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Is Gold a Good Investment?

Seth Jentner07/23/2013

You’ve probably heard a lot of advertisements encouraging people to invest in gold. But is gold really a good investment?

Some investors continue to ask about gold as an investment holding as they eyed the yellow metal’s rise into record territory in 2011 and saw it largely hold its value through 2012. We acknowledge it can be very tempting to purchase gold during recent years.

But to us, gold, simply, is not a prudent investment on its own. It is a fad and a place to hide when things are scary. We see it as the Beanie Babies of the investment world. Everyone is piling in, expecting someone else to buy them out at a higher price. Gold produces no real value, so its price is dependent solely on new buyers. Once they stop coming in, the price can fall sharply, as it has in the first half of 2013.

We find what Warren Buffett recently said about gold as an investment interesting:

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all—not some—of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

We would rather own shares in companies that create things and add value, rather than something dependent on the whims of buyers. That is why we believe the majority of an investment portfolio should be invested in companies, in both bonds and stocks.

Do we think commodities such as gold can play a role in a diversified investment portfolio? We sure do. But we prefer investing in a commodities index fund that attempts to track a diversified commodities index total return. This can include commodity returns for aluminum, crude oil, copper, corn, gasoline, gold, heating oil, natural gas, silver, soybeans, sugar, wheat and zinc.

By strategically placing commodities as an asset class in a diversified portfolio and by disciplining yourself to rebalance each asset-class fund once it is either over-weighted or under-weighted, you are able to sell when the price is relatively high and buy when the price is relatively low. And this is done without trying to predict what the future price will be.

Be smart. Diversify and rebalance regularly. This enables the prudent investor to chart a successful investment experience through challenging as well as opportunistic times.

For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s newest white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.