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Speculation drives up gold's price, and buyer's risk
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The price of gold reached $1,116 per ounce Friday, putting its appreciation at about 26 percent for the year.
Many with hard-earned savings and money to invest are wondering if there will be more such gains to mine, or if sometime soon a market reversal will turn purchases now into fool’s gold.
Some market strategists say go with gold’s momentum, at least in the short run. Others taking a longer view say that unless gold now defies its entire history, other investments make much more sense.
Christopher Barker, writing this week in The Motley Fool, expects gold prices to increase in volatility while rising into the $1,250 to $1,650 range — before a major correction begins.
Many speculators have placed such bets. Nearly half of the gold futures tracked by the U.S. Commodity Futures Trading Commission this month are held by speculative funds positioned to profit from continued price increases.
Speculators believe that inflation worries and fears of a U.S. currency or even government collapse will continue to draw more new people into the gold market.
Writing in Salon last month, Mike Madden told how he profited from such trends in an article under the headline “I get my investment advice from Glenn Beck and G. Gorden Liddy.”
Having seen Beck promote gold buying on his Fox News show as a protection against government and currency collapse, and former Watergate convict Liddy urge its purchase in commercials during the show, Madden figured Beck’s 2 million viewers might be moved to action. So he put some retirement money in a Fidelity gold fund and realized a 22 percent gain in less than two months, he said.
Despite such tales, Bill Stone thinks there isn’t a compelling case for gold as a long-term or even short-term investment ... not now, not ever.
Stone is chief investment strategist for PNC Wealth Management, which oversees $104 billion in investments.
“If you’re buying gold right now, you may in fact be speculating,” he said Friday, taking big risks in hope of quick profits as opposed to investing in areas most likely to yield increased future wealth.
Stone said the two drivers of the gold price — as an inflation hedge, and as secure value in case of government or currency collapse — don’t hold up under analysis.
“There’s a subset of people who believe there will be a doomsday, and obviously paper money would be worthless,” he said. “I argue that gold may or may not be worth something in such a situation.”
“Investing isn’t about the apocalypse. If you’re going to invest, your view can’t be that it’s all going to come crashing down,” Stone said. “If you thought that, you’d stockpile food and move out to a farm.”
The more rational, but still deficient, argument for gold is as a hedge against inflation, he said.
“We say the ingredients are there that could lead to future inflation, but you can’t jump to the assumption that you’re going to have runaway inflation,” he said. “We have to wait and see what is actually done by the Federal Reserve and others.”
Even when there has been significant inflation, gold’s track record has been mixed. After the previous gold price spike in 1982, investments in the metal lost 59 percent of their real purchasing power during the next 18 years, according to a November’s PNC Investment Outlook report.
For short inflationary periods, gold can work — but timing such buys is very difficult. “Your average person certainly doesn’t have the skill to do it,” Stone said. “I can’t do it.”
If the time comes to make a sensible inflation-protected investment, people should consider vehicles such as Treasury Inflation-Protected Securities instead of gold, he said.
“If you’re buying TIPS today, go in with eyes wide open. You’re signing up for a really low return, but it will be a guaranteed real return after inflation. You can’t say that about really anything else,” Stone said. “And you will get this return unless there’s a collapse of the U.S. government.”
And for those who have been punished by stock market volatility the past two years and want to escape, Stone offered this assessment: Gold prices have been very volatile over the past 60 years, far more so than stocks.
Only over a very, very long period does gold’s power to hold value shine.
“If you go back to 1802, gold does hold its purchasing power in reference to inflation, so if you’ve got a hundred-year time frame, you’re good,” he said.
“If you want to get some gold and leave it to your heirs, it will be worth more than just burying dollar bills for them,” he said.
Contact Kevin Post:
609-272-7250
Posted in Business on Sunday, November 15, 2009 10:00 pm
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