Tuesday’s National Post reported that the price of gold may rise on news that Greece’s credit ratings have been cut by a number of agencies. There are concerns in that country of a developing sovereign debt crisis. The Greeks’ troubles aside, the story illustrates a fundamental belief about investing in gold: it’s a good bet in volatile times. (Its valuation often runs opposite to that of the U.S. dollar too. When investors lose faith in the greenback, many turn to gold for security.)

So the price of gold can swing wildly. In the last 10 years, gold has risen better than 175% in value. It closed yesterday at $1,164.35.

Jamie Hyndman, director of marketing at Mawer Investment Management Ltd. has posted an excellent piece at mawer.com called Gold – Just a Shiny Yellow Metal? Hyndman and I spoke earlier this week. He shared three solid reasons not to invest in gold.

1. Gold is volatile. The price of gold is driven by a complex web of global political and economic affairs. That web is virtually impossible to predict. “There can be very long periods of time when something like gold can do well. It can last anywhere from a year to a decade or more,” said Hyndman. “But the problem ultimately is that you have to trade. You have to know when to get in and when to get out … Trading something like that depends largely on macroeconomic forces like the economy, politics and all kinds of other things which we think are unknowable. To be able to trade effectively, you have to understand all those drivers.”
2. Gold doesn’t offer compound interest. “The quintessential thing that grows long-term returns is the effect of compounding,” said Hyndman. “Dividends from equities and coupons from bonds have that, and hard assets like gold don’t have that.”
3. Gold doesn’t create value the way a stock does. “Companies have the ability to grow, to enter new markets, to create new products, new services, to enter new geographies. All those things are possible with a great company.” In other words, gold just sits there.

Hyndman explained that an alternative way to gain exposure to gold is by investing in gold mining companies, which at least offer the benefits of an investment in human capital. With research, an investor can spot the sector’s best management teams, the best technology and so forth – advantages that can lead to superior results. But, across the board, gold mining companies “seem to be perpetually overvalued,” he warned. “The valuation of gold miners is at stratospheric levels. We’re finding them in the 20-, 25- to 30-times earning range which is way out of our comfort zone.”