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Investing Specialists

Go for Gold, or Not Really Sold?

For some readers, gold is a necessary piece of the puzzle; for others, it's no better than iron pyrite.

Gold's shimmer has been bright this year. The price of gold has jumped 26% for the year to date through July 28, and the typical fund in the equity precious metals Morningstar Category is up 109% over the same period. And investors have channeled more than $660 million into precious metals funds in the first half of 2016 (through June 30).

We recently asked Morningstar readers whether they had an allocation to gold in their portfolio, and if so, why. On the flip side, we also wanted to hear from those who had no interest in gold. If readers claimed they wouldn't touch it with a 10-foot pole, we wanted to know why not.

Overall, we got just as many answers of yes as we did of no (if not more). The responses we collected reflected quite a wide range of thinking on the matter. They were also nuanced: Even when the respondents were in agreement, there was still room for dissent. For example, many readers opined that gold was a vehicle for speculation rather than investing, but for some that meant they stayed away; for others it meant they happily bought on price dips. 

Some readers said they owned collectible gold coins or jewelry, but didn't consider them a true portfolio allocation. Others, meanwhile, said they had a sizable percentage of their portfolios in the physical metal--many of these respondents consider gold to be "insurance" in the case of a cataclysmic event or drastic currency devaluation. "Gold is a risk against monetary mismanagement. It's like an insurance policy, and less like an actual investment," said NDinLA

The most common themes heard from readers steadfastly in the "no" camp were that gold is difficult to value and long-term returns are not attractive. "How does one value it?" asked GoldenRetrieve. "My past review of gold/precious metals is that their long-term returns have been pretty poor," stated win1177.

What follows is a summary of the responses. To read the full thread and weigh in yourself, please click here

'I keep 1% of my portfolio in gold eagles in case the world goes "to hell in a handbag."'
Like JonR11, quoted above, many investors regard gold as a safe haven in chaotic economic times. The word "insurance" was mentioned by quite a few readers. In the event that the stock market is gripped by severe losses, these readers believe gold is likely to rise, thus having a protective effect on one's portfolio. In addition, some readers also stated that gold could effectively "insure" them in the event of currency devaluation. 

"We're a few years from retirement. Serious trouble in Middle East, Korean peninsula, etc. could send markets reeling at wrong time for near-retirees," said tom5tom. "In such instances gold is only asset likely to gain value. So 10% allocation to physical gold, which we would sell as needed, would provide income for several years until markets recover. We would not have to draw funds from depressed markets."

"I own some American gold Eagle coins, not so much as an 'investment' but as 'insurance,'" said vandy73. "[If] we came close to another Depression … I would still be able to buy bread. Or, if we ever had severe inflation, it would be better barter than currency in that it's a commodity. Hope I never have to use them. (<1% of total portfolio value)." 

Dennygal said: "… at some point the world could stop rolling over U.S. government bonds in which case the dollar could take a serious tumble. If you are an investor that is confident that the Federal Reserve and U.S. Treasury Department know what they are doing, then there is no need to consider owning gold. If you are not, then you need to find a way to hedge the risk of holding paper money."

"I invest in gold's less expensive sibling--silver. I buy on a quarterly or semiannual basis, no matter the cost per ounce. I buy solely as an insurance policy against a social or economic collapse. At least it would buy me some time until social order is restored, hopefully," said mrlessgovt.

'Gold is a store of value; cash is a medium of exchange.'
Some readers, like El Paso, believe that gold will retain its value over the very long term. In Jason Zweig's recent article in which he defends his case against owning gold, he concedes that gold has, in fact, preserved its purchasing power over very long periods. To illustrate, Zweig cites an observation in the CFA Institute's Financial Analysts Journal that the same quantity of gold that a Roman centurion earned annually under Emperor Augustus would roughly approximate one year's pay for a U.S. Army captain today.

"I am buying small amounts of gold bullion as a 'generational' investment, meaning to say, my descendants will inherit it. In the long run, I do not believe gold will lose its value," said Satish.

"Over multiple millennia, gold has performed fairly well as a store of value; while every currency has had a far inferior track record over the past decades since they became fiat," said chris33.

'Never have, and don't expect that I ever will.'
On the other hand, Juris2 was one of many readers who said they didn't have any sort of allocation to gold. For many, the intrinsic value of gold is too difficult if not impossible to determine, as it lacks cash flows. Many other readers in the "just say no" camp cited gold's low absolute return. (In the same Financial Analysts' Journal article Zweig referenced, gold's return in the context of the Roman's centurion's salary was compared with a theoretical investment compounding at just 1% per year over the same period: "Starting 2,000 years ago, in the year 12, one dollar compounding at just 1% a year turns into $439 million after 2,000 years. If the rate of return is increased to 1.62%, the ending value is $100 trillion--more than today's combined capitalization of world stock and bond markets.") 

"How does one value it? Is it expensive right now? No earnings, no supply/demand, no corporate culture, no real product or service. Its merits lie only in what it might have done in the recent past," said GoldenRetrieve.

"I don't have gold in my investment portfolio because I have no idea what drives pricing," said rllucky.

"Gold is extremely useful for making lovely jewelry. It cannot be beat for fine electronics. As an investment, I would prefer to buy a nice bridge somewhere," said FedEngineer, who also cited gold's low long-term absolute return compared with equities.

Chang said, "It doesn't grow, doesn't invent things or cure diseases, doesn't hire people, doesn't make profits or pay dividends. In fact it costs money to store. Its ups and downs are triggered by fear and instability, which doesn't form the basis of an investing plan."

"No ... I try to make investment decisions based on long term results of the various investment opportunities and then stick with them until given reason to do otherwise. When I look at the returns on gold versus the returns on the equity indexes, the results are not even close. When that changes, let me know ..." said ramseyd.

"No, long term gold has been terrible," said mckinm. "Also I can't time it and there are less correlated things to own as a hedge against stocks right now."

'For me, it's a diversifier'
Some respondents (such as Harryb) said that they have a long-term allocation to gold for portfolio diversification purposes. We recently examined gold's correlation to stocks (using the S&P 500 as a proxy) and found that it was, in fact, very low or negative over various periods. For some readers, this low correlation is compelling. 

"[Five percent] in physical gold ETFs, just for portfolio diversification. I need some small Investments in assets that zig when everything else is zagging to keep my own emotional reactions in check, even if it doesn't lead to higher long term returns. It helps me not become my own worst enemy," said Django.

JoAnnP38 said: "I have a 5% allocation to gold as a portfolio diversifier. I don't know what the long term prospects are, but it may offer a little protection against inflation. But primarily it's there because of its low-ish correlation with equities and bonds."

"I never have, but recently have been considering a small ride in SPDR Gold Shares (GLD) with the idea that it will likely zig when my stocks zag, thus providing me some capital to deploy in a downdraft without selling other stocks while they're down," said BcSwede

"I have been interested to invest in gold for some time because of its useful diversification feature, i.e. its very low correlation to the stock market," said williama22. "However I have never been able to get comfortable enough to pull the trigger."

'It's a casino.'
Finally, many investors said they have used the notoriously volatile metal to speculate. Reader ignatz adds, "I long ago gave up on the notion that 'investing' is anything more than speculation."

"Gold is my main portfolio 'trading vehicle', with the additional merit as a diversification tool (not an investment)," said Syclone. "I own [iShares Gold Trust (IAU)] and two gold miner ETFs as a set. Set point is 4% of my portfolio: When gold value raises to >5% of portfolio I sell some; when gold value decreases to <4% I buy back some. This has worked very well during the entire range of $700 per ounce to $1,900 per ounce; my trades have yielded over 8% per year since 2005."

EricTheRon13 said: "I invest in gold (as GLD) only when it is both above its 200-day moving average and also showing more momentum that other assets (between value stocks, growth stocks, long treasuries, short  treasuries, and gold). So right now I'm one third in GLD, but may not be after the first of the month. I don't think gold is a good 'buy-and-hold' investment for anyone."

"I usually don't try to time the market, but I did and got lucky with gold. I sold at $1,700 an ounce, at a huge profit, before it dropped to $1,100 or so. I bought more IAU, and it has appreciated more than stocks recently. It's just speculation, but it's not a serious part of my portfolio, probably about 1%," said ticotico.

Karen Wallace does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.