Is Gold a Viable Investment for Retirement Portfolios?

Gold has recently hit new all-time highs, capturing headlines and sparking discussions among investors about its place in a diversified investment portfolio.

This blog explores whether gold should be part of asset allocation for an investment portfolio in retirement.

Let's start by stating our bias: at Strategic Wealth Partners, our financial planning and investment management philosophy is firmly based on academic research. We strive to deliver optimal investment solutions by maintaining a globally-diversified portfolio of low-cost index funds. Our approach involves minimising trading to keep costs low. According to our review of the academic literature, the long-term return potential of gold and other commodities does not support their inclusion in our portfolios, primarily due to their lack of cash flow generation.

Gold's Performance and Market Impact

Historically, gold has demonstrated strong performance in short bursts. However, these periods of high returns are typically short-lived and followed by significant drops, as seen after the 2020 rally. Moreover, the future performance of gold is unpredictable and often swayed by short-term market trends and media attention.

Investing in gold presents considerable challenges. Many investors opt for ETFs like 'GLD', which rely heavily on the trust that fund managers and custodians actually possess the gold they claim—an assertion difficult to verify. Historical instances of fraud, such as gold bars filled with tungsten, undermine this trust further. Moreover, the market is overwhelmed with 'paper' claims on physical gold, potentially valued at $200-$300 trillion, starkly disproportionate to the actual $10-15 trillion value of above-ground gold reserves. This discrepancy suggests that real ownership of gold for most investors might merely be an illusion, exacerbated by the logistical and financial impracticalities of securing physical gold, which only a few, like central banks or wealthy individuals managing physical gold bars and coins, can afford.

While physical ownership of gold reduces some risks, it requires costly security measures, making it impractical for most investors. Additionally, the value of gold faces potential depreciation due to technological advances that could make extraction from previously inaccessible sources viable. For instance, an estimated 20 million tonnes of gold are in the oceans, vastly more than what has been mined on land. While currently inaccessible, emerging technologies may soon make economical extraction possible, significantly impacting gold's value. Similar potential exists with asteroid-based gold, which could further influence market dynamics and devalue gold.

Final Thoughts

Considering these factors and the current global economic conditions, gold does not currently fit into our retirement planning portfolios. As always, we continuously assess a wide range of asset classes and remain open to revising our investment strategies in response to new developments and global economic shifts.

For a more detailed discussion on this topic, please feel free to contact us. Our team are always available to answer your questions and to help you with any of your financial planning needs. Here’s what we offer: A cup of coffee… and a second opinion.

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