All That Glitters

Every investment decision has its pros and cons. And yet, one has to search far and wide in order to find an argument against a gold investment. Many pro-gold articles, such as found at Gold Eagle or 321gold, are written by those tied closely with the gold exchange, and have a very good reason for their bullish outlook. Other articles fall squarely into the “doom and gloom” camp, of which gold has long been the favorite. It seems that no one is motivated to take the other side.

It’s high time this was rectified. In an effort to present both sides of the coin (no pun intended), I have delved deep into the underbelly of the Internet to bring you a rational debate against gold. But first, a disclaimer. I am not personally anti-gold, nor am I recommending you avoid gold in your investment portfolio. There are in fact many good reasons to invest in gold. I am merely presenting some thoughts to consider when making an investment decision.

1. Gold makes a Lousy Investment

An investment, strictly put, is an exchange of existing value (typically cash) for something that you anticipate will result in an increase in value. Basically, you are hoping to make a profit: a nice solid return that you can brag about over the dinner table. Primarily, this profit is earned either by reoccurring payments (i.e. dividends), or appreciation – of which gold only has the later. Typically, appreciation is magnified through leveraging, the practice of which gold does not offer. However, this may be a good thing, as the value of gold has been headed down for the last 25 years:
As steady as the tortoise, gold has been sinking since 1980. Over the last three years the price has been picking up, but it is still well within the overall downward trend. “Don’t forget about the spike in 1980,” I hear the gold zealots saying. True, gold spiked almost 20 times in the course of just a few years. However, when compared to the big picture, it is comparatively small. For example:
When comparing the growth rate of gold to that of the Dow Jones, you can see the the spike in 1980 is overwhelmed by the growth of the stock market. Worse still, the risk you incur trying to “time the market” can be devastating. While a handful of investors where lucky enough to sell at the top of 1980, and make a fortune, this quick buy-and-sell strategy is not only terribly difficult to pull off, but also quite risky. For example, the very next year gold shed over 25% its value. Alex Wallenwein of Safe Haven summed it up well when he said “…as an ‘investment’, gold absolutely sucks.”

2. Gold is Not Inflation Proof

One of the biggest arguments for owning gold is its supposed ability to withstand inflation. As the general price of goods rises, so does the price of gold, or so the story goes. However, the numbers just don’t bare this out. Behold:
In the last 20 years, while overall inflation has nearly doubled the price of consumer goods, the price of gold has barely risen 10%. In fact, previous to the last three years, gold was cruising along at 20% less than it’s original value. To understand this, you must appreciate two things: 1) Gold is a very emotionally driven commodity, and as such, will rocket up during times of concern, but will equally crash during times of confidence. This is what causes the volatility in gold, not inflation. 2) Unlike other commodities, gold is controlled by a handful of world banks, who have an interest in keeping the price of gold steady. While gold does perform well during times of financial stress, typically its value does not grow fast enough to keep up with inflation.

3. Is Gold really all that Secure?

My favorite argument for owning gold is the professed safety it provides during calamity. “You can sleep easy, knowing that when the U.S. economy shoots straight down the toilet, your gold will provide you with all the bartering capability you need.” Hum.

One result of the Great Depression commonly left out of high school history books was the United States Government’s seizure of all privately held gold. On April 5th, 1933, in a desperate attempt to lessen the effects of bank runs, President Franklin Roosevelt commanded all citizens “return” their gold. The very wording implied that the government considered its self the original and rightful owner of all gold in the nation. While Roosevelt assured the country “the order is limited to the period of the emergency,” this order remained in force for over forty years.

It is not unforeseeable for the U.S. government, finding its self in another time of crisis, to again claim the nation’s gold. A plummeting U.S. dollar will eventually need to be backed by something, in order for foreign economies to feel it is worth more than the paper it is printed on.

Even more probable is the sale of huge amounts of gold by the central banks of the world. The vast majority of the world’s gold is controlled by a handful of large national banks. They periodically release some of this store to the world, in order to keep gold prices at bay. However, these banks have made it clear on several occasions that should we find ourselves in economic turmoil, they would sell off large portions of their reserve, driving the price of gold down.

In conclusion, gold may not be the safe harbor it is touted as. When it comes to “economic disaster securities”, one must consider the political aspects of a world in crisis, not just the economic. Right or wrong, gold is a controlled substance, with a turbulent history. And more important still, should we find ourselves in such a disaster, gold may glitter, but it can be pretty hard to eat.