20 Second Advisor: Should I invest in gold?

Investors often think of gold as a hedge against inflation. As Exhibit 1 shows, however, gold has been about 15 times more volatile than inflation. Over the period from January 1970 – December 2019, the annualized compound return for gold was 7.81% with a volatility of 19.24%. For comparison, the annual inflation rate has been 3.91% with a volatility of 1.29%.
Exhibit 1: Performance Statistics, January 1st, 1970 – December 31st, 2019

Clients often wonder whether an asset allocation to gold should be included as a part of a diversified portfolio. Keep in mind that gold’s only source of return is price appreciation caused by shifting supply and demand. This makes gold a speculative asset. If you put gold in a vault and wait a few decades, it will not produce anything, and its value will reflect the current market price. In fact, holding physical bullion may incur negative cash flows due to storage, insurance, and other costs.