Brett Arends of Wall St Journal on Gold

This link is from WSJ 5/27/2010.

http://online.wsj.com/article/SB10001424052748704032704575268462477689760.html?mod=rss_Money

Gold investing expanded

Roubini - renowned economist, on gold: "If you're really worried about inflation rising, buy spam. You can eat spam, you can't eat gold."

People tend to rush to buy gold when they fear that their currency's purchasing power will be diminished through a systemic collapse or inflation.

But be careful if you are buying gold in order to preserve wealth or as a an investment. Gold has a poor historical return. It also does not pay dividends or interest. Its growth is based solely on speculation. One needs to time when to buy and sell in order to profit.

A review of the chart above shows that gold is priced at a historically high price. If one buys now, how high will it go? Also beware - when it comes back down, how long before it gets back to todays prices. In addition, it will pay no interest and potentially cost you money for safe keeping. Finally, you can see that over the last two hundred years gold has not even outperformed short term US Treasury Bills.

If you are nervous about inflation devaluing your dollars. Purchase US government Treasury Inflated Protected Securities (TIPS). They are issued by the US Treasury and adjust with inflation.

I expressed Roubini's sentiment in a slightly different manner: I have said if the whole system collapses and your treasury securities and bank deposits collapse, what good will gold do you? What could you buy when the grocery stores have been looted? The canned goods owner may be the wealthy one.

In Cormac McCarthy's post apocolypotic book "The Road" about a father and son who are wondering the scorched, desolate remains of the American West; there is a scene where the man and his son find canned food and a box of gold in a fall-out shelter. The man leaves the gold.

Any way you slice it: gold, government bonds or stocks, there is the risk of loss. Historically, bonds and stocks have been a better investment.

There can be a place for some gold and other commodities in a diversified portfolio, I will discuss that in a future post.