Gold ?
On May 12, I wrote: “I anticipate we will see Gold at US$1,350 before the end of the year. I would recommend Junior Gold stocks and Gold exploration companies.”
My statement reflects the fears and attitudes of many traders as we attempt to navigate through these rough investing waters. Whether or not gold makes for a good investment depends on whom you ask and how long you want to hold it.
Speculators love gold due to its rapid price spikes and volatility. Traders make money when investments make big moves, up or down, so during times of fear, gold traders can do well.
It’s not just speculators who appreciate gold, though. Investors the past 10 years have been pleased, too.
Since 2000, thanks to two stock market crashes, the Sept. 11 terror attacks, a U.S. credit bubble and fears about the financial health of Europe, gold has done well. So if you ask investors who have gotten into gold anytime since 2000, you’ll hear about great it is.
With that said, a fatal flaw of all investing is believing that recent history determines the future.
Historically, gold has been a laggard compared with most other asset classes, including common stocks, bonds, and preferred stock, says Ken Winans of investment adviser Winans International.
Even excluding dividends, the S&P 500 has gained 210% since December 1989, while the S&P 400 Midcap index is up 565% and the Russell 2000 Small Cap index is up 276%, Winans says. Again, that’s excluding dividends, which account for at least half of total returns from stocks.
During the same time, gold bullion is up 170%. Not bad, but it isn’t 210% plus dividends.
And that’s why many market historians urge long-term investors not to go gold crazy. Sure, a 1% or even 5% position in gold might make sense if you’re really worried about macro economic problems. But going to 20% or more, as some gold bugs recommend, will likely generate subpar future returns.
If you’re interested in gold because you fear financial apocalypse, you want actual gold in your home or buried in the yard.
History is pretty clear that gold, while attractive during times of economic worry, isn’t a great long-term investment.
