5 reasons that gold is a loser
Reprinted courtesy of MarketWatch.com
Published: April 24, 2013
To read the original article click here
For centuries, gold has been regarded as the ultimate standard of wealth, safety and value. But for today’s investors, it’s a has-been. A loser.
That statement will annoy many people and infuriate a few but gold simply doesn’t belong in anyone’s portfolio — especially a retirement portfolio.
Here are five reasons you should take heed:
No. 1:Gold has likely topped
The big surge in gold prices is probably behind us. (Perhaps like the price of Apple’s stock?)
When I was an investment adviser, from 1983 through 2011, I failed to put my clients into investments that later turned out to be great short-term opportunities, including gold.
Sure, I knew that bull markets are always possible in commodities and “hot sector” stocks. But I also knew that these bull markets often turn into speculative bubbles that do lots of damage when they burst.
It happened to airline stocks in the 1960s, energy stocks in the 1970s and of course Internet and other technology stocks in the 1990s. It happened with real estate in the first half dozen years of this century. Each time, what had seemed to be a sure bet, wasn’t.
Once a bubble gets going, it is typically fueled by the financial media’s zeal for an exciting story and fueled further by aggressive hedge fund managers. Throw in eager salespeople, and the well-known “greater fool” theory kicks in.
Investors may sense they are paying too much for popular assets, but the lure of quick profits is too strong to pass up. They can always hope that somebody else (the greater fool) will pay even more. The booms always end with some wretch unexpectedly becoming the final fool.
No. 2:Speculating isn’t investing
Speculating in asset classes and commodities generally hurts more investors than it helps.
Unfortunately, the very investors who can least afford the risks of speculating are those who arrive quite late at the party. Seeking the safety of “a sure thing,” they typically wait until the trend of rising prices is so obvious that they can’t stand to miss out any more.
This is what I call the “I can’t stand it anymore” method of timing investments. It usually does produce short-term emotional relief — but at the cost of long-term financial grief.
After gold prices shot up in the 1970s, and then started falling, many speculators waited more than 25 years hoping to “break even.” Some investors who were caught up in the technology boom of the late 1990s are still sitting on portfolios worth less than half their values 13 years ago. Who is the greater fool?
No. 3:Doesn’t produce income
With money that matters, investing is smart, but speculation is foolish. When you put your money into gold and other non-income-producing assets, you are speculating, not investing. Gold doesn’t pay dividends or interest. There’s no management trying to make it more valuable in the future (as in a corporation).
Warren Buffett used the following analogy: Imagine that you had $9.6 trillion to invest and you had two choices: You could buy the world’s entire gold stock melted together into a cube 68 feet on each side. Or you could buy all the farmland in the U.S. plus 16 corporations each worth as much as Exxon Mobil Corp. and still have about $1 trillion in “walking-around” money. Which would you choose?
In 20 years, 50 years or 100 years, the agricultural land will still be producing valuable crops, while dividends from the corporations will likely be worth many billions if not trillions of dollars ever year. But your 170,000 metric tons of gold “will be unchanged in size and still incapable of producing anything,” Buffett wrote.
Gold’s only value, as Vanguard founder John Bogle once said, is the possibility that somebody else will pay more for it in the future. In other words, you need a greater fool.
No. 4:Poor long-term returns
In terms of investment return, gold is a loser.
Perhaps you like gold’s return of 7.6% over the past 50 years. But you could have received slightly more (7.7%) in long-term U.S. Treasury bonds, which of course are vastly less risky. In the same 50 years, you would have received three times the return of gold from a simple portfolio invested half in U.S. government bonds and half in diversified stocks.
No. 5:Gold timers miss
Despite its volatility, gold is not a useful trading vehicle.
I’ve been unable to find any convincing evidence that, during the past five years of “gold fever,” newsletters have produced buy and sell recommendations that did better than simply buying and holding the metal. Many newsletters’ recommendations grossly underperformed gold bullion’s buy-and-hold return of 14.7% in the five years ending Dec. 31, 2012.
The average of gold-oriented newsletters tracked by Hulbert Financial Digest in that time was 4.1%. Nearly a third of those portfolios (seven of 22) actually lost money while gold was gaining. Who was the greater fool?
I find it pretty fascinating that many financial advisory firms are just now starting to issue reports listing all the reasons gold is not a good investment.
Where were they when investors really needed to know this?
Richard Buck contributed to this article.
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