Gold is all over the news right now as the price has been tumbling for months and has dropped dramatically over the past few days. Here is the most recent look:
The price has fallen about 24% from its peak in October 2012, prompting many to ask if the mania in gold prices over the past several years is coming to an end. My opinion? I have no idea about the future direction of the price of some shiny metal.
Let’s be honest, gold is not an investment. It does not pay a dividend, have earnings, make interest payments; it is not consumed, burned, planted or eaten. There are no fundamentals, there is no inherent value. Gold is an entirely speculative vehicle that depends only on irrational demand for changes in price. It is the peak of the “bigger sucker” trade: when you buy gold, you are hoping against hope that there is someone else who will want to buy it from you at a higher price. Gold is a fad, and a trade. Gold bulls will tell you that the price has increased some astronomical percentage over the past forty years, and if you look at a basic chart, you might be inclined to agree:
However, anyone looking at the chart can see that ALL of the gains in gold prices have come in the last 10 years, and most in the last five years.
And, we’ve been here before. In the late 70s, among actual inflation, the price of gold skyrocketed as fear took hold and lemmings piled in, only to have the price come tumbling back down when inflation abated. A gold buyer in 1979 would have been underwater for over twenty years without so much as a dividend or interest payment to show for it. Most importantly, gold has been unable to serve as the “inflation hedge” so many proclaim it to be. Here’s a look at gold prices after they have been adjusted for inflation (aka Real prices) since 1971 (when the United States Dollar left the Gold Standard).
Over the long term, gold has offered basically no inflation-adjusted return if we ignore the most recent speculative bubble. But it’s so hard to ignore the bubble, because we just LOVE BUBBLES. Tulips, commodities, tech stocks, real estate, gold, the list goes on and on. There is a long history of asset class bubbles in the United States and the reason is fairly simple: Greed. Everyone wants in on the next hot play, they want to talk about how they bought gold at $300 at the next neighborhood barbecue, they want to brag about their fix-and-flip at the office holiday party and they want to wave their tech stock winnings in front of their father in law.
I don’t know if the gold bubble will burst or continue for a time, but bubbles are inescapable because people are driven to make emotional decisions and let their fear and greed get the best of them. While these bubbles can provide entertainment value for the rest of us, investors building long term portfolios to meet personal goals are best served buying financial investments that offer actual investment returns and leave speculation by the wayside.
(Update: There is a great but fairly academic piece from the CFA Society that one-by-one takes apart the traditional argument for owning gold as an investment. Highly recommended reading. http://www.cfapubs.org/doi/pdf/10.2469/cp.v30.n1.9).
Bason Asset Management 