The question most often asked of gold bulls is, “At what price will you take your profits?” It is a question that betrays a lack of understanding about why anyone should own gold. Nevertheless, the simple answer must be, “When paper money stops losing its value”. This response should alert anyone who asks this question to the idea that owning fiat cash is the speculative position, not ownership of precious metals.
This sums up the problem. Instead of gold, people commonly think of paper money as the only medium of exchange and as a store of value; cash is after all their unit of account. They see the gold price rising when they should be seeing the value of paper money falling. Because cash is everyone’s unit of account it is wrongly seen as the ultimate risk-free asset. This is also the fund manager’s approach to investment: his investment returns are calculated in paper money, so he cannot account for a superior class of asset. He is also taught to spread investment risk across a range of inferior asset classes to enhance returns. Therefore the investment manager wrongly assumes that precious metals is one of those inferior asset classes. All modern investment management works on these assumptions.
This helps explains why managed portfolios today have very little exposure to precious metals, but there are other reasons. Investment funds in total have grown rapidly since the 1970s on the back of money and credit creation. This monetary expansion has fuelled both new funds for investment as well as asset prices generally, while gold and related investments became unfashionable in gold’s twenty year bear market between 1980 and 2000. The combination of these two factors reduced precious metals exposure in managed portfolios to very low levels. Gold was therefore ignored as an asset class when modern portfolio theory evolved in the 1990s, and is simply not considered by the current generation of fund managers.
Source Finance And Economics