The Debate about Gold: Be Wary

One of the hottest topics for investors is the question of gold.  Should you invest?  If so, how?

Background

Here at "A Dash" we are not negative about gold.  As usual, I go where I am led by the data.  Consider the following:

• We have frequently owned and endorsed gold shares via GDX as part of our TCA-ETF trading system.
• We recommended gold holdings to our clients in the years before we launched this blog in 2003-04.
• We specifically  suggested some gold stocks in February 2007.

So we are open to gold.

A client asked about gold in February, 2007.  He had seen someone on CNBC who said that gold was going to $3000/ounce and wanted to know how to play it.  We suggested a number of strong choices.  Let us summarize what happened by looking at a chart of GDX versus the S&P 500.

The general concept worked, even though the price target for gold was way off.  One wonders whether an investor would have hold on when gold prices collapsed below stocks.  The recent gain plays off of the weak dollar trade.  Overall, it was a good move for an investor who held on.

The Marketing Push

But I am now angry!  My anger comes from the incessant advertising on television and online sources.

The ad that runs over and over on CNBC shows an attractive woman, with the attributes of culture and intelligence, asking whether you would rather own gold or cash over the next five years.  She fingers the gold, speaks in the British accent that seems to mesmerize US viewers, holds up a report, and cites "experts."  Classical music plays in the background.  She has fine gold jewelry.  It is almost irresistible.  Where can you sign up?

Meanwhile....

I have never seen a great investment where the first information came through advertising.

If investors could learn one thing, resisting TV ads would be the key choice.

The Other Viewpoint

TheStreet.com notes the recent slide in gold prices.  It is a balanced article worth reading, but here is a key quotation:

Given this fact [recent trading], it only seems logical to consider that perhaps gold is not necessarily the best place to put your money. In fact, based on TheStreet's calculations, it seems that gold would have to rise and stay at significantly higher levels than the current one in order to beat the earnings that an investor would accrue in his or her interest-bearing savings and checking accounts -- even at the measly savings rates today.

The point is that the gold trade depends upon several factors -- inflation expectations, the dollar, and overall fear about the economy and the market.  Being right requires an opinion.

Our Take

Let me add one more personal story.  A relative of a client made an investment in gold coins using IRA money.  This took a lot of doing.  They needed to find a trustee to host the IRA.  The trustee had to be willing to accept the gold coins as an acceptable IRA investment.  The seller of the coins charged a big commission and sold the coins at "collector" prices, not the fundamental price of gold.  When the client got cold feet, she learned for the first time about the bid/ask spread and the non-refundable commission.  The immediate loss to her account would have been nearly 50%.

The customer first learned about this investment on late-night trucker radio....

I was able to help -- this time -- but most people would not have a resource and most resources would be powerless.

Investment Conclusion

An investment in gold can be a winner, as I illustrated above.  There are many ways to invest in gold.  Beware of plans that charge high commissions to placed you in illiquid holdings.

There are many sources using the 2008 market and political viewpoints to ring the cash register on gold.  I suggest that readers look for this advertising in whatever they read.

Caveat emptor.

[Full disclosure:  long GDX in some client accounts.]

Comments

[jimstout7878]

I wonder what it is going to be like to sell gold in Albuquerque in the next 20 or so years? This economy is not heading in a good direction, that's for sure.

[Andrew Murray]

I have investments in gold - it cannot be manipulated like paper fiat money. That's why it's safer in times like these.

[Gold Coin for Sale]

I am going to apply these principles to everything and buy gold accordingly. Thanks!

[oldprof]

Jim -- Thanks for this bit of info! I am reminded of John Hillerman, who played Higgins on Magnum PI. This Texan fooled many Brits with his accent, learned from studying Sir Laurence Olivier.

A good chuckle for us all.

Jeff

[CordovaJim]

BTW Jeff, I chuckle every time I see that same gold ad because the "British accent" is actually Jane Metzler who for years was the news anchor on Ch. 7 in Albuquerque. She then went on to work for Don Imus for a number of years, then I lost track of her until this gold commercial started running. LOL.

[Doug Digger Eberhardt]

The Street.com article you reference is full of misinformation.

I critique that article here: http://fedupbook.com/blog/gold/bloomberg-and-the-street-com-think-your-money-is-better-off-in-the-bank-than-in-gold/

As far as the comments about gold, to Andy I say that we are still in the second and longest cycle for gold, and to Mike, there are some advisors who recommend gold as portfolio insurance, but more as a hedge against U.S. holdings than headline risk. Typically, 80% (give or take) of a portfolio in the U.S. is U.S. Dollar based. But I still don't see too many advisors recommending it. They just don't understand it. It was never taught to them as part of their required understanding even in preparation for the CFP exams.

Also, regarding the pricing of gold, from 1971 to 1999 there really wasn't any competition to gold, but after 1999, the EURO became viable as competition and a few years later, ETFs, including gold ETFs offered investors very liquid alternatives to protect themselves from a falling dollar.

[Mike]

I've chuckled at the same commercial, and I'm a retired ad guy! I suspect that randomly chosen 5 year periods wouldn't show a consistent, positive return on gold. It seems a very unstable investment in that sense. Nevertheless, many advisors recommend a small position in gold as portfolio insurance against headline risk.

[andy]

"I have never seen a great investment where the first information came through advertising."

And you don't see the above in gold either, as the "first information" was a long time ago. This is mid cycle or maybe even late cycle, and there are adverts running to sell your gold (at a crappy price) which are way more numerous than the odd buy gold advert.

When you see the shoe shine guy putting his proceeds into krugerrands at $3000 each and taxi drivers calling multi thousand dollar gold a bargain, then you will now the top is near. But right now, the taxi drivers and cleaners put their money in IRA's, CD's and savings accounts yielding 1%, so don't panic...