Even though the performance of gold has not been very impressive at all this year, I continue to hear commercials on the radio and television enticing people to buy gold any number of ways. There are ways to shift retirement funds into gold, buy gold directly, buy gold credits in accounts where a custodian holds it for you, and any number of other schemes. Sure, there was a period where gold was one of the only asset classes that performed well during the financial crash, but here are several reasons it’s unlikely to repeat that performance long-term:
- Inflation Isn’t What It Used to Be – The biggest reason people have traditionally recommended buying gold is for its inflation protection. The thing is, with a weak economy and a strong US dollar right now, inflation is highly unlikely. This is also reflected in the record low US Treasury interest rates we’re seeing. Most people don’t follow this type of data every day, but in summary, all the traditional signs of high inflation have gone away.
- You Don’t Get Paid to Hold Gold – Unlike a CD, Savings Account, Dividend-Paying Stocks or Bonds, while they all pay out some sort of interest or dividend, gold doesn’t. There is no cash flow generated from this metal. You basically have to pay someone else to hold it (or pay for security to protect it yourself), whereas all those other investments above have routine payments and can be held in an account for free.
- Gold Just Isn’t Moving Any More Anyway – This is probably the most telling sign that the run up in gold may have been a bubble that has already burst. Even though it seems like the world is collapsing all the time with the European debt crisis, a nuclear standoff with Iran, and everything else you can think of, the run on gold that is normally expected when times are scary just isn’t happening. A look at a year-to-date chart for gold (Google Finance) shows it has only moved one percent. That is less than stocks have returned. The S&P500 index is up six percent as of the end of July.
- Is It Time to Sell Gold? You might be thinking that if it’s not a great time to buy gold, perhaps it’s time to sell your gold jewelry or family heirlooms. People often do this when money is tight. There might be other options including a personal loan or cutting monthly spending, but I like to think that markets are efficient – meaning for something as heavily followed and traded as gold, that there is NO best time to buy or sell it. The market always prices it as it should be and betting that it will rise or fall is pure guesswork.
In summary, if you’re a sophisticated investor with lots of investments in other asset classes like stocks, bonds and real estate, perhaps holding a small portion of gold is OK for diversification. But let’s face it, most of us aren’t the ultra-wealthy with estates to manage and trusts set to return a certain amount with limited volatility. We want and need simple, safe investment options. Gold is not one of them.