Gold is usually seen as a hedge against inflation, or 'purchasing power risk'. In theory the precious metal holds its value quite well over time, which allows investors to maintain the value of their wealth when rampant inflation or money printing might erode the purchasing power of their dollars.
Another common perception is that gold is a safe haven investment that offers protection from volatility – the value of gold soared during the GFC.
So with the latest developments in the 'Grexit' saga sending shockwaves through the market, it is understandable why investors might seek the safety of gold. Shares in Australian miners Northern Star Resources Ltd (ASX: NST), EVOLUTION FPO (ASX: EVN), and Newcrest Mining Limited (ASX: NCM) are all up more than 2% so far in today's trade.
Unfortunately transitioning into gold is not a reliable hedge against volatility or inflation because both of the above assumptions overlook the fact that gold is a widely traded commodity vulnerable to supply, demand, and speculation like any other.
An investment in gold also has an 'opportunity cost' in that investors miss the earnings that come with traditional investments like stocks or bonds. In the short term that may be OK, but over the long term gold's lack of payments and compounding can make a major dent in your investment.
For a simple comparison, gold today is worth roughly 2.5x its value back when the Australian Securities Exchange (ASX) opened in 1987. The ASX is worth 11x its 1987 value, and that's excluding all the dividends that have been paid in that time.
No, gold is not a sensible long-term investment, unless it's only a small part of your overall portfolio. And when it comes to gold miners, well, they're a slave to supply and demand as much as any commodity producer.
All three of the above miners are nicely profitable at today's prices, and Greek jitters and a possible market crash could well send gold to US$1,700 per ounce, giving shareholders a bumper few years.
Prices that high will attract competition, more supply will come online, prices will come down, shares will fall, and investors will be back where they started. That's before considering the alternative case in which the Greek scenario is resolved, the global economy recovers, and interest rates rise reducing much of the appeal (and value) of gold.
No, gold is not a sensible long-term investment.
I'm putting my money in reliable, dividend-paying stocks with defensive earnings, and you should too.
