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Does gold really glitter?

This past week, the financial markets saw renewed volatility with the main culprit supposedly being weakness in commodity prices. Although there are many types of commodities, one in particular gets the spotlight - gold.

I have to admit, gold makes me scratch my head. I struggle with it.

Gold does not pay a dividend or interest. Unlike other metals, gold does not have a meaningful industrial use. Although you can make some earrings out of gold, I wouldn't exactly consider that to be a necessity. You can't take gold to H-E-B to buy groceries and you can't take it to Speedy Stop to fill your tank.

Making matters worse, the owner of gold has to pay up to secure and store it, as well as to verify its purity. And, if we truly have a nuclear type of event, I am not convinced gold is going to do you much good - other than to serve as a paperweight.

Recently, Warren Buffett was asked about investing in gold. His response was typically logical.

"For all the gold that has ever been mined, you could buy every acre of farmland in the United States and 10 companies the size of Exxon Mobil, and you'd still have $1 trillion left over," Buffet said. "Would you rather have a shiny cube of metal, 67 feet on a side or trillions of dollars of assets that actually produce wealth?"

Buffett went on to say that he sees gold primarily as a bet on fear. If investors are more afraid in a year than they are today, then you make money. If they aren't, then you lose money. It certainly seems there are plenty of things to be fearful of these days.

Gold is referred to as a "faith-based metal" - meaning it has value simply because we have faith that it has value.

Another way to look at gold might be to compare it to something like the Mona Lisa. In its raw components, the Mona Lisa is worth mere pennies. However, in its current form there are plenty of people worldwide who would wait in line to pay millions for this painting. In this case, beauty and value are truly in the eye of the beholder.

For all of gold's shortcomings, it is often viewed as a universal representation of value. Unlike paper currency, a government cannot simply print more gold.

As governments devalue their currency, gold, therefore, continues to be a popular strategy to hedge this currency problem.

Many also see gold as a hedge against inflation. However, before taking this as the gospel truth, you might want to slice and dice the numbers.

In general, during the past five, 10 and 20 years, you'll find that gold has consistently underperformed oil, wheat, corn, lumber, copper and many other commodities. As an inflation hedge, gold certainly has a mixed track record.

In fact, the current price of gold - about $1,500 per ounce - will actually have to break $2,000 per ounce to eclipse its 1980 peak price when adjusted for inflation.

In the world we live in today, there are many things that cause us fear. As such, a variety of investors will continue to look to gold as a form of insurance against the "fear factor." Understanding this, no matter how useful an item may be, you shouldn't overpay.

As such, before you pile your entire net worth into the shiny metal, it is wise to consider Buffett's words and logic.

Dave Sather is a Victoria Certified Financial Planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.

Author: Dave Sather

Originally published Tuesday, May 17, 2011

Victoria Advocate