There was an interesting article in today's (7th November 2007) Australian newspaper.
It looked at the collapse of a gold trading scheme - the Gold Link Income Plus fund. The fund had traded in gold derivatives, and the article reported that the trading had taken a position on gold prices falling. Of course, gold prices have surged lately and the fund lost much of the money.
The key person behind the fund - Mr Kovac's - was paid fees for managing the fund to a private company. Over the last 16 months he was paid $9.7 million while the fund lost more than $100 million.
Investors are likely to lose around 80 cents for every dollar that they have invested.
A question that this begs is, does gold have a place in investment portfolios?
My opinion is that it does not.
Firstly, I continue to focus on investments that produce an ongoing stream of real earnings for investors - whether they be cash assets, fixed interest assets, real estate assets or shares (part ownership of a company).
Secondly, the historical returns from gold have not been that good. Over the past 50 years (1957 to 2007) gold has risen in value from US$43 to US$808 (source Global Financial Data). Sound impressive? That's a return of spot on 6% a year. Remember there are no income, interest, rent or dividends - all an investor receives is the increase in value of 6% a year. And that is a terrible return over that period of time - particularly given the volatility of gold prices. Not so long ago gold was trading at less than $300.
For all the arguments about gold I really can't see any justification for its place in a portfolio.