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All that Glitters - is it Gold?

Has anyone noticed how the price of an ounce of gold has continued to climb and climb?  Hard not to, considering how other markets (equities and bonds) have been much more volatile and varied.  But is this rise justified at all?  Should you be buying gold now? Ever since I got in the business in the early 90s', I've been told that gold is a good inflation hedge and that an ounce of gold, historically, is worth about the price of a good men's suit.  Anyone here pay $1,876 for a suit lately? Those that believe gold is a good hedge against inflation may want to rethink their position.  If we look back at the last gold "bubble", January 1980 saw gold trading at $850 an ounce, a rise of $700/oz over a 5 year period.  But then by June 1982, gold was trading down in the $300 range.  So what happened to inflation during that time?  In 1980, the year following the peak of gold prices, inflation was 13.5% followed by 10.3% and 6.2% the next two years.  But we just learned that instead of gold following suit, it was clobbered over that time frame.  Therefore, gold being a hedge during inflationary periods doesn't match the data during the early 80s.  You could possibly argue that gold was a leading indicator which I may entertain as plausible. 

However the argument that this is true in today's environment is rather obvious as interest rates cannot possibly go any lower and it doesn't take looking at the price of gold to figure that out. Gold itself works better as an inflation hedge when combined with the rest of the basket of commodities.  Take oil, lumber, pork bellies, and all the other things with which we fill our economic shopping cart and once our cart is full, the price of the items in that cart should be a much better hedge against inflation.  But owning commodities in a vacuum as a return/growth investment is not a good risk/return investment.  The price of this basket of goods swings widely while inflation averages in the 3-4% range historically.  You can buy other investments that produce that range of returns with much less volatility.  So why own commodities in a diversified portfolio?  The data generally supports that commodities as an asset class produce low correlations with other investments and can therefore mitigate the risk of the portfolio as a whole.* I remember several times throughout my career asking a client why they wanted to buy a particular investment and remember the response of "because it's going up."  Let me tell you, that is probably the worst reason I've ever heard for owning an investment.  I'd almost rather hear that the CEO has a nice haircut because at least it shows that the investor took the time to learn something about the investment they're considering other than it "went up yesterday." The memory of the tech bubble of the late 90's and 2000 is fading but I remember clients coming in and all they wanted was an Internet Fund.   I can't help but draw the comparison between them and today's gold buyers.  Folks, buying gold at this price is just pure speculation.  Please don't invest any more money than you can afford to lose. *French does not agree that commodities have a place in a diversified portfolio, however Gorton and Rouwenhorst take the other side of that argument.