Steadfast Finances10 Reasons Why Investing in Gold is a Bad Idea

10 Reasons Why Investing in Gold is a Bad Idea

Filed in Commodities , Investing 101 , Investor Psychology 56 comments

black sheep standing out from the herd (pasotraspaso)

The majority of the investing world, like countless times throughout history, has once again found itself spellbound by gold’s luster and I’m here to tell you why I think gold is a bad investment.

I’m feeling another black sheep moment coming on.

Truth is, gold has had a heck of a run. Over the last 5 years, gold has outperformed the S&P index by ~140%. It has successfully breached the $1000 psychological resistance level, and gold bulls are prognosticating that gold can go as high as $2000, maybe even $3000, if inflation slams the U.S. Dollar.

While these are impressive achievements and even more impressive projections, what concerns me is the ubiquitous bullish mentality and everyone trying to convince us that the rally can’t be stopped. When this occurs, you can bet with a reasonable degree of certainty that the gold bubble (if it exists) is about to burst.

10 Reasons Why Gold is a Bad Investment

  1. Gold has become front page news. Every time I flip on CNBC or click to mainstream financial website, I have a better than average chance of being reminded gold is once again at all time highs. Anytime an investment — gold, housing, oil, or even tulips — has become front page news, the end is likely drawing nigh and the smart money is slowly exiting the playing field. Remember, the smart money sells when the news is at its best.
  2. Gold Bubble? Anyone? Anyone? Remember that little thing called an oil bubble? How about the housing bubble? Maybe a stock market bubble? When any type of investment has substantially appreciated over a small time frame and everyone you know is still buying into rally, it’s time to take off the blinders. Do your due diligence, set aside your emotions, and don’t fall into the comfort of following the rest of the herd. Otherwise, you’re chasing the fast money.
  3. Gold is a sure thing. When you hear that any type of investment is a “sure thing”, you should immediately declare a state of shenanigans. Moreover, you should be doubly suspect when that “sure thing” has doubled in value over the last 5 years. Anyone remember the statement the false claims that real estate was a sure thing and can never go down in value?
  4. People will laugh and ridicule you for suggesting it’s a bubble. I have no doubt that I’ll receive hate mail for even insinuating a gold bubble has formed. They may be right and I might be completely wrong. But when everyone you know is on the side of the majority, and will laugh in your face at the very suggestion that you have identified another investment bubble, it’s time to start asking the hard questions.
  5. Everyone trying to make money on the gold rush. The fact that so many people are piling into the gold business, whether that be making a few bucks selling gold coins to a growing number of esoteric gold-related ETFs, tells me the game may be up. For example, when you see the hard sell advertisements promising extreme returns on your investment, the ethics police might need to step in (as well as the Better Business Bureau).
  6. What value does gold really have? Other than gold is pretty to look at, is chemically inert, and is the preferred metal of satellite manufacturers, what hidden value does gold really possess other than mankind’s desire to possess it? If the doom and gloom soothsayers are right, would you prefer to own bag of gold coins or a fully stocked pantry with rice and beans? Gold really only holds value to those people who put value in it, and in these days, those people have the prerogative to change gold’s “value” with a few clicks of the mouse.
  7. Gold produces no tangible income. Unlike real estate, equities, or other dividend paying investments, gold does not produce income. If you were to lock away a dozen American Eagle gold coins in a safety deposit box for 20 years, you would be forced to rely on the value of gold 20 years from now to be higher than it was when you purchased them. As investors who bought during the real estate or tech bubble found out, it may take decades to make their money back, if they ever do.
  8. Who even uses gold these days? As a joke, ask the checkout clerk at your local grocery store if you can pay with a gold coin that is worth $1000 instead of your debit card. Our present society is no where near geared for a conversion back to a currency that hasn’t been minted since the Great Depression, and I suspect it wouldn’t go over that well.
  9. Gold might not be the best investment to hedge against inflation. Being that we live in the 21st century, there is a good chance we might put more value in other commodities. With gold, the only thing you can do is lock it away in a vault and hope someone doesn’t steal it from you once you’ve got it. Alternatively, commodities like gas, rice, even cattle, would probably have more usefulness (on the consumer level) since you can use them as food, fuel, or other things society would deem more valuable. Gold may be edible in small amounts, but I would rather have a steak any day.
  10. Speculators, speculators, speculators. When hedge funds and big money traders are trading 100,000 share blocks of the Gold ETF, you know the sharks are circling. No one can deny gold has had a tremendous run, but it is partly due to fast money trading firms consistently bidding up shares looking for the quick buck. When these guys decide to start cashing in their profits, or they feel that there is a risk to their capital, they will liquidate mass quantities of shares and will push the gold market down in a hurry. They will also start piling on the shorts and that’s when things begin to turn nasty for the long term buy & hold investor.

Bottom line is that gold has significantly appreciated over the short term, has drawn the attention of every fast money trader around the world, and the advertisements are beginning to target the Mom & Pop investors. I don’t have a crystal ball so I can’t predict the future, but if history is any indicator, it looks like we’re setting up for another bubble to pop.

Whether the gold bubble bursts at $1000, or $3000, is anyone’s guess and best left up to the speculators. Not the investors.

So what’s your take?

Do you believe we’re just setting up for another gigantic bubble to burst? Will gold trade sideways for a dozen years or will it continue to shoot the moon? Do you think the Federal Reserve will allow the U.S. Dollar to continue to fall and gold (or other foreign currencies) to replace King Dollar?

~ ~ ~

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Posted by CJ   @   9 October 2009 56 comments
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56 Comments

Comments
Oct 9, 2009
4:00 pm
#1 SJ :

“If the doom and gloom soothsayers are right, would you prefer to own bag of gold coins or a fully stocked pantry with rice and beans”
Yes! That was one of my fav retorts lol…

Oct 9, 2009
4:05 pm
#2 aliotsy :

I agree with you that gold is likely in a bubble right now, and your reasoning backs up the idea that it is unwise to speculate in gold when it’s in a bubble.

However, I think gold can have a place as an investment in one’s portfolio. This post sums up what I consider to be a reasonable case.

http://www.bogleheads.org/forum/viewtopic.php?p=569997&highlight=#568626

I don’t know enough about TIPS to agree with the post’s assertion that gold is better as an inflation hedge, but the gist of the post does make sense: using gold as an uncertainty hedge and treating it unemotionally.

Oct 9, 2009
5:07 pm
#3 Matt SF :

@ SJ

I considered adding “shotgun shells” somewhere in that line, but thought I might give off a Beverly Hillbillies kinda vibe. ;)

Oct 9, 2009
5:50 pm
#4 Matt SF :

@ aliotsy

Thank you for mentioning that very important point.

I struggled with the making the statement that “most financial planners/advisers suggest you maintain a small percentage of your portfolio in gold or precious metals” because gold has risen so far so fast. I also struggled with the argument that one should buy TIPS considering there is the uncertainty around the government’s role in calculating the inflation rate, and of course, your potential ROI.

The difficulty in the debate right now is the “you better invest in it now, because if you don’t, you’re missing out” thesis. I really can’t subscribe to that idea, so when I’m in doubt, I’d rather sit on the sidelines or turn it over to better minds.

Oct 9, 2009
6:00 pm
#5 aliotsy :

“The difficulty in the debate right now is the ‘you better invest in it now, because if you don’t, you’re missing out’ thesis. I really can’t subscribe to that idea, so when I’m in doubt, I’d rather sit on the sidelines or turn it over to better minds.”

Agreed. :)

Incidentally, the person who wrote that post, craigr, advocates Harry Browne’s Permanent Portfolio, and has a blog about it. His post on Harry Browne’s “16 Golden Rules of Financial Safety” is relevant to this discussion, particularly these two:

Rule #9: Don’t ever do anything you don’t understand. Don’t undertake any investment, speculation, or investment program that you don’t understand. If you do, you may later discover risks you weren’t aware of. Or your losses might turn out to be greater than the amount you invested.

Rule #16: Whenever you’re in doubt about a course of action, it is always better to err on the side of safety. If you pass up an opportunity to increase your fortune, another one will be along soon enough. But if you lose your life savings just once, you might never get a chance to replace it.

http://crawlingroad.com/blog/2008/12/17/the-permanent-portfolio-and-the-16-golden-rules-of-financial-safety/

Oct 11, 2009
9:03 pm

The reason you own physical gold is as insurance against a falling U.S. dollar. It should be part of everyone’s portfolio for this reason. Short term after a run up in the price of gold, anything can happen.

Before the year 2000, there wasn’t any real competition to the U.S. dollar for investors. Since the year 2000 with the introduction of the EURO and since with the intro of ETFs, including gold ETFs, there is plenty of competition to the U.S. dollar.

Since the year 2000, gold has gone up in price every calendar year.

Gold has risen since that time primarily because of the fall in the U.S. dollar index, but also because of demand.

The recent rise in the price of gold I believe is more speculation with only a little bit of dollar index decline (to just below 76). For one to be a believer in the gold price moing higher at this time, the dollar index would have to break below it’s March 2008 low of 72ish.

I’ve written quite a few articles on gold, the latest written last Wednesday called; “Is Gold Peaking For Now?”

I’m a long term believer in the secular gold market because of the fact you can count on the U.S. government to keep on spending. Until that dynamic changes, you can expect the price of gold to continue to rise.

As to the rest of the post:

Some of what you say is true. I’ll address a few of them that need more discussion….

Who uses gold these days? All Central Banks in the world.

Gold Bubble? Depends on the timeframe you’re looking at. There is definitely a U.S. debt bubble that could burst too (the wrong way for holders of U.S. assets). Thank God we have the Fed eh? Oh wait…they’re the one’s who helped get us here…

You can’t eat gold. Yes, that is true. You can’t eat paper dollars either.

Gold produces no tangible income. True. Gold does however maintain its purchasing power over time, unlike the U.S. Dollar’s short 38 year history without gold backing.

Could gold fall a few hundred dollars from here? Sure. I hope it does. That would mean a stronger dollar in the short term, and more time for astute buyers of gold to gather more of the precious metal at lower proces. A holder of physical gold however, cares not that gold goes to $900 or $800 on it’s way to $2,000 or more. You show me a government that lives within its means and I’ll change my opinions about gold. Wonder what the odds are in Vegas on that…

Timing is everything they say. A little understanding of economics wouldn’t hurt either.

And I’m not trying to be a smart ass with my replies. I’m just trying to join the conversation.

I’ve been challenging financial advisors and journalists who criticize gold (and won’t post my replies to them) via my site and no one wants to talk to me except for one advisor so far. You can click on the “gold” tab on my blog and read for yourself.

Disclosure: I don’t sell gold. I just write about it.

Oct 11, 2009
11:14 pm
#7 Matt SF :

Well, Digger, I think you might need to try a little harder in the not trying to be a smartass part because you came off fairly snarky. That’s to be expected sometimes, so no hard feelings. But this might explain why folks are reluctant to speak with you.

(FYI: It kind of goes against blogger etiquette to load your comments with 3 backlinks (and 1 deep link) to your blog. I deleted 2 of them, but left one so readers could follow you if they wish.)

While I’m not trying to be a smartass back, your comment reminds me of a former Realtor who told me the real estate bubble was nothing but media hype and I was a fool for selling back 2005. He gave lots of cool stats, backed up his reasoning with lots of “fundamental data”, and all of which sounded very believable, but he still lost sight of the most important aspect… price appreciation.

As you said, timing is everything, and as you can probably guess… I ignored his advice. (Thank God!) The fundamentals may be there all day long, but human beings are not rational or fundamental creatures. We spook easy, and when traders get spooked, they sell. Usually, faster than the Everyday Joe with 100 shares of the GLD.

Right now, gold is an uber crowded trade and it’s really best left to the speculators — not investors. If you’ve owned gold over the long haul, you’ve got a great return. But it’s a paper return until you do something with it.

Also, there are big consequences for the gold market when the gold miners are paying out the wazoo to remove their medium to long term hedges. I can’t recall the specific names, but it might be worth looking into if you’re a gold bull.

Once again, timing is everything, and if the insiders are positioning themselves to sell at $1000 (or $2000 next month???), who knows. I don’t have a crystal ball, but it’s wise to follow what the insiders are doing.

As for Vegas and timing the market, this is a personal finance & investing 101 blog (e.g. not speculator central). Usually, we’re fairly conservative folks.

So as the tone of the post conveyed, I think it’s fairly dangerous for the average index fund investor to wade into such a highly traded and volatile commodity.

So you can slam my lack of economics knowledge and use the Central Banks argument all you like, but I’m rather focused on what’s happening on the ground. Not Econ101.

Oct 11, 2009
11:47 pm

One common theme to both the current Gold bubble and the Tech Boom of the late 90′s is the way people continue to ‘talk it up.’ The old saying that when the shoeshine boy is talking stocks, it’s time to get out is still true. Why so much talk now, when Gold is already at $1000? Where were these experts when it was $300? I’ve also observed that supply increases as the price rises, something that doesn’t quite happen with stocks. You see, Gold yield is measured in oz of Gold per tons of ore, something like an ounce per two tons typical. Mines know their cost. There are closed mines whose cost may be $600, $800/oz, etc. So as the price rises to make them profitable, they re-open and sell futures, dampening the price and flooding the market with new supply. In the end all bubbles burst, and gold will drop back to something that makes more sense.
If one bought the Dow index at its 1987 peak, they could just hold, reinvest dividends and years later find they still had a 10%+ annual return. If one bought gold at $800 in 1980, 30 years later it didn’t keep up with inflation. Ok, that’s unfair to cite the peak of 1980. Go back to $200 prior, so $200 and 35 years later you have $1000, not even a 5% return. An S&P index would have blown gold away.
Sorry, no links. You know where to find me.

Oct 12, 2009
12:50 am
#9 Matt SF :

Great point Joe!

I’ve seen the historical price of gold measured against inflation. I believe it measured $2300 to $2400 at one point during the early 1980s. Scary stuff. Must have been around the time where a 30 year mortgage was 15%.

(My knowledge of finance at that time in history was measured in crayons, not gold or U.S. Dollars!).

I’m beginning to think I’m one of those pain in the butt “Buy on the Dips” investors who is learning patience pays off. Or I’m using that “risk versus reward” rule a little too stringently when selecting entry points.

Oct 12, 2009
12:53 am

Matt SF,

Appreciate the response. First let me state that in my other replies to financial advisors and journalists I have kept it non-”snarky.” I did have a glass of wine tonight, so I’ll blame it on that.

Since the wine has warn off, I’ll respond to your analysis of my reply. Regarding blogger etiquette, I only put url’s in certain spots to direct those that read what I say to the place they can learn more about the particular point I’m making rather than search all over my site for it. And lastly in regards to my Vegas reference, it was just a joke and no harm intended (I’d never recommend someone go there to make money).

To your comments;

Folks are reluctant to reply to my challenges in general because they lack the fundamental knowledge concerning gold, let alone economics, especially journalists who tout the same mantra from article to article. And when I say economics, I’m not talking about the Econ 101 or 102 that we’re taught in college, but the fact that even those with an Econ degree are never taught anything but Keynesian solution economics that the Harvard and Wharton boys can’t even utilize to stop the busts from occurring.

Austrian economics however has both predicted the bust as well as analyzed the consequences of “what’s happening now” both from a business cycle analysis as well as the root of the problems we are presently experiencing. There are a few professors who teach Austrian economics, but it’s not mainstream by any means.

So when you write an article called “10 Reasons Why Gold Is A Bad Investment,” I think the title is somewhat misleading from a long term perspective based on what our government is up to from an economic and monetary stand point. Add to that how Federal Reserve policy affects the dollar both short term and long term. But from a short term perspective (timing) could be good advice (which I did agree with as well as wrote about).

I just didn’t see any discussion of this in your critique of gold yet it is paramount to both short term and long term trading. Add to that the fact that when an investor earns 10% on U.S. assets and the dollar loses 10% (purchasing power), what is there in one’s portfolio that counteracts that? I’ve written articles on this as well.

As to gold and tulips, gold is still in its second and longest stage and hasn’t even come close to the “mania” stage. It will, but that doesn’t mean in the short term it’s not overbought. The commitment of traders show this as well.

As to the real estate person you spoke of, I don’t think in my over 20 years as a financial advisor I ever met a realtor who didn’t think that real estate was a good buy! Congrats for seeing the light and not listening to them in 2005! (I left the financial planning business four years ago to take on a bigger task). In 2004 – 2006, those of us over on Richard Russell’s Dow Theory Letters bulletin board were saying the same thing about real estate crashing (it’s unfortunate Russell closed it).

In the meantime, I did write a book on gold to help investors and I wasn’t intentionally “slamming” anything you wrote, just replying to what was written. I need to remember to lay off the wine before responding from now on as obviously my training in neuro linquistics loses its luster, ha…. Sorry for any snarkyness.

Appreciate the response.

Oct 12, 2009
1:02 am

Joetaxpayer,

I believe the dynamic for gold as an investment class has changed since the year 2000. Why? Because until that time there wasn’t much competition to the U.S. dollar. See post above where I talk about 10% return and purchasing power.

Also, the historical 10% return that investment advisors tout doesn’t hold true today. Most of that return (60%) came from dividends which today pay about 1.5% on average (give or take). This means that the remaining 8.5% has to come from capital appreciation. That hasn’t happened for quite sometime. See Ed Easterlings study on this http://www.crestmontresearch.com or his book; Unexpected Returns.

You also say, “in the end all bubbles burst and gold will drop back to something that makes more sense.”

Gold is priced in dollars. Dollars have 38 years of existence without gold backing. The purchasing power of the dollar has shrunk considerably during this time. From 1971 to the year 2000, the dollar didn’t have much competition and that’s why Volcker in 1980 managed to convince people that interest on depreciating dollars was better than gold. It worked. Of course raising interest rates today on a depreciating dollar would kill the economy. It won’t work today. That and it’s much easier for the world to put their money elsewhere.

Doesn’t mean that gold won’t fall $200 – $300 from here though! :-)

Oct 12, 2009
8:36 am
#12 JoeTaxpayer :

Doug -
It’s obvious to me you’re a bright guy, we just reach different conclusions.
Whenever someone says “this time is different” I struggle to accept the conclusion. The dollar has lost value and it’s at risk to not be the first currency of choice, I get that. I see how the current events are likely to devalue the dollar and spark inflation.
You say “gold is priced in dollars.” I know this is said of oil, which is controlled by a small group of countries, but I’ve never heard this of gold. Doesn’t mean it’s not true, just never heard this. If we were both in a country with a strong currency, how would your view change?
I could easily suggest that one either (a) change their dollars to a mix of the currencies you are happier with, a at least gain interest instead of just sitting on a non-interest yielding chunk of metal, or better still, invest in non-US ETFs in stocks of companies based in those same countries. I’d be curious to see if the rise of gold appears so dramatic when measured in those other currencies, unfortunately, I don’t have the time or interest to search for such data.

Oct 12, 2009
9:41 am
#13 Johnny H :

Buy and hold investors are a curious bunch, indeed.

The gladly hold during a crushing -50% downturn. Their diversification poor, their exit strategies non-existent.

Yet, apparently I am the heart of foolishness for having less than 10% in precious metals.

Gold will continue it’s rise. If gold falls to 0, yay we can all rejoice a sound dollar (not bloody likely).

Do I care about a bubble? Nay, I care about diversification and protection… Something you blind faith equity holders should look into.

Dow:gold ratio will continue its march toward 1. Gold still have a long way to go.

Oct 12, 2009
10:34 am
#14 Chris :

Last time I checked virtually all central banks around the world still hold gold and “value” it.

When the bankers sell theirs, I’ll sell mine.

Oct 12, 2009
11:38 am

joetaxpayer,

Your analysis is good. I didn’t mean to imply that gold is priced only in dollars. It’s obviously priced in the currency that you purchase it in. For most of us, that is U.S. dollars.

Dennis Gartman last weak revealed that he is invested in gold, not in U.S. dollars, but British Pounds. He sees more risk with the Pound at present than with U.S. dollars.

While there are at present, currencies that are holding their own versus gold (Australian Dollar and New Zealand Dollar for example), in the long run, they are all “fiat” currencies and have governments that are infatuated with debt/spending.

Take a look at the 10 year chart of the leading currencies versus gold by going to kitco.com and searching towards the bottom of the home page for this: “Live currency charts and charts comparing $USD gold to all major currencies.” Gold is up versus all currencies since 2000.

As to other investments (ETFs) that one can invest in that are not U.S. dollar related…. sure….as part of a diversified portfolio this is prudent (and even more so at present).

All I want people to think about is that if your financial advisor says to put 60% in stocks and 35% in bonds (U.S. government and corporate) and 5% in cash, which is the typical advice from Charles Schwab et al, where is the hedge against a falling dollar (insurance) for that portfolio outside of a little of the 60% in stocks being invested in foreign companies?

10% into gold would have buoyed a portfolio the last 10 years, and will moving forward as well, give or take current market action.

Oct 12, 2009
8:01 pm
#16 Simple Llama :

I’ll address #6 briefly. Gold has value because it is coveted, and because it is considered the most eternal form of money. In the same vein, I would ask, why do Federal Reserve Notes have value? A $100 FRN is simply green ink on a piece of cotton. Nominal value? Maybe eleven cents. However, I am able to buy $100 worth of goods, because people accept that it has value.

Money of any kind only has value because someone else is wiling to accept it. Gold has been used as money for thousands of years, and will probably continue to be used as the most important form of money. ( Just look at central banks, and how most / all of they hold a large portion of their reserves – gold bars. )

Federal reserve notes are money today, and have been for nearly 100 years. In that time, their purchasing power has plumetted drastically. $100 could buy much more when FRN’s were first introduced. 1 ounce of gold buys *roughly* the same amount of goods / services as it always has. There are valleys and peaks of course, but it does a drastically better job of holding it’s value than fiat money.

Should you go “all in” on gold? No, just like you shouldn’t on any single investment. But it’s important to have some gold andor silver in your portfolio if for no other reason than to hedge against the US dollar.

Oct 13, 2009
9:57 pm
#17 Atlas :

Gold…

Where do I begin? This essay represents the best and most eloquently written argument for a Gold based monetary system I have read ANYWHERE—by former fed chairman Alan Greenspan in 1960′s:

http://mymoneyshrugged.blogspot.com/2009/10/gold-and-economic-freedom.html

It is long and prob doesn’t speak to a lot of your interest, but you will learn valuable off of it.

My problem is simple, if I had a ton of wealth I would buy so much gold right now. I just don’t have that much to loose? Still want to put anywhere from 10-15% of my portfolio in precious metals.

It also represents my beliefs of economic policy so I am biased based strictly on my thought process.

Oct 31, 2009
7:30 pm
#18 CPL :

It’s absolutely true on gold being an awful investment as a “hedge” or even a long term hold. Seriously there is no hedge in owning a rock that can’t even keep it’s principal value against inflation of real goods like food.

I read the gold cheerleaders nonsense almost daily while trading and sincerely I could give a rat’s ass what some semi-survivalist thinks would be good to trade with. Only people I’ve heard cheer gold as an investment are weekend-survivalists, demented CNBC talking heads and Rappers. What do these people all have in common? Given enough time you meet them in a trailer park broke from buying gold. In turn, the same people will be selling said gold at the pawn shop for 1/8th it’s principal value to cover the cable bill. Then the pawn shop sells it for 1/2 of market value. Don’t believe me, bring your gold into a pawn shop and prepare for a fiscal punch in the head.

How does market value work again? Usually it involves that on face value that mark to market effectively puts the correct value the market will offer and withstand. It has little to do with the intended thought of value an analyst or an ETF believes it is which is of course magical thinking.

Want to see Mark to market in action? Buy a new car and drive it off the lot. As soon as the new car hits the road it’s lost 30% of it’s value. Why did it lose value? Nobody knows, but it does illustrate a great point. The listed price is not reality. The buyer goes to buy the car fully accepting that driving the four tires off the dealership lot will lose them money. Owners of , all fall into the same position of a new car buyer. It’s called justification of a really dumb purchase, we all do it. So while magically thinking gold is a hedge to equities, 15 years ago there were idiots that also believed buying beanie babies and baseball cards hedged equities as well. The risk is equal regardless of the “hedge”.

Now if you really want to hedge equities, bad markets and see results? Throw a party with booze and a DJ in a nice place. Increase your business contacts. Meet new people. Make more money. You could either piss it away on a couple of rocks or expand your opportunities and throw back a couple of drinks.

Oct 31, 2009
8:06 pm
#19 Matt SF :

@ Atlas,

I believe Greenspan also stated that the models he believed were true (e.g. that the market can police itself and the world’s financial economic system) were incorrect.

This was stated in his October 2008 Congressional testimony. I hate to pick on the guy since he looks so frail, but his testimony is available in this Frontline video (Chapter 6, 49:20min).

Oct 31, 2009
8:51 pm
#20 Matt SF :

@ CPL

I think you make some noteworthy statements, but traditionally (as I’ve seen), gold is just the first investment of choice when the fear trade is going strong. Investor psychology is funny that way since speculators are programmed to go after the fast money first.

Personally, I always like to ask if the gold bugs were this bullish on gold when it was at $250 instead of pushing the BUY BUY BUY button when it closed above $1001. As I see it, gold above $1000 isn’t an investment… it’s a trade!

For the life of me, I can’t figure out why people wouldn’t be selling into the rally. If you were smart enough to get in several years ago, basic portfolio maintenance suggests you should be periodically re-balancing instead of trying to squeeze the last drop of blood from the proverbial turnip. Hopefully, most folks slaughtered because they were too greedy or weren’t fast enough on the trigger.

I do disagree with you on the use of gold as a hedge. Most traders (of what my limited experience tells me) are told that if the Dollar goes down, gold will go up… and will make it a self fulfilling prophecy. So if the dollar takes a slide, you’re protected on the downside. I’ve even heard that gold is a decent put option that never expires. But like most things, how much you pay for that put option determines whether your in the black or in the red.

Thanks for the comment!

Oct 31, 2009
9:28 pm

Matt, just so you know, I treat it as a trade at times as well. When it hit $1,058, I mentioned on my blog that gold might be “peaking.”

http://fedupbook.com/blog/gold/is-gold-peaking-for-now/

Just yesterday, Jim Rogers and Marc Faber said the same thing.

Also Matt, many of us who had followed Richard Russell from DOW Theory Letters had been following gold since the $300 – $400 range (many earlier, but that’s when I first dialed in as an investment advisor).

And JPL, I’ll take the rock with 5,000 years of existence as a dollar hedge/insurance over a piece of paper that has 38 short years of existence without gold backing. Not that your advice of having a few cocktails isn’t good…(as Matt knows, lol).

Cheers!

Oct 31, 2009
11:46 pm
#22 Matt SF :

@ Digger,

$300 to $1050 is a pretty kickass trade if you don’t mind me saying so! If you spotted the value back then, then hats off to you sir.

I think my big pet peeve with gold is that it’s being pitched to the retail investor. I can always tell we’re near a top when the commercials on CNBC try to convince me to buy something.

Maybe next year they’ll have an ETF to mimic the price action of the Snuggie!

Nov 1, 2009
1:20 am
#23 CPL :

Well an investment should be something more notable than a rock. We have investments that are more precious than gold but they aren’t equities or commodities. They look more like roads, distribution systems, systems to run those systems, farming practices, etc. Stuff that contribute to all of our well being over generations. Those are investments. You just couldn’t convince anyone but the government but to deal with that mess though because anytime one of us step in from the private sector we royally screw up. Now when we say investments, what is really meant is pure unadulterated trading. We trade, not invest.

Example, if I’m buying UGY (x2 Gold ETF) or DTO/ERY (x2/x3 Oil/Energy ETFs) to either long or short the ETF, I’m not thinking long term in any sense of the word, it’s not an investment. Or playing something like CLNE (NG gas company disguised as a green trade company). It’s a trade. I take into consideration of leveraged decay for x2-x3 ETF, for CLNE it’s run by a grandfatherly frontman, my trades in UGY/ might last an hour or three. My longs might be a month. And yes you can play puts of leverage ETFs because regardless of the promise of infinite returns of gold/oil/beanie babies, under the umbrella of a x2 leveraged ETF you always win because of falls/flats and the basic math behind leveraged decay of leveraged investments. If you want a basic spreadsheet on how to determine entries I have some older ones on the blog you can pull from google docs.

Even in my long trades that I’ve held for years to take advantage of dividends on preferred shares, they are still realistically a trade, I have shed the delusion they are investments. As soon as I seen trouble in fall 07 I dumped as fast as I could click “sell” for all of my assets in a long position. Made out like a bandit, but there is one thing I can promise, I did make more than 180% over a four year hold. The sad thing I outperformed my long holds day trading during that time. I honestly was not going to get caught like the Asian currency crisis or dot.bomb. That was brutal. I was under the auspicious magical thinking I was protected by hedges and diversification. There is no hedge, never was. The “hedge” is how we trick ourselves into thinking that we are safe. Now I’m all in, keep a tight SL, move the stop loss constantly and use a minimum 10k block size.

So two things, when not in doubt, get in doubt fast and take a profit even if it’s a penny.

As far as a hedge against currency free fall. Seriously currencies get kicked around like a soccer ball, always have and always will. Talking heads will jabber on for months about anything around the subject. They typically make comparisons to zimbabwe or post war germany. If they could interview currencies like people they would ask them if they wore boxers or briefs and who are they currently dating.

The news universe hasn’t got much else to do but manufacture crap to put on between ads. And the experts they trot on and off the stage like trained horses are there to sell you a book, services, both or attempt to move the market in their favor depending on their “weight” in the investment community.

Now gold isn’t a currency. It’s a material good, a commodity and a rock. It can make stuff and be bought under market value at anytime through a half dozen non regulated sources. As a value play in investment is isn’t. It’s a trade and like any trade keeping the SL tight and moving up is how you make money from it. Holding it in the form of a shiny rock will only lead to a couple of things.

1) People want the shiny rock and steal it from you. As I’ve mentioned dumb people covet shiny rocks and will target you for it.
2) When you need the capital of the shiny rock, you are usually in a position of going in the underdog position.

Now that’s not to say gold won’t be a currency again. Just not until the entire system falls down, the gun nuts hiding in the woods surface with AK-47′s and fists full of gold. At that point in time it’s probably more likely people will agree to exchange things because of AK-47′s and not the carat of the bullion being carried around. I’m not holding my breath on that option though. The current default currency is the USD and will be for a while. People have bought so much of the US debt, a serious drop in the dollar and someone will declare war or governments will simply print more money unfortunately. Give it time and you’ll start to see some serious reform to FOREX, it’s already started in the banking industry and governments are back pedaling all the silly reforms of the late 90′s. It’s only a matter of time before FOREX is regulated again.

Just be sure, understand holding something with a value versus selling it and having its value in hand are two different things. Why would anyone care if it was gold, pig knuckles, camel toe or used rubbers. A profit is a profit, take the profit and run as fast as you can to the bank. Cash is worth more than the thing at the moment it was purchased and in turn can be put into other deals to make a dime off of. If you find yourself cheerleading a vehicle to make money it means you are not investing or trading, at that point in time it’s magical thinking of using a market condition as a fixed dogma.

Nov 1, 2009
1:23 am

Matt, part of my reason for writing my book is to explain to people the misinformation in buying gold. All I want is for people to make the right decision based on the facts as I know them. I feel my over 20 years as a financial advisor and my time working after that time for a Gold Dealer to learn their secrets qualifies me as someone who can advise people on gold. My books on gold and silver will soon be released on Amazon.com helping people understand the right way to invest as well as tax and “when to sell” advice.

I made the mistake of trusting a “marketing guru” in May when I first wrote my books as to best get them to the public. I wrote in May what people who are curious about what gold represents need to hear.

You know our system is biased against gold. You also know I possess good info on the subject of gold.

Hopefully the lower price of my books will get the word out to America. I plan a press release to get the word out to more when I can.

And I do continue to challenge mainstream journalists and financial advisors continually on my blog. Sooner or later, people will either reply to my queries or the truth will be known. That is my quest.

I accept any and all questions and enjoy the discourse. I don’t profess to know more than anyone else, but I do have CFP’s and the financial experts from CBSMoneywatch.com agreeing with me as to the need to acquire gold as a hedge against the demise of the dollar.

In reality, it’s not the commercials on CNBC that one should follow, you’re right, but the commitment of traders for short term traders, as well as an economic understanding of GDP related to government spending as well as Federal Reserve policy and continued left and right abuse.

Long term gold investors care not that gold falls to $700 on its way to $2,000 or higher. I hope it does fall so more can acquire the metal at a lower price.

And as you know, it’s not like I’m advising people to invest their life savings in gold. Just enough to hedge their U.S. dollar portfolio holdings.

Nov 1, 2009
1:28 am
#25 Doug Digger Eberhardt :

CPL, I’ll be happy to discuss tomorrow….It’s late here.

From a quick read, I dont’ disagree with short term investing, but we may disagree on the definition of “short term.”

Would be happy to discuss that as well.

Nov 1, 2009
1:30 am
#26 Doug Digger Eberhardt :

Oh, and I saw you have Mish Shedlock’s site on your blog roll, so I know you have some intelligence behind you. As you know, Mish recommends gold. Maybe the wrong type, but he is a believer even with his deflationary scenario which corresponds with Jastram’s well known research.

Nov 12, 2009
8:05 pm
#27 Andrew Bachagalupe :

@CPL – that was one of the most stupid posts I have ever read. If it is not 100% obvious that Digger has made an extremely eloquent argument in favor of gold, then you probably should NOT BE managing your own money.

Andrew

Nov 30, 2009
7:34 am
#28 Joe Bear :

For those who think that gold is in a bubble, are you kidding me?? What about the other markets like the stock market? Now there is a bubble. This gold bubble you all talk about has such weak arguments!! Gold can go up for much longer and much higher than people realize, just like other bubbles created. So you think it is a bubble because you are on the wrong side of the trade? Puuuuulllllleeezzzeeeeeeeeeee Gold can easily go much much higher and for much longer if the world economies continue their decent.

Nov 30, 2009
9:50 am
#29 Matt SF :

@ Joe Bear

Couple points since you obviously didn’t read the post very well. Then again, that’s not surprising considering the only thing you forgot to do is jump, kick and shake your gold pom poms.

1) I’m not on any side of the gold trade.
2) I said gold could easily hit $2000 to $3000 per ounce before the bubble pops. Bubbles tend to shoot the moon, and I expect it to hit the 1980 inflation adjusted price.

Nov 30, 2009
10:47 am

Yes Matt, Joe Bear may or may not be aware that many people who are “gold bulls” can go broke being on the right side of the trade. How? Last year was a good example. Gold took a big hit and even Peter Schiff’s clients got the shaft (pun intended).

Those who actually bought into the gold game on leverage might have received a margin call. Same with investors who leveraged over at Monex. But at the same time, they were eventually long term right about why they invested in gold, as was Peter Schiff. They possibly have less wealth because of their approach to investing, or more.

This up and down cycle will repeat as the gold bull tries to knock weak players off (or those that leverage). I had a friend who over-invested in gold mining stocks last year after running up some nice profits the years before (after listening to my advice). I had no idea he was so heavily invested. About a year ago he almost “cried uncle” and sold to protect what he had left, but was smart enough to ride out the bull trying to buck him off. His problem was that he doubled down when gold fell (not my advice unless it’s physical gold).

He rode the double down and original investments to nice profits and sold not too long ago. Lesson learned. Interesting thing was a year ago we had discussed actually converting his IRA to a ROTH IRA and buying those same mining stocks back. Now all of the growth and income would have been tax-free.

I cautioned about gold possibly peaking a little early on my blog. I wrote some articles about the fallacies of Elliot Wave Theory as well that Andrew above was nice enough to comment on. My being early to the selling is fine with my conservative approach. There were a couple events that happened to keep the gold game going a little longer than I expected, that being India Central Bank buying gold and Vietnam lifting its gold import ban.

Gold can go anywhere from here because of these types of “unexpected events.”

I critiqued a CFA’s analysis of gold recently on my blog. He had a distorted historical perspective, but I did agree with his short term analysis.

That 72 mark on the dollar index still hasn’t been breached (let alone 74), so I’m still cautious. Because of the aforementioned events however, the dollar index did hit lower 15 months lows, but still hasn’t broke the March 2008 low.

I like Jim Rogers, Schiff and Jim Sinclair, but I like Marc Faber better as he takes into account shorter term analysis. They are all correct in their long term forecasts and we have the Fed and the U.S. Government (Treasury, Congress) to thank for that.

As I always say, holders of physical gold care not that it falls to $800 (as March Faber says) on its way to $2,000 or higher.

You’ll get your $2,000 to $3,000 pop, but it won’t happen till the dollar index falls below 72 again. Then we might possibly hit 3rd stage euphoria.

You’ll see interest rates much higher too.

I don’t like calling short term declines, as I’m such a gold bull. We’ve had a nice run in gold. Nothing goes straight up. What would happen if a January 1980 price action occurred right now? People would be coming out of the woodwork to bash gold prophets. I hope we get it! It won’t shake my confidence in gold one bit. If we did get the hit in gold, it wouldn’t be because Bernanke pulled a Volcker and raised interest rates to double digits to lure people away from gold. That’s the difference.

But this eventually will be the game the Fed plays….at the detriment of the stock market and bonds. But, as I said, people can go broke waiting for it to occur.

Last paragraph omitted

Dec 25, 2009
12:40 pm
#31 Kidgas :

I respectfully disagree with your 10 reasons that investing in gold is a bad idea and published an article on Xomba (under same user name) as a counter-point. I could easily be wrong and am keeping my eyes peeled for evidence that would suggest so. In the meantime, I am invested in gold, silver, as well as GG, AUY, SLW but am hedging these with puts and calls.
.-= Kidgas´s last blog ..In the Top 1 Million!! =-.

Dec 26, 2009
9:33 am
#32 Matt SF :

Hey no worries about disagreeing with me, and I thank you for phrasing your disagreements so eloquently. After you write it, come back and post the link here in the comments section so I can take a look.

I just think the speculators have ran away with this one, and the amount gold can continue to appreciate is neglible when compared to other commodities. Natural gas, timber, or maybe even boring old TIPs will be better inflation hedges since they’re either trading at a discount, haven’t participated in the rally, or are guaranteed to return the rate of inflation.

Dec 26, 2009
10:55 am
#33 Kidgas :

Matt,
Thank you for agreeing to disagree. Here is the link to the article: http://www.xomba.com/10_reasons_why_investing_gold_good_idea

I agree speculators ran away pretty quickly to $1200, but I don’t think it is done. Also, natural gas did get pretty low. But there is a lot of supply currently. That said, I did purchase some CHK at $15 that I am happy about.

May 19, 2010
6:09 pm
#34 Brian :

@ Matt,

Greenspan may have believed that at one point, but his actions as Fed Chairman were oppositional to his prior views. If he truly felt that the market could police itself, the what the heck was he doing taking a position as the head of the Central Bank?

May 19, 2010
7:05 pm
#35 Matt SF :

I would estimate that Greenspan’s position as Fed Chairman wouldn’t have allowed him to personally deregulate the financial markets regardless of his economic ideologies. That required much more work on the legislative (and lobbyist) branch of government.

Jun 9, 2010
12:47 pm
#36 Jeff :

These 10 reasons are all really just one reason stated different ways: it’s an overhyped bandwagon everyone has already joined. Tell me, what percentage of your acquaintances own physical gold? The answer for most people is very few. Very few people own gold. If very few people own gold, there’s no bandwagon to jump on.

Also, I wouldn’t say people are criticized for claiming a gold bubble. Quit the contrary. You’re referred to as a “gold bug” if you own the stuff.

Finally, there’s no substantive discussion of historical prices here, no mention of how the Dow/gold ratio performs during and after recessions, and no talk about how these impossibly overleveraged countries will unwind their debt without inflating their currencies. Sure, you could buy other commodities (and I agree with agriculture as a good buy), but gold isn’t in a bubble worth blowing your whistle over.

I happened to find this blog today, and I see this post is from October 9, 2009, when gold closed at $1048. I owned gold at the time and haven’t sold. It’s now June 9, 2010, and gold is $1227. That’s a 17% gain. The Dow went from $986 on October 9 to $10,038 today for a 1.7% increase. Buying gold was a pretty good call when this article was posted.

Jun 20, 2010
10:33 pm
#37 Kidgas :

Jeff,
I agree with you completely. There is no hype in gold. No one at work is telling me about all of their gold stocks in contrast to the internet stocks in 1999 and 2000.

I also recently did an analysis looking at investing in gold an equal amount each January from 1980 to 2010. I ran the same scenario for the S&P 500 (without dividends since I looked at the index) and guess what? Through Friday the S&P 500 index would have yielded only $1500 more. Big deal. The key is investing on a regular and consistent basis over the years.

Jun 20, 2010
10:44 pm
#38 JoeTaxpayer :

Kidgas – The Jan 80 S&P was about 105, vs today 1117. A factor of about 10.6. But with dividends included, it’s closer to a factor of 25, per http://www.moneychimp.com/features/market_cagr.htm

Gold had no dividends but the S&P sure does. You can’t simply ignore it to prove a point. A non-dividend adjusted index becomes meaningless over time.
Also, at this moment, gold is at an all time high, ready to crash. Stock are pretty depressed.

Jun 20, 2010
11:19 pm
#39 Kidgas :

Your point about dividends is well taken, and I appreciate the link. When I use it to adjust for inflation the factor including dividends is 8.8 instead of 25.

I suppose to make a completely fair comparison then dividends would have to be included, taxes on dividends would have to be calculated and subtracted on an annual basis, and the purchasing power at the end of the 30 years would have to be compared against the purchasing power of gold minus insurance and storage costs (say a safe deposit box).

It is certainly too late for me to expend that much energy. I would still suspect that the values would be closer than financial analysts would encourage us to believe.

Realistically, expecting someone to invest on a regular basis each January with little regard to emotion is unlikely as well, but it would be an instructive exercise.

I will give you that gold is looking a little top heavy. Personally, I believe in Kondratiev’s long cycles which seem to fit with the human emotional aspects of investing and generational biases in investing that might be expected based upon personal experience.

That said, I think we have 5-10 more years of subpar returns in stocks and 5-10 more years of the commodities (including gold) bull. At least that is my premise and how I am looking to position myself. Only time will tell.

Jun 21, 2010
9:26 am
#40 JoeTaxpayer :

Inflation applies to all investments, so it’s ok to skip that if you wish. Moving forward, ETFs (GLD) are available that let you ignore insurance and the huge buy/sell fees many charge.
As far at taxes go, it’s too much effort with little to offer the conversation. Most of my portfolio is in pretax accounts, and two decades into it, I can’t tell you how much was withheld at what rate. Either way, always interesting dialog.

Jun 21, 2010
9:35 am
#41 Kidgas :

True, ETFs will offer advantages going forward to many investors who might not otherwise have considered gold due to the insurance and storage issues as well as the large bid/ask spread from dealers.

The tax issue can be incredibly complex as well. I agree that the dialogue has been interesting. I certainly would not advocate going “all in” on gold nor any investment for that matter. It is best to diversify across asset classes no matter what.

Jun 21, 2010
2:50 pm

If one were to do an honest comparison of gold and the S&P 500, then they would start in 1971 when Nixon took us off the gold standard. But since 1973 and 1974 were terrible years for the stock market, an more fair time to begin the analysis would be 1975 when Americans were first allowed to purchase more than $100 of gold.

To complete this analysis you can go to: http://www.measuringworth.com/uscompare/

From there you have to figure out which of the 7 ways to calculate relative value of the dollar best fits your attempt at honest comparisons.

The point that also needs to be considered is the S&P 500 isn’t paying much in dividends these days (1.96%).

http://www.multpl.com/s-p-500-dividend-yield/

JoeTaxpayer said: “Also, at this moment, gold is at an all time high, ready to crash.”

Joe, above you were calling gold a “bubble” in October of 2009.

Maybe you’re right this time and maybe you’re not. In the meantime, I reiterate my point back then that gold makes sense as part of a diversified portfolio.

A nice pullback in the U.S. Dollar price of gold is a good time for people to dollar cost average into a position.

Feb 25, 2011
10:32 am
#43 kidgas :

Gold is trading over $1400 again due to the turmoil in the Middle East and Northern Africa and silver is going absolutely nuts. Makes me wonder what would be happening without the political overtones.

May 4, 2011
11:49 am
#44 Geopulse Inc. :

Whatever the logics are, investment in Gold and Silver indeed have some strong potential, and we can’t ignore the positive sides of this type of investment.

May 4, 2011
11:54 am
#45 Matt SF :

No doubt, but when organic growth comes back and fundamentals improve the rotation out of the precious metals will be swift. When that happens is anyone’s best guess, but if history is any indicator, markets repeat themselves with fairly consistent regularity.

Jun 13, 2011
1:30 pm
#46 Daniel K :

okay. 2 years into this article. Any considerations?

Jun 13, 2011
1:58 pm
#47 Matt SF :

Sure, the trend is your friend and uncertainty keeps sending nervous (and rightly so) into the world’s ultimate reserve currency.

However, as I eluded to in bullet #9: there might be better priced and more well suited commodities to consider.

Gold is up ~50% after 2 years, but…

Cattle: + 25%
Copper: + 100%
Corn: + 100%
Hogs: + 80%
Oil: + 50%
Silver: + 350%
Wheat: + 50%
(note: approximations)

So saying that gold was the best place to go was/is hogwash from a trader’s perspective. Now, it was the safe bet, no doubt, b/c it continues to be the fear trade du jour.

But if your motive was to make money for yourself or your clients, there were definitely equivalent — and better — values to be had at the time.

And that’s one of several points I was attempting to make.

Aug 30, 2011
10:25 pm
#48 Steve :

I’d rather have lots of booze and cigarettes. Many people will gladly trade away their food for those.

Feb 8, 2012
2:59 pm

Hello from Thailand!

I’m a foreigner residing here. The Thai Baht has gained 15% in value compared to the US$. I wonder what you eloquent commentators have to say about the so-called bailout bubble after the Fed printed a TON of money from thin air when the banks were bailed out a few years ago? (NOT being sarcastic at all. I enjoyed going through these comments that built up over 2.5 years!). I want to know what you all think of the relation between securing your savings against the potential fall of the US$ and converting 10-20% of your current cash flow to gold.

My current situation: I earn US$ even though I live in Thailand as an Internet marketer. I immediately convert my US$ to the stronger Thai Baht (stronger based on performance in the last few years against US$ and Euro) and recently used 20% of my income to buy Thai gold.

I agree with the comments regarding gold buyers not being in the wagon. I tell all my friends about converting 10-20% of their current income into gold. They listen intently usually but sometimes laugh at me but I’m the only one who actually does buys gold. Income is good here in Thailand for white-collared employees and even blue-collared ones. Rent is cheap, food is even cheaper and the Baht is strong against Western currencies so I figured now is the time to buy gold.

I also buy gold since I’m an impulse buyer and I protect myself against buying an iPad for stupid reasons haha. Sure I can pawn my gold but the added step of pawning as opposed to swiping my debit card is all I need to stop an impulse buy. I’m pretty young and most people my age buy electronics like their lives depended on owning the latest gadget. We all know how gadgets’ value plummets out of the box and how hardware prices fall rapidly.

Wow this is getting lengthy! Well on a last note, I also invest in websites. Websites’ value goes up with age as opposed to hardware’s rapid decline. Get up on Google ranking with popular keywords and you find yourself owning a piece of digital property worth more than my much treasured shiny yellow Thai gold :-)

Mar 3, 2013
10:10 am
#50 beatsme :

Well gold was around 1000$ when this was written. Now its March 2013 abd gold is at 1600$. Someone was wrong.

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