Steadfast Finances10 Reasons Why Investing in Gold is a Bad Idea

10 Reasons Why Investing in Gold is a Bad Idea

Filed in 20s , 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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Nov 12, 2009
8:05 pm
#1 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.


Nov 30, 2009
7:34 am
#2 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
#3 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
#5 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
#6 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
#7 Kidgas :

Thank you for agreeing to disagree. Here is the link to the article:

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.

Jun 9, 2010
12:47 pm
#8 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
#9 Kidgas :

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
#10 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

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
#11 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
#12 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
#13 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:

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%).

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
#15 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
#16 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
#17 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
#18 Daniel K :

okay. 2 years into this article. Any considerations?

Jun 13, 2011
1:58 pm
#19 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.

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
#21 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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