I periodically express my views on gold as a retirement investment. Generally I don’t get it, because many of those who advocate investing in gold generally own gold as a security blanket. In other words, they have no plan or strategy for selling it. They are waiting for the world economy to collapse entirely, at which time they will buy stuff with their gold. I have my doubts about that last part. Nevertheless, we own a relatively small amount of the GLD exchange traded fund. It’s gained about 38% over two years, with a lot of volatility in between.
Occasionally I read a well-reasoned, objective article about gold investing that is not written by a gold “fanboy.” That was the case yesterday. The article was actually written for financial planners to consider when providing advice to their clients.
The author focuses on risk-adjusted returns provided by gold investing. This is very important for gold because of its extreme variability in long and short terms trends. This is one of the problems in discussing gold as an investment. Depending on what years you include in your historical analysis, the results are all over the place. As the article notes, during the years 1987-2004, gold prices varied by not much more than $200 an ounce. On the other hand, there has been a 260% increase in gold prices over last six years. If the world economic news suddenly turns positive, that 6 year rally can disappear in a hurry.
More sophisticated investors (not the doomsday types) will observe that investing gold can be a good hedging strategy. The author addresses that point this way:
[M]any admirers of the yellow metal formed their opinions when there were less sophisticated hedging instruments available to individual investors. With the growth of the ETF industry, investors now have access to funds that deliver the inverse performance of a wide range of equity, fixed income, and currency-based assets.
These instruments can be targeted at specific risks, such as inflation or currency devaluation, while the same cannot be said for gold. Some, such as Treasury Inflation Protected Securities, offer a modest return even when markets move against them.
I highlighted the comment about TIPS because that is the inflation-hedge that I prefer. Inflation-protected securities don’t need a constant stream of bad news to increase in value.
Anyway, if you are still considering gold as a retirement investment, the article is definitely worth a read: Gold: Worth the Risk?