Gold and precious metals
Gold generates no income and simply hopes for a higher price. It has historically preserved purchasing power over very long stretches, but with decades-long phases of no real return.
A company earns a profit, a bond pays interest, an apartment brings in rent. Gold does none of that. It just sits there. Your gain can only come from someone else paying more for it later.
Still, gold has a long history as a store of value. It's scarce, indestructible, accepted worldwide, and answers to no government. In crises where trust in currencies erodes, it often rises.
The catch is what happens in between. There have been stretches of twenty years and more where gold lost significant real value. Anyone who bought in 1980 had to wait a very long time.
Practically: physical gold costs a premium on purchase plus storage, but carries no counterparty risk. A common portfolio allocation sits at five to ten percent, meant as insurance, not as a source of return.
Lacking a cash-flow stream, gold can't be valued via present value. Its price forms from jewelry demand, industrial use, central bank purchases, and investment demand, with the latter strongly dependent on real interest rates. As real rates rise, the opportunity cost of holding a non-yielding asset rises too, which tends to weigh on the price.
In a portfolio context, its actual contribution comes from its correlation to stocks. That correlation is low on average over the long run and negative during individual crisis periods, which is the basis for its diversification benefit. It's also unstable: in liquidity crises, gold gets sold too, since it's among the easily sellable positions.
For implementation, a distinction is needed between physical ownership, collateralized certificates with a delivery claim, and futures contracts. Physical gold carries storage and insurance costs plus a buy-sell spread that's substantial for small denominations. Securities-based solutions reduce these costs but introduce issuer or custody risk depending on their structure.
Summary
- Gold generates nothing; its price depends purely on demand.
- It can lose real value for decades at a stretch.
- Its portfolio value lies in low correlation, not in return.
Did you get it?
Why can't gold be valued like a stock?
Because there's no cash-flow stream from which a present value could be calculated.
How do rising real interest rates affect the gold price?
They raise the opportunity cost of holding it and tend to weigh on the price.
Where does gold's portfolio benefit come from?
From its low, sometimes negative correlation to stocks, not from an expected return.
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