8 Reasons I’m NOT Investing In Gold

by Ron Haynes

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

goldbars 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

About the author

Ron Haynes has written 1000 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 11 comments }

Dave @ 30 Days At A Time

Good points.

I’ve never understood the fixation with gold. There is a bubble in gold and other precious metals right now, and it will burst. Meanwhile, the stock market is probably undervalued (less than it was a year ago) and will almost certainly show solid returns in the near future. When gold goes back down to <$500, I might think about it, but $1,100 is pure insanity.

Doug Digger Eberhardt

Ron, to your points, one by one…

1. There is no logical reason that gold is priced over $1,100 USD per ounce right now.

My take: The logic is based on the fact the U.S. Dollar was falling and thus gold rising. The last 10 years the Dollar Index and gold have been almost perfectly inverse related.

2. 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.

My take: The Central Banks have indeed been selling the last 10 years with the Bretton Woods Agreement which lasted 5 years and subsequent agreement (Bretton Woods II) which is for an additional 5 years. Despite all this selling, gold has broken out to new highs. I can’t imagine the citizens of Switzerland are too happy about selling most of their Central Banks gold at an average price under $500 an ounce, but that’s what their Central Banks was forced to do.

3. No Cash Flow

My Take; Gold is insurance for the U.S. Dollar portion of one’s portfolio. Stocks, U.S. Government and U.S. Corporate Bonds and cash make up those portfolios. Outside of a small foreign stock exposure, all of those assets are price in U.S. Dollars. There is no hedge against the fall in the U.S. Dollar in most U.S. portfolios (on average). People insure their home, auto and life, but not their portfolio from a falling U.S. Dollar.

4. Gold becoming currency again.

My take: You don’t have to go back to 1913 to see how gold has been used as currency. Argentina was a recent example of how gold and silver were used in barter via the various swap meets that propped up during their currency crisis. In the absence of a trusted medium of exchange, silver coins (actual U.S. money at one time) and yes, gold coins, can be used as barter to secure needed supplies. Iceland came close to this with their recent fall in currency by 75% but the IMF rescued them. Interesting point, while Iceland is not the U.S., they did in fact have better economic data at the time of their crisis.

5. Gold bugs think that *recent* past performance is indicative of future results.

My take: I’m not sure where you are getting that from. It has to do with the dollar, not what some gold bug says. As far as the analysis pre-2000, I discount it as there was no competition to the U.S. Dollar at that time (1980 – 2000). Since 2000, the EURO, ETFs in gold and currencies plus about every other possible investment offer viable alternatives to the U.S. Dollar. Since 2000, gold has shined brightly.

6. Commissions on gold are outrageous.

Bullion gold can be had for around a 5% commission, depending on available supply. The higher commissions are associated with numismatic or “rare” coins which I don’t recommend people purchase.

7. The whole store of value thing is bogus.

Through time, one can hardly argue against golds store of value. But lets look at things from an economic perspective. Government debt is presently over 12.4 trillion. GDP, which is utilized in showing the strength of an economy is presently only supported by government spending (more debt) and some green shoots spawned from that government spending. But the employment picture just gets worse and worse, banks aren’t lending thus businesses aren’t spending, trade deficits get worse as we choose to buy at Walmart than our local unionized businesses and consumers are tapped out (consumer confidence down big today, to 1980′s level).

So while we’re enjoying the bounce in the U.S. Dollar at present, which has caused (and will continue to cause) gold to fall in price from its highs, realize that this only temporary. And the dynamics are changing around the globe too. Gold is up 7.92% in EUROs the last 60 days.

I try to reply to these types of articles on gold with well thought out reasoning. I leave it to the reader to make their own judgments. On my site I’ve challenged, journalists, CFPs, CFAs, PhDs, Economic Professors, Dave Ramsey and even George Soros in their understanding of gold. I just want people to understand that for which most don’t.

On a side note, while I definitely agree with you on trading ETFs, I can’t say I do on holding Index funds unless one locks in profit. Buy and hold, for the most part, is a thing of the past (except for physical gold). A holder of physical gold cares not that it falls to $700 or lower on its way to $2,000 and higher.

Disclosure: Financial Advisor for over 20 years and I don’t sell gold (at least not right now), I just write about it. And if you don’t want to buy gold, that’s ok.

Ron

No response to number 8?
A reasoned and well thought out response to numbers one through seven, though *recent* gold performance is the only thing that has made people interested in investing in gold. If it was still at $350 an ounce, no one would be interested. When it dips again to reasonable levels (I believe it’s in a big bubble myself), the whole house of cards will collapse.

The practicality of gold just isn’t there. Can you imagine going to Wal Mart and trying to pay in gold? Do you really think the US will start minting gold coins again? Could we really afford to? Hardly.

The US dollar is the world’s currency and the Chinese and others are too heavily invested to switch over to gold. There just isn’t enough of it.

Doug Digger Eberhardt

Hi Ron, Help me out here…I didn’t see a #8. What was it? Or was that done on purpose (which is pretty cool if so, to see if people were paying attention…which clearly I wasn’t as I would have commented on it, lol).

Time will tell what happens with gold. As far as “the whole house of cards collapsing” with this current downturn, think about it a different way.

It’s really not about gold at all. This is what most people don’t understand.

This may surprise you, but Gold is just a shiny rock. If one buried it in their back yard 10 years ago and dug it up today and cleaned it off it would still be a shiny rock right? The only thing that changed is what the shiny rock is priced in (Dollars, EUROs, etc.).

BTW, technically the U.S. Mint does mint gold and has since 1986. Our constitution defines money as a certain weight of gold or silver. It is only with the addition of the Federal Reserve Act and Federal Reserve Notes that things changed.

I haven’t said anything about returning to a gold standard in the above or in any of my writings on my blog but I am in favor of competing currencies and letting the individual decide what they want to hold. It’s a whole separate discussion, and one that is irrelevant at present since the dollar is currently king.

While one can’t see the future, one can analyze the economic data and while gold may not return as a monetary standard, at present…. it sure does a good job in counteracting the fall of the dollar. The Dollar Index is key. We break below 74 and then the March 2008 lows of 72, one better hold some gold (and silver).

Personally I would like to see gold go down below $800 or $700 an ounce like some Elliott Wave Theorists are predicting (barring any external influences). It will set things up for the trade of a lifetime.

Lastly, I’ve been cautioning people about trading gold long in U.S. Dollars as while gold broke out to new highs, the Dollar Index didn’t confirm. In November, I recommended people look at trading gold in EUROs and that trade is up 7.92% in the last 60 days. I just wrote an article on it today you might like: Call To Buy Gold in EUROs Up 7.92% Last 60 Days

Thanks for posting my reply and your comments…

Ron

My bad — I left off the number! It’s fixed now. LOL — thanks for pointing it out!

And yeah, I do get it — gold only has the value that we assign to it, just like paper currencies. I just don’t personally see 7 billion people going back to using that shiny rock as a medium of exchange no matter how devalued our US currency becomes. Just a personal opinion though. I wouldn’t be surprised to see an Elliott Extension of a couple of years or so when some gold pessimism creeps back in. Remember that just a few years ago, everyone was touting real estate …

And for the record — virtually ALL comments get through, even if they disagree with me (just keep them civil and something my children or mother wouldn’t get offended by!). Your comments are welcomed and encouraged at any time.

Doug Digger Eberhardt

#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.”

My take: This is a good observation but I’ll try and expand on it some. First I would say that individuals are buying gold in droves via the ETFs, worldwide yet financial advisors still don’t recommend gold as part of a diversified portfolio and it’s not even mentioned but in passing in our CFP study books. I’ve written on this a few times and have had CFPs who were bashing gold, agree with me in private emails.

While there are many hedge funds that do buy gold, many park money in treasuries waiting for the next opportunity. The most notable hedge funds doing the purchases of gold are John Paulson, whose fund made 20 billion betting against the housing and financial markets, and George Soros whose fund bought over $600 million of the ETF, GLD as reported in their quarterly recently (Soros has since said gold was in a bubble, but I showed in an article on him that this is how he acquires assets at a lower price…he’s no fool, ha).

While there are some Central Banks buying gold (India, Russia and some smaller nations), and China bought a little, China can’t show it’s hand too much for fear of a run on the dollar. Remember, the YUAN is tied to the dollar (an unfair advantage to them and a different discussion).

So what is China doing to hedge themselves? While China is now the worlds largest gold producer, they’re also contemplating
buying up foreign mines.

Granted, during the last financial crisis, the world did in fact turn to treasuries and the dollar bounced higher, I’ll give you that. But from an economic perspective, including analysis of GDP, Debt and Deficits, potential health care for all, housing subsidies and Fannie and Freddie funding, cash for clunkers, trillion a year for fighting two wars, bombing Pakistan and potential of war with Iran, somethings got to give. The arrogance of congress in thinking their spending ways without consequence to the purchasing power of the dollar is appalling.

All I ask for is a little insurance in gold, not to load up the boat. 10% – 20% is my recommendation. But one must have a plan with that insurance. Today’s world is not tomorrows.

One can profit from this beyond insurance too, both up and down and in other currencies. That’s why I like the ETFs just as you do Ron.

Doug Digger Eberhardt

Interesting in the paragraph above where I wrote “my blog” it actually put yours in there, hehe…

Ron

That’s the Crosslinker Plugin I have installed on this blog — see there it goes again! (maxes at 3 links per post though).

Doug Digger Eberhardt

Thanks…hadn’t seen that before… I’ll address #8 now! At first glance, it looks like a good one.

FFB

How about buying gold through an ETF rather than it’s physical form? Or buying a fund of gold companies (mining)?

I see the arguments as a hedge against inflation, which many are saying will eventually hit. But what concerns me is the fact that everyone is saying it driving up the price of gold too high. It may be a good hedge but if its already overpriced then you are hedging inflation with an inflated item, right?

Doug Digger Eberhardt

If you go to Kitco.com you’ll see in the middle section at the top they break down the price of gold by what weakness in the U.S. Dollar and by predominant buying or selling. This can give you short term analysis.

As I type this, the Dollar Index is down a bit and “weakness in the U.S. Dollar” price of gold is up $1.64. However, due to predominant selling, gold is down $10.05 giving a total fall in the price of gold of $8.4o.

The trend is sell as you can see. I haven’t had time to research the reasoning yet, but I did glance somewhere that it’s options expiration.

Right now, there’s really not of “seen” inflation out there except for those things that the government has their hands in (school tuition, health care). You’re right about the build up of government spending (deficits added to current debt) and that is inflationary. But there’s also credit contraction occurring. In a sense, we’re experiencing deflation and stealth inflation (a reason many own physical gold).

Remember in 2008, the stock market and gold both got whacked. The gold mining stocks got hit especially hard. Yet gold finished the year positive.

I read
daily to try and keep up with the deflation outlook and weigh what he says against the folks at
Lew Rockwell who take more the inflation side of the coin. But I read much more than that…the more opinions, the better my understanding.

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