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Why Gold Does Not Belong in Your Portfolio

Lawrence Meyers

What should investors do when it comes to gold? SPDR Gold Shares (NYSE:GLD) is the vehicle under which most investors are able to hold gold. The GLD ETF represents fractional, undivided beneficial ownership interests in a trust whose sole assets are gold bullion on and, from time to time, cash. So the GLD ETF is one step removed from actually holding gold in your own vault. The question is whether or not you should own the GLD ETF and, if so, under what parameters?

The Problem With Gold

The truth is that precious metals don’t really make for a very good long-term investment. Psychology plays a very big part in the price of gold at any particular moment, as well as demand for gold in various parts of industry.

Gold has traditionally been seen as a hedge against inflation. The inflation-adjusted price of gold was $2,200 per ounce in 1979 and it fell to just under $400/ounce in 2000. So, I suppose you could say it was a hedge against inflation.

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However, the sad truth is that the price of gold went nowhere from 1915 to 1975. One might even argue that it went nowhere all the way through 2005. I suppose it’s all well and good that, adjusting for inflation, gold held its value for almost an entire century. The problem is that nobody holds gold buillon for 90 years. As a long-term investment, then, the GLD ETF is not going to deliver growth.

That is the big difference between precious metals and stocks. Over time the stock market has a positive bias. Going back to the stock market’s earliest days, and tracking it to today, the markets have obviously gone significantly higher. That is because stock prices tend to follow earnings. Earnings tend to rise over time because economies tend to grow over time. Economies tend to grow over time because, as opposed to what misinformed ideological wonks want you to believe, wealth is in fact created from nothing. Stocks therefore have a positive expectation over time. A Gold ETF does not. And while were talking about that, gambling at the casino has a negative expectation over time. That’s why you want to invest in casino stocks rather than play casino games.

The Argument for Gold

So does GLD have any place in your portfolio?

I’m sure readers who know about my fondness for non-correlated investments, meaning investments that do not track with the overall market over time, would think that precious metals do have a place in a long-term diversified portfolio. In point of fact, my investment advisory newsletter, The Liberty Portfolio, does not have and does not intend to have any kind of precious metal holdings. That’s because the point of non-correlated investments, and The Liberty Portfolio, is to reduce overall volatility in the portfolio. Gold and precious metals tend to have a great deal of volatility.

The way to play gold, in my opinion, is to trade it. But you cannot just trade willy-nilly. Technical analysis is your friend when it comes to trading gold, but because psychological sentiment is all over the place, you will frequently find that technical analysis is actually very little help.

The only real technical analysis that is going to help you is when gold is trading at extreme valuations on either end. If gold flies back up over $1,800/ounce, that would be a time to short. If gold falls below $1000, that’s fairly likely an opportunity to go long. In both cases, however, I would set stop losses of 7 to 10%.

Otherwise, I would avoid GLD altogether.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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