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.
Learning objective: After this lesson, you can assess what role gold can realistically play in a portfolio.
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.
For euro-based investors there's an extra source of swings: gold is traded internationally in US dollars, so the price you see in euros also depends on the euro-dollar exchange rate. If the dollar gold price rises five percent but the euro also strengthens five percent against the dollar, you're left with roughly nothing once you convert back. This currency component adds to gold's already substantial volatility, in both directions. Sometimes it offsets part of the dollar move, sometimes it amplifies it.
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 allocation in your brokerage account 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 investors outside the dollar zone, there's a second price component at work: the internationally dollar-quoted gold price gets distorted further by the exchange rate between your own currency and the dollar. This currency component can noticeably decouple the volatility of a euro-denominated gold position from the volatility of the dollar gold price, for better or worse.
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.
Check your understanding
Sources and further reading
- The World Gold Council explains the opportunity-cost mechanism: falling bond yields make gold, a non-yielding asset, more attractive, while rising real interest rates tend to weigh on its price. View source ↗
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