News about gold's rise to new highs has been in the main stream media for the past 2 years. The gold bugs are out in full force predicting economic doom and gloom. Does this mean we should rush out and buy gold stocks? Actually, it's the opposite. Gold appears to be in bubble territory, so buying gold or gold stocks may well prove hazardous to your financial health.
One of the problems with buying gold is that it has no intrinsic value. It does not produce income and is priced in the market based on people fear and emotion combined with poor supply/demand fundamentals. So if we can't figure out what it's really worth, then how can we buy it?
If you do a quick google search on "gold as an investment", you will see hundreds of sites offering to sell you gold. They all use the last ten years of data to show how gold has trounced the S&P 500. But, what they forget to tell you is that gold's long term returns are lousy. While it is true that gold has had periods of out performance, the fact remains that it is extremely difficult to predict when the next period of out performance will be. See the chart below and you'll see why owning stocks is clearly been a winner over the long-run.
So, since 1900 stocks have returned 9.5% compound annually. Gold has returned 3.5% annually. So, after inflation you would have a near zero return on gold. Ask someone who bought gold in 1980 how their return was. In fact several investment heavy weights have recently commented on gold. George Soros, the famous hedge fund manager recently commented about how gold is in a bubble. Also, Warren Buffett was recently quoted in Fortune magazine about his thoughts on gold. The following excerpt is a classic Buffettism - the ability to simplify a subject to which Wallstreet makes complicated;
"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States," Buffett said. "Plus, you could buy 10, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
In the short-term gold could still actually move higher as the euphoria continues and people clamour to buy gold and the plethora of gold related investment products, to protect them from the "doom and gloom".
However, the party has already started and is well underway. In short, gold is a crowded trade.
Do you remember anyone in 2001 wanting to sell you gold coins when gold was $300/oz? I don't.
Merry Christmas to all,
Disclosure: I currently have a small short position on gold.