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.
This is how seasoned commodity traders view the current gold bubble. Whoops! I mean gold rush.
Experienced traders know very well that the gold market is teeming with multibillion dollar hedge funds and professional speculators, which means they are after one thing… fast money!
Granted, the popularity of investing in gold is also being fed by nations topping off their gold coffers, Forex traders shorting the U.S. Dollar, and even the possibility the U.S. Dollar will no longer be the world’s reserve currency. These are all highly valid reasons for gold to spike higher. But this far, this fast?
One has to remember that the story fueling the oil bubble (e.g. the BRIC emerging markets) was also a highly plausible argument, until the speculators dropped it like a bad habit. They even began shorting oil and the oil related equities they pumped up months before.
As my Grandfather used to say: when everyone has jumped aboard the bandwagon, the wagon breaks down. (Apparently, that’s a fairly common adage considering Mark Haines says something similar in the CNBC segment.)
10 Reasons Why Gold is a Bad Investment
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.
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.
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?
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.
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).
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.
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.
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.
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.
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.