Rules of the Game: Gold's Shortfalls

 | Jul 08, 2013 | 12:00 PM EDT
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I know I harped on the futility of treating gold as an investment just a couple weeks ago. But that column had barely hit the ether before I had a conversation with a friend who was adamant about keeping his gold position. He boasted that the underlying metal was up that day. The SPDR Gold Trust (GLD) advanced 1.7% on July 1, before leveling off and then eventually gapping down 2.2% Friday.

I understand that any investment -- or trade -- will have good days and bad days, so I'm actually just having a little fun with that particular example.

There is no shortage of gold enthusiasts who insist on the need to hold the yellow metal. I understand that it's a fun and exciting trade, and many take comfort in the simple notion that gold is an asset class separate from stocks and bonds. But the fact remains: Over time, stocks are a better investment than gold.

Let's reiterate some of the basics. Many of my clients are retired, and they want to stay retired. My retired clients generally are invested in portfolios with moderate or conservative risk exposure. These portfolios consist of stocks and bonds -- no speculative trades or gambles on an asset class that looks like a sophisticated alternative to plain vanilla.

Why would we put 10% or 20% of client investable assets in something that is speculative and doesn't even pay a dividend when it takes a tumble? That means gold actually costs money to hold in a portfolio.

It seems the allure of the trade, and the prospect of outsmarting the equity and fixed-income markets, holds even greater attraction than staying on a tried-and-true course.

Stocks have a global market cap of $35 trillion. Companies make money and deliver returns to shareholders. Gold bulls would counter, "But, some companies go out of business! Some lose money!" Yes, of course. That's part of capitalism. There are inevitably economic slowdowns. As we've seen in recent years, these slowdowns can be felt globally, not just regionally.

But the world economy overall is expanding. That bodes well for not only equities, but for corporate bonds. This flies in the face of worries that Barack Obama and Ben Bernanke are teaming up to destroy world economies. (And lest you shriek about my liberal leanings, I'll be completely transparent: I voted against Obama twice. But I'm not joining in the "end of the world" choruses.)

I know it's tempting to get caught in the weeds of what the Fed may or may not do. It's enchanting conversation at a dinner party, where anybody without a hard-and-fast opinion will look naïve. But it's one thing to banter with friends, quite another to base your investment philosophy (and gamble with your nest egg) on your prediction of economic events.

I'm snarking a bit. But I have to put it bluntly: Our clients don't speculate with their portfolios; they all have financial plans designed to withstand various economic cycles, market-moving news and even shifts in asset-class value.

I return to my main point. Stocks earn money. Bonds pay interest. Gold does neither. It's far more volatile than many investors understand.

Even if you believe the economy and/or the market is going to turn south, then own bonds. I recognize this is not popular these days, with so many believing the fixed income has permanently imploded. But it's still a good place to be, especially if your thesis is that equity markets will also tank. It's a proven antidote to a poor stock market, something gold cannot claim, over the long term.

For 400 years, gold has only maintained its value, at best. Stocks are the best insurance against loss of purchasing power. Gold is a fun trade. There's really no comparison.

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