Gold is the ultimate insurance policy to protect against the ongoing decline of the dollar.

What’s up with all of the schlock adds on TV exhorting you to buy gold? Where were they 10 years ago when gold was still languishing at under $300 per ounce?

Who knows, but they sure are out in force now. There’s even a billboard on Pinhook Road with a Capt. Jack Sparrow-like pirate inviting you to visit his “Gold Xchange” emporium (where is Jr. Lagneaux’s “King of” everything crown when you need it?). 

You might be thinking the hype has gone too far and wonder if owning gold is really a good idea.

The answer to that question is an emphatic yes.


But why? You certainly can’t eat gold and it doesn’t produce income. In fact, it doesn’t do a thing except sit there. And if you own it in physical form, you have the inconvenience of storing and protecting it.

So what’s to like? For a long-term, diversified investor, a lot.

You see, gold is the ultimate insurance policy to protect against the ongoing decline of the dollar (what else would you expect when new dollars can be created out of thin air by a fiat decree, as has been the case for some time now?). 

Want to know how much our U.S. buck has been devalued over the years?

Well, if a shopper were magically transported from the year 1900 to today, the $100 bill that he had in his wallet in 1900 would now be worth only $3.64. That is, $100 today would have the purchasing power that $3.64 had in 1900. That’s a 96.4 percent decrease in buying power.

Current dollars are virtually worthless compared to what a dollar bought in 1900.

But gold’s value, on the other hand, has endured. That’s because it can’t be printed, created out of thin air or manipulated. There’s a reason why gold sold for under $100 per ounce 40 years ago and why gold sells for roughly $1,700 per ounce today.

The value of gold in reality hasn’t budged as much as the buying power of the dollars in your wallet has declined. And yes, while there are other factors as well that help explain gold’s higher price today, the dollar’s devaluation over the years is a huge culprit. Gold is the ultimate insurance policy to protect you from this hidden (devaluation) tax on your wealth.

In the spirit of being fully diversified, it also turns out that gold has been a terrific addition to an investment portfolio over the last 40 years, reducing volatility and increasing return for long-term investors.

If you started with $100,000 in 1972 and invested in a conventional portfolio (60 percent stocks and 40 percent bonds) you’d have had roughly $4.37 million in 2011. But by adding a bit of gold to that portfolio (50 percent stocks, 35 percent bonds and 15 percent gold), that same investment would have grown to $5.26 million.

That’s roughly an extra million dollars, nearly 20 percent more. And it made for a less volatile ride along the way.

A caveat: while gold has been rising in recent years, it is not necessarily a forgone conclusion that such a strong upward climb will continue unabated over the very near term. It might, or it might not.

In fact, during the golden era for stocks of the 1980s and 1990s, gold was very much out of favor. And that will surely happen again.

But so what? In the years past where gold has declined, stocks or bonds have often risen (gold can move counter-cyclically to stocks and bonds). So your total portfolio value forged ahead (that’s why you would want to own gold as a part of a portfolio, not all of the portfolio). By rebalancing gold’s place in a diversified portfolio annually, an individual with a longer-term time horizon (beyond say, five years) can easily make gold’s price volatility an asset. You know – buy low, sell high. 

So don’t automatically be turned off by the current barrage of gold advertisements you see running on TV. The record’s clear — things go better with gold.

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