Column: Gold lags as a good financial and inflation hedge

As a woman, I love gold, but gold is essentially nothing more than another commodity. It is wonderful for jewelry and making some electronic components but disastrous as an investment option.

Gold shone as a store of value in the high inflation '70s and early '80s. When inflation zoomed, investors sought real assets such as gold, art and real estate. After peaking in the early '80s at more than $800 an ounce, the precious metal has been falling steadily. Gold futures recently tumbled to a near 18-year-low. New, innovative financial instruments have made the fall worse, leaving gold behind as a good financial and inflation hedge.

Much of the damage gold has sustained in the last several years has come from government central banks. Those institutions, which hold about 30 percent of the world's mined gold, have increasingly looked for ways to get rid of their gold. Central banks today prefer to put funds in financial instruments (such as U.S. Treasury bills) which, unlike gold, pay interest to the holder.

Additional uncertainty stems from the recent opening of the unified European Central Bank. If the bank takes in less than the separate European banks presently hold in reserves, inventory from bank vaults could flood the market, driving gold prices even lower. Recent estimates place the size of the industrial countries' central bank stockpile at 23,000 metric tons. (The annual new supply of gold to the markets is about 3,000.)

While demand for gold continues to fall, investors should take note that the supply of gold, unlike most commodities, is rarely consumed but is merely stored. The result is that the raw metal can be easily turned back into the market by those who hold it. This fact limits gold's upside potential. Gold pays no dividends, is expensive to store and insure and has a miserable track record as an investment alternative.

Investors, looking for an inflation hedge, should take a cue from the central banks and invest the appropriate percent in U.S. treasuries or a similar investment. If inflation comes back, the return on money market accounts will rise as short-term interest rates increase, offsetting some of the loss on financial assets such as stocks and bonds.

Are gold prices a better investment than gold itself? Not really. Falling gold prices have made it a struggle for gold companies to grow earnings. In addition, gold companies have the problem of trying to replace depleted reserves as their existing gold is mined out of the ground. Companies that fail in this quest risk mining themselves out of business.

Perhaps because gold was for centuries the raw material from which money was made, it retained a monetary aura into the 20th century. But in today's world, precious metal is better suited around my neck than it is in an investment portfolio. The price of gold today, adjusted for inflation, is lower than it was in 1863. Could someone tell that to the jewelry stores?

If you would like to learn more about inflation hedges, contact me at my office, 882-6070.

Carol Perry, a Northern Nevada resident since 1983, represents the firm of Edward Jones Investments in Carson City.


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