gold buyers: please be careful!

I read an article today that frightens me: apparently, SPDR’s gold ETF (GLD) now has more money invested in it than their S&P500 ETF (SPY). What this means is that investors are, in mass quantities, pulling out of stocks and investing in gold. I understand the lack of confidence in both the stock market and the US government, but this is a bad idea on many levels:

  • Stocks are shares in companies that (in theory) produce something of value. Gold’s value is mostly arbitrary.
    • As a side note: I say “mostly” because there are some useful applications of gold, such as in semiconductor bond wires. As an engineer in the semiconductor industry, I’m greatly irritated that those who are buying gold just to sit on it are driving up prices for those who actually want to use it.
  • Gold is highly volatile, and over the long term, has had very poor returns. Compare this chart with this chart. Consider the fact that gold is just now coming back up to what it was in the late 70’s-early 80’s — and that’s not even accounting for inflation. Also consider the fact that the stock market chart above is logarithmic!
  • This is a story that has played out over and over again throughout history. This has happened before, and it will happen again. This is not the first time consumer confidence has been shot. This is not the first time that the media has gone ballistic over the economy. And every time, we have recovered. Every time, the people who flew to “safety” have lost their shirts.(And gold, as the charts above indicate, is anything but safe!) Those of you who lived through the 70’s should know better. Hell, those of us who lived through 2009 should know better!

If you’re still insistent on buying gold, fine. But please, be careful. There’s a word for the kind of run-up gold is experiencing right now: a bubble.

 

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2 thoughts on “gold buyers: please be careful!

  1. A few comments:
    Your gold chart ends back in ’07. The price of gold is sitting about $1850/oz right now, up 15% in the last month and 50% in the last year. In inflation-adjusted terms, we’re getting close to the 1980 peak.
    http://inflationdata.com/inflation/images/charts/Gold/Gold_inflation_chart.htm

    The late 70’s runup was, I think, due to concerns about massive inflation in a time of no economic growth. That bubble popped once Carter appointed (and Reagan followed through with) a Fed chair that got serious about getting inflation under control by draining excess money out of the system.

    The runup now is due, I think, to reasonable expectations of high inflation in the near future. The Fed has created ginormous amounts of money, but so far the banks have mostly been using that money to rebuild capital reserves after 08-09. There are signs, though, that inflation is starting to creep up again (http://cr4re.com/charts/charts.html?CPI#category=CPI&chart=InflationJuly2011.jpg) and the thought is if there’s another round of QE, there’s no reason for the banks to hold on to it this time.

    I bought a couple oz of gold at $1500 (wish I’d bought it at $900!). I’ll sell once it appears the government’s ready to give up on Keynesian theory.. but it doesn’t look that day is coming before January 2013 at the earliest. 🙂

    • Indeed. I don’t think anyone’s arguing that inflation is unlikely (though it’s certainly not a sure thing). However, what you’re attempting to do is time the market. Do you think that the price of gold will be at its peak when things have clearly turned around? No, it’ll already be on its way back down to reasonable levels. Your only hope to hold on to your gains is to sell before it’s clear that the threat of inflation is over; if you wait until it hits the news, it’s already too late. Moreover, you’re betting that the Fed has learned nothing from the stagflation of the 70’s; understandable if you have a dislike for the current administration, but hardly a risk-free wager.

      I can understand wanting to hedge against inflation, but that’s what TIPS and short-term bonds are for. Speculating on inflation, however, is a dangerous game. If it’s fun for you, if that’s how you want to spend your time and energy, then by all means, play — just be careful.

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