Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head. – Warren Buffett
Scratching their heads indeed! With all the radio talk show hosts hyping it, B-grade television stars hawking it, and the Franklin Mint crowing about it (they pitch gold plated coins and replica 1/14th scale Studebakers though), you’d think investing in gold would be the next best thing since oxygen or a Josh Groban Christmas CD. Gold may or may not have a place in your portfolio, but it isn’t in my E*Trade account. Why?
1. Gold is an emotional investment.
There is no logical reason that gold is priced over $1,700 USD per ounce right now. None. There are a host of emotional reasons, however. Fear, uncertainty, insecurity, powerlessness, skepticism.
2. Gold prices can be manipulated.
Vast, huge quantities of gold are already held by the central banks of various countries, making the price of gold easily manipulated just like the Hunt brothers did with silver back in the 1980’s. If one of those countries were to sell off their gold, the market would be flooded causing a surplus of the metal on the market, and driving down prices.
3. Gold has no cash flow.
Just like Warren Buffett said, we bury it and pay others to guard it. Gold costs money to own. I would rather own a piece of a business that produces cash flow rather than a chunk of metal that may or may not go up in value.
Gold can never become the panacea that the proponents make it out to be. Investors would be wise to avoid gold altogether and focus instead on companies who are capable of surviving the recession.
4. Gold can never become currency again.
Can you imagine the collapse of society with you having a wheelbarrow full of the shiny yellow stuff? Imagine going downtown to buy some food and paying in gold. Now imagine Vito and Brutus following you home after they see you buying stuff with gold. I hope you have an armed bodyguard and I hope he has only your best interests at heart …
You’ll have to convert it to some sort of currency. Gold just doesn’t lend itself to paying for your daily life — no matter how they did it 100 years ago. Heck, 100 years ago people regularly carried sidearms and rode in stage coaches.
5. Gold bugs think that *recent* past performance is indicative of future results.
Gold has had a remarkable run up in price lately, that much is certain (don’t look at it from 1800 through 1970). Will it continue? Where is the evidence that it will? Back in 1978 gold proponents were claiming that it would continue only to see gold prices fall over the next decade from almost $800 USD per ounce to about $250. It took until 1996 for gold to reach its 1978 level – and that’s is UN-adjusted for inflation!
We can look at how a company has performed in the past, what products it’s working on, and what respected analysts in the industry believe the company’s growth rate will be. We can’t do that with gold. We just have to trust the talking heads.
6. Commissions on gold are outrageous.
Yeah, I did look at it out of curiosity, and I was astounded at the high commissions. Some were as low as 10 percent but others hovered around 30 percent! You have to see a MASSIVE run up in price to overcome those costs. Buying gold at $1,100 with a 30 percent commission means you’re really paying $1,430 per ounce. No thanks.
7. The whole store of value thing is bogus.
Please. Store of value? C’mon, if all you’re interested in is “storing value,” why are the gold bugs always talking about how they believe it will go up in price? They’re obviously NOT interested in “storing value” but in capital appreciation and the only way they will realize capital appreciation is in generating fear among the populace that inflation will run rampant and it will take a barrel full of dollars to buy a loaf of bread.
Right now, many investors and others are operating in the fog of crisis. Once the fog of recession clears, I think we’ll realize that gold has probably seen its best days. If you’re worried about massive deficits, recall that our country was founded with debt, debt that was ultimately paid back.
8. We have a history of repaying our debts, no matter how difficult it is.
That’s just one reason that even during this crisis, buyers of Treasury securities (other countries, large hedge funds, etc) remain strongly interested in purchasing US bonds and Treasuries. These buyers could just as easily buy gold instead. They are not.
Me, I’m sticking to index funds and ETFs through E*Trade.
Photo by ed002m