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Gold-Hedge or Investment?

Gold is often touted as an investment by ads on the television or radio, usually by companies that do little else but sell gold! Gold and other precious metals do have some value as a store of investment value and inflation hedge. But the value of gold as a long-term investment in your portfolio is marginal at best. Ibbotson Associates recently noted that the average annual return of gold since 1980 was 2.6%, while the average annual return on stocks was 11.2%-even after last year’s disaster.

We agree that gold offers some hedge against a weak dollar and inflation, and some of our fund managers use it short-term for tactical purposes. But we do not view it as a strategic long-term asset allocation. We think the long-term decline in the dollar is best hedged against through investment in foreign assets and in stocks that benefit from stronger commodity prices, including gold. Emerging market stocks and bonds have benefited from these trends in recent years, and have strong long-term growth prospects as well. Academic research also suggests investments in gold mining stocks offer better long-term returns than direct investment in gold.

The reasons for investing in gold are not compelling in the short-term either, the dollar is showing signs of a short-term rally, and inflation is still historically low, indicating little need for immediate inflation protection. The pitch for gold sounds good-but dig a little deeper and you find low long-term returns, higher volatility, and no dividends at all. No thanks.

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