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The amount of nonsense I come across misleading readers, or simply providing bad advice, makes me cringe. Sometimes our own site presents such information like discussing penny stocks and technical analysis.In general, I distinguish bad advice, misleading or misguided information from that regarding a stock idea that simply did not pan out, of which I have been guilty too -- all of us have hits and misses. However, a post I read on Seeking Alpha promoting gold, with suggestions of doom by tailoring the data to fit the theory. The author supported his point by back-testing only ten years to a known low water mark.
This is not to say that there is not something of value to be gleaned from the story which is about more than gold, but the author chooses to give space to extreme views and some suspect data points.
There is a simple reason that over long periods of time gold under performs a broad based basket of equities available in the stock market. The price of gold fluctuates with demand that is created by fear, and the perception of scarcity. Like stocks, gold may be a good value at times, and not others. Is it really wise to invest in anything when it is at an all-time high, and driven by fear?
A review of history indicates that the price of gold fluctuates wildly and has not even kept up with inflation over the past 35 years.
The following chart comes from Gold Price
The following chart compares gold prices to the Dow Jones Industrial Average, the lower red line being gold.
DJIA vs Gold Value of $1000 1933-2008
Two things drive the price of gold, inflation and fear of inflation. For now, the latter has taken hold pushing the price of gold to new highs. Inflation fears have been followed by justifiable concern about the trillion dollar (and counting) debts being piled up by the U.S. Treasury with no end in sight. Europe, Japan and even the once flush Middle Eastern icon of Dubai have also run-up unprecedented debts.
I share the concern of many that increasing the money supply must inevitably create inflation. However, I don't think that is an immediate threat. Considering the specific components of goods, services, and raw materials, where do we stand? Unemployment remains a problem and nobody believes we will return to 5% levels any time soon. This and the abundance of excess labor capacity in most of the world means labor costs should remain flat and might even see downward pressure.
High unemployment and hangover personal debt have changed spenders to savers (except government) slashing demand for durable goods, which in turn has punished raw materials like iron (steel), platinum, aluminum and composites.
Another component driving world markers upward that has all this probability of reversing direction is rock bottom interest rates and a falling dollar, but rates can go no lower, and at least for now the dollar appears to be stabilizing. For most of the last 1500 years gold has also been a means of capital flight -- in particular in times of war, but that has faded with the advent of split second electronic transfers of assets anywhere in the world.
In the twentieth century gold outpaced the stock market for two periods of about ten years when inflation ran rampant. Once the inflation was brought under control, gold sank. Now it is up again, but this time way ahead of the actual inflation. The reason for that may actually have more to do with the weak dollar.
There is nothing wrong with owning gold or using some as a hedge against inflation as a part of an overall investment plan. I just would not make it too large a portion and do not think it is going to make you rich -- unless of course you are doing infomercials.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.
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Reader Comments (Page 1 of 1)
12-12-2009 @ 4:54PM
Peter Van Schaik said...
Of course gold is an investment but, like all other vehicles in which we invest our surplus funds, it will not, nor can not, deliver consistent profits during all phases of the long term (approximately 45 to 60 years) business cycle. No investment can, over the long term, consistently beat inflation or deliver the same returns during economic expansions and contractions.
We are nearing the end of a cycle: We are past the expansion phase and now we are experiencing a period of contraction. There is no single investment always appropriate. If we want to maximize the return on our portfolio we need to invest in areas that are proper for our position in the long term cycle.