It’s Risky to Invest in Gold

I see many financial commentators are telling us all to invest in gold. This has been prompted by the $1 Trillion or so of money the US is printing to buy it’s own debt and some of the mortgage backed securities.

The fear of inflation is rising fast. Gold is the traditional safe haven against imageinflation.

In my view it is very risky to invest  a large part of your nest egg in gold (physical) and as such it is a trade NOT an investment.

However I personally think that buying a small amount of gold that can be used to buy goods if the whole world falls apart is a good thing. You’ll probably need a gun too to protect you and your gold when your neighbors finds out you have got some.

But let’s not go there.

Gold is a commodity and a commodity is traded. It is not an investment. The Gold Futures market was created to offer gold producers and purchasers a way of hedging their bets forward in time, or locking in prices in the future because of the high volatility associated with gold or any commodity for that matter. This is a good thing and allows for an orderly market.

You recall Large Fund Managers bought up Oil futures in vast quantities as Oil went to $145 a barrel. They bought them as an investment to offset poor returns in equities. Oil is a commodity just like gold. It is not an investment. Using the futures market as an investment vehicle for mutual funds is wrong. Note Oil then dropped to less that $40.00 a barrel.

The Fund Manager mind set is that of an investor, not a trader and as such they may still be holding many futures contracts in their funds with their investors money at high risk. The chances are these funds have got caught with a huge number of futures contracts that will expire in the future with oil still well below their purchase price.

When all those futures contracts fall due there could well be no buyers. When that happens it is going to hurt mutual fund investors – Ouch!

It could be the same with gold. Right now all the Gold Merchants can’t process all the buy orders. When the economy turns round it is likely they won’t be able to process all the sell orders as people want cash to buy stocks or invest in other things.

Read my earlier posts on Gold, “Will Gold Go Above $1,000 any time soon?” and look at the Gold Chart on, “Should You Buy Gold?”. Gold Prices 1975 to 2009

Gold Prices 2000 to 2009

The chart on the left is from 1975 to 2009. The one on the right from 2000 to 2009.

I agree if you had purchased gold in 1999/2000 it has proven to be a good investment as opposed to a trade. But you would not have known that until now. It’s all about “timing” and that’s a dirty word to financial planners.

If you had purchased gold in 1979 then it would have been a wild ride. Gold would NOT have been a good investment for the long term at all.

These are not adjusted for inflation. But it is the speed with which Gold prices change (drop) that is the problem. You cannot put a stop loss on physical gold either.

The point I want to make is unless you are “in the loop” or “know someone” to sell your gold quickly if you have to, you may well sell it at a significant loss. Or end up holding it for the long term, like many may have done in 1979-1980.

The Gold commodity market is for producers, gold merchants and gold traders. Baby Boomers should keep out in my view.

Gold Producer stocks may offer some hedge against inflation but many gold producers don’t run their business well and can lose money even if the price of gold is high. So us Stop Losses if you trade in gold stocks.

Gold ETFs can be used but again they should be actively traded and not treated as investments. As stated on Goldprice.org;

The purpose of an ETF is to be able to invest in the growth of an industry or even commodity that was not easily available to the market prior to ETFs.
Some benefits of an EFT include:

  • No stamp duty to pay (duty already paid on the underlying investments)
  • Flexibility in the timing of purchases and sales
  • Availability online.
  • Can use Stop loss strategies to limit losses (I added this to the list)

Some disadvantages include:

  • No control over the activities or the content of the ETF.
  • Different costs associated with trading ETFs as distinct to ordinary shares
    Tax implications
  • Hidden annual management costs ( the costs are built into the fund pricing)
    No guarantee that you actually own gold.
  • The investor cannot redeem the gold or take delivery of the gold, only cash.

Goldprice.ord goes on to say;

An investor has to ask themselves the question, then, “Do I want to actually own gold, or simply shares in it?

I think it should read,

A Baby Boomer has to ask themselves the question, then, “Do I want to actually own gold, or simply shares in it?

If you want to own it then only buy a small amount and keep it near you, not in a vault somewhere.

If you want to buy shares and ETFs use proper stop loss strategies and money you can afford to lose.

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