As I walked down my street recently, one of my neighbours stopped me to ask about investing in gold. He quite eloquently rhymed off the standard case for gold these days. Specifically, he cited the U.S. dollar’s decline, now in its ninth year, and high debt levels of governments around the globe. Of course, the tripling in the price of gold in the past decade makes it a comfortable choice.

But is gold all it’s cracked up to be? The three reasons traditionally cited for investing in gold need a hard look — and there’s at least one question worth posing before betting the farm on the yellow metal.

> Inflation Protection. There is widespread belief that gold offers protection from inflation. Data on gold prices date back to 1871. However, gold’s price was largely fixed during the vast majority of that history. It wasn’t until about 1968 that the price of gold was partly free-floating, and not until 1970 that it was fully free-floating.

Since 1970, gold has generally delivered a total return of about 4% a year in excess of inflation. This solid figure masks a very volatile history. Using monthend closing prices, gold failed to keep pace with inflation in 50%-60% of rolling five-, 10- and 20-year periods. To have enjoyed gold’s inflation protection, then, required either good timing or an awful lot of patience.

> Portfolio Diversifier. A non-correlated asset can have a positive impact on an investment portfolio when that asset’s return is above zero while displaying a price pattern that is sufficiently unlike that of the rest of the portfolio. Gold has delivered high-single-digit annualized returns and has seen a correlation of about zero with U.S. stocks during its free-floating price history. Accordingly, it has delivered on its promise of effective portfolio diversification.

To remove the bias of recent years, I re-ran the analysis to exclude the huge run since the turn of the century. Gold’s portfolio diversifying properties were less attractive, but generally remained intact.

> Catastrophe Insur-ance. In times of turmoil, gold has generally held up well. There have been five U.S. bear stock markets during gold’s free-floating price history. Gold lost slightly less than half of the U.S. stock market’s 31% loss in the first of those bear markets (18 months through mid-1970), but posted a range of gains in the other four. A strong argument can be made that gold hasn’t seen a true catastrophic test.

The closest thing to catastrophe during gold’s free-floating history was the 2008 financial crisis. As the crisis deepened, however, the US$’s ascent caused gold to lose more than 25% of its value. Gold didn’t start rising again until the worst of the crisis had passed. Although the precious metal has done very well overall, so have stocks.

What if the worst is yet to come? There are many ways to buy gold, with more gold dealers and financial instruments (e.g., mutual and exchange-traded funds) seemingly popping up all the time. But if a real catastrophe hits, I’m not sure why gold bugs are so confident that the gold sitting in a vault on their behalf won’t be confiscated by governments or banks. Sure, that’s a far-fetched notion; but so is the idea of the complete loss of confidence in currencies across the developed world.

The basic question worth asking concerns the intrinsic value of gold. Even if you are convinced of the eventual fall of paper currencies around the globe, why not look to other precious metals as safe havens? What’s so special about gold? Does gold have any intrinsic value?

Any asset’s value is a function of its future after-tax cash flows. But gold has no cash flow.

So, the case for buying gold today is based on fear and currency collapse — although even those scenarios are no guarantees for attractive returns. I have a hard time making a case for gold as anything more than a long-term portfolio diversifier. IE

Dan Hallett, CFA, CFP, is director, asset management, with Oakville-based HighView Financial Group, which designs portfolio solutions for advisors, affluent families and institutions.