We are ready to get some argumentative emails on this blog. You see, whenever someone even tries to say something negative about gold, the gold bugs and conspiracy theorists come out en masse. “How dare anyone say anything negative about the yellow metal, which will (soon) be the only currency in town, after governments print enough money to send us all into a inflationary-oblivion?”

We will grant that gold: (a) is a great store of value; (2) has gone up for 11 years in a row; (3) can protect your portfolio in inflation; (4) is a good asset to have in a portfolio.

However, most gold bugs never even consider the following about gold: (a) it pays no interest; (b) it actually costs you money to store; (c) it can and does go down (remember the 20-year bear market in gold? and (d) Just when you need it the most, it often disappoints—it didn’t exactly soar, for example, during the 2008 financial crisis (its liquidity worked against it, as it was one of the only assets investors could actually sell).

Gold is a great asset to own in a portfolio, don’t get us wrong. We just think that it needs to be within reason, say, maybe 15% of your portfolio (most advisors would say 5%, so that proves we actually like it as an asset a lot).

However, many investors go “all-in” on gold. These investors refuse to buy stocks, waiting for the hyperinflation payoff from gold.

Warren Buffett, in a recent Fortune Magazine column, put it this way: “Gold investors require an ever-expanding pool of buyers, who, in turn, are enticed because they believe will expand still further. Gold owners are NOT inspired by what the asset itself can produce—it will remain lifeless forever—but rather the belief that others will desire it even more avidly in the future”.

The way Warren puts it; the above makes gold sound like a bubble at best, and a Ponzi scheme at worst. Keep in mind also that he is, um, the second-richest guy in the world.

In Canada, we had to chuckle at a recent monthly letter from Venator Capital, headed-up by Brandon Austen. He visited a gold mine site recently, and came back with these comments. Note Venator doesn’t own much gold, and has still managed a 19% return so far this year.

“So off we went to the mine’s facilities where we were greeted by two massive "tumblers" that took already crushed rock and ground it into dust. The dust then went through a vat of cyanide to separate the gold from the ore, and then another vat of carbon solution to separate the gold from the cyanide. At this point the gold is ready to be poured into a brick the size of, well ... a brick.

Unfortunately, we didn't get to see an actual brick of gold being poured. As it turns out, miles of underground caverns, acres of clear cut forest, two massive rock tumblers, vats of chemicals, and hundreds of millions of invested dollars doesn't quite get you to one gold brick per day in an industry where if you can pull a marble sized amount of gold out of a house sized chunk of ore, you have a pretty decent grade mine.

The skeptic in me says this is an outrageous amount of effort for a near useless metal (from a practical standpoint) that, due to the advent of electronic asset storage, has outlived its usefulness in human society. Furthermore, after all is said and done, the gold will go from the pour to the Brinks truck and finally to a vault where it will be accounted for so other marginally-productive members of society (the financial services community) can trade derivatives on it until the end of history.

On the other hand, if we are willing to put this much capital and effort behind a process designed to put out three bricks worth of this shiny yellow metal per week, the resulting product must be very valuable to someone. After all, economics is, if nothing else, all about supply and demand; so who am I to argue? That I get more value out of my $700 I Pad than I would get out of an ounce of gold worth twice as much is a matter of personal preference I suppose.”

Keep these smart managers’ comments in in mind next time you are tempted to increase your gold holdings. Yes, it is valuable. Yes, gold can go up. It can diversify your portfolio and reduce risk. Like any asset, though, it is only good if someone else wants it in the future. Like life, maintain some balance in your portfolio.