There's gold in them thar hills … or is there??

Why is it that so many investors get into the game at the wrong time? With gold breaking an all-time high earlier this year, investors are flocking to this precious metal as part of their investment portfolio. Why?

The reasons touted to treat gold as an investment: it’s a good portfolio diversifier, it acts to smooth out investment volatility, and finally, it tends to be a good inflation hedge. True? Let's look at the long-term facts and see if we can come to a conclusion whether gold belongs in a doctor’s retirement portfolio.

This country came off of the gold standard in 1969 when gold was selling for $41 an ounce. Now nearly 40 years later, as it floats around $1,000 an ounce, it seems like a good investment. But let’s take a closer look. More importantly, gold rushed up in value from $41 an ounce to over $800 an ounce towards the end of 1980. If we look at the numbers from November 1980 to December 2003, gold had a compound negative return. That’s right—negative!

If you held gold as an investment for that 24-year period, you would have lost about 25% of your original investment. Not a good return at all. In 1997, I appeared on Fox on Money, which was at that time on the new Fox News Network, with George Milling-Stanley of the World Gold Council and we debated the value of gold as an investment. At that time it was in the middle of a 25-year slump. Many investors get bummed out when an investment goes negative for a month; would you still own an investment that had not turned positive in over 300 months?

Since that time, it's undeniable that gold has gone up, but why? I think that any rational person could conclude that there is a direct relationship between gold prices and the war in Iraq. Gold was still well below its 1980 prices as the war began, and did not give us real returns until the Iraq conflict extended well beyond “mission accomplished.” Can gold still go up? Maybe, but I believe that unless we stay in Iraq for the next 20 years we will not see anything at all like the 400% return over the past 8 years again. Also take this to heart—from November 1980 through February of 2008 gold as an investment returned 1/3 of the CPI, therefore any argument that it is an inflation hedge is basically moot.

Do I believe that all retirement portfolios need a good diversifier? Yes, while I see a broad basket of all commodities as a good play, just remember the developing nations, especially the BRIC nations (Brazil, Russia, India and China) are consuming raw goods faster than they can be produced. So commodities as a whole belong as part of a well diversified portfolio.

However, as far as gold alone is concerned, I will answer the same way I did in that 1997 debate. How much gold should you own? Whatever you want to wear.