Jim'sMoneyBlog

Financial Opinion and Insights

Is Gold Really A “Store of Value”?

IFG BlogJim Lorenzen, CFP®, AIF®

It seems in every recession, the same two phenomena inevitably occurs:  Someone you know comes to you with a multi-level opportunity, and gold commercials begin filling the airwaves.

Those old enough to remember may recall that while the stock market struggled during the 1970s, a fellow named Howard Ruff hit the airwaves touting gold.  Not much has changed.  But, when you consider that money, even gold, is worth only whatever it will buy, how has gold really performed?

The line you see most often in commercials represents the nominal (dollar) value of gold – nominal value of money tells you how many pictures of Presidents you have in your wallet – but, what most investors really care about the ‘real’ return – real value tells you just how much all those pictures will actually buy – the return after inflation. 

Are the commercials right?  Is gold really a store of value?  To get some answers, I asked the folks at JP Morgan Asset Management to tell us what they’ve learned.  They sent me a chart.

Indeed, a picture is worth a thousand words.  It appears gold’s real return is far less than advertised by the gold retailers, who have to cover their acquisition, distribution, and television advertising costs.   In fact, gold’s real return is actually down since January, 1980; and like all indexes, these figures don’t account for the extra expenses incurred by investors associated with either the purchase or the custody of the asset.

Does this mean investors should avoid gold as part of their portfolio?  Probably not.  Gold is only one component of the commodities basket which most investors would be wise to consider.  Just how and to what extent is a good subject for individual discussion during your planning and portfolio reviews.

Hmmm.  Maybe commercials aren’t the best source of information, ya think?

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

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Written by Jim Lorenzen, CFP®, AIF®

June 5, 2012 at 8:00 am