs. Gold is a hedge against currency devaluation, and this is by far the best rationale to buy it. Weigel said the correlation between the value of the U.S. dollar and gold has been particularly strong over the past two years. "I think going forward, gold will be a good hedge against eroding currencies,” he said.
In sum, if the motivation to buy gold is to protect against a volatile stock market or inflation, there are probably some better hedges. If it is to protect a portfolio against eroding currencies, that’s not a bad idea, and at least it's based in fact.
Please see these two related Serpent articles:
Rather than declaring the merits of gold (or the lack thereof), this article’s purpose is to stimulate awareness of some key arguments. Please remember Proverbs 16:16 KJV: "How much better to get wisdom than gold, and good judgment than silver!" Since gold isn’t edible, most ZLMers would be better served to maintain three days’ (or weeks’) worth of water and canned food than a stack of coins.