I found this quote by Howard Marks rather appropriate given the fact that gold is getting hammered in recent weeks and it’s only fair that I pile on. In a February 2nd interview Marks said:
“There is nothing intelligent to be said about gold. Nobody can tell you the right price for an ounce of gold. People will tell you it should go up or go down. To make any intelligent statements about investments you have to know what the right price is. You can’t do that with an asset like gold, which doesn’t produce any cash flow. So you can buy it out of superstition or ignore it because you are an atheist but you cannot buy it with an analytical foundation.”
Gold is a hedge. Insurance. Not a core piece of a portfolio and certainly not something you should construct your monetary life around. I am probably less pessimistic about the role of gold in a portfolio than Marks is, but I do think this is a crucial understanding. Assets without cash flows cannot be the centerpiece of a portfolio not only because they are difficult to value, but because they cannot be relied upon to protect one’s portfolio against the risk of permanent loss.
At the end of the day, the primary goal of a savings portfolio is allocating that savings in a manner that protects against the risk of permanent loss and the loss of purchasing power in a manner that is consistent with generating reasonable risk adjusted returns. See here for more on “the myth of investing” and proper portfolio construction.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.