Gold as Portfolio Insurance
Gold pays you nothing.
No interest. No dividend. No earnings. Put a bar in a vault and next year you have exactly one bar. Leave it a century and you still have one bar.
So why does anyone own it?
Here is the answer, and it is worth sitting with, because it turns out not to be about gold at all.
Every other financial asset you can name is somebody's promise to you. A bond is a government promising to pay. A stock is a company promising you a share of its profits. The money in your bank is a bank promising to give it back. Look closely at almost anything in a portfolio and you will find a promise, with a person or an institution on the other end of it.
Gold is not a promise. Gold is a thing.
And when people stop trusting promises, they want things.
That is the entire insurance argument. Nobody buys gold for what it earns, because we just established that it earns nothing. They buy it for the days when what everything else earns stops mattering.
Now, insurance has a premium, and this one does too. You just never get a bill for it. The cost is the return you gave up. Money sitting in gold is money not earning interest, and when rates are high, that giving-up gets expensive. Which is exactly why gold tends to struggle when safe bonds pay well. Nobody wants a rock that pays nothing when a treasury pays something.
When rates fall, the logic runs backwards, and gold gets its hearing again.
Two honest cautions before you go.
Gold can fall hard and stay down for years. Insurance does not mean never loses.
And it is not an income plan. If you need this money to pay you something while you hold it, gold is the wrong tool, and no amount of conviction about the dollar changes that.
Keep going
The Investing Explainers are written by Kanin D. Alldredge for The Currency Classroom, and they are free to read. CNS Pro adds a brief before every market open, his column, and the weekly and monthly letters.
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