The Misconception About Gold
/Every so often someone asks me about gold and whether they should own it. Here is a look at the price of gold over the past 10 years:
(chart created in stockcharts.com)
You will notice a big run-up in the price of gold post-recession, from 2008 to 2011. Then the price fell -40% over the following years and has floundered around since then. Beyond the fact that we do not invest in currencies or precious metals (at least yet), gold lacks the one thing that matters most to us, which is a rising trend. The price of gold has been a mess for nearly 7 years.
So then why do people want gold?
Many consider gold to be a hedge against inflation. As prices rise throughout the economy (inflation) the theory is that the U.S. dollar becomes less valuable. If the dollar is less valuable, that means it requires more dollars to buy the same goods and services than it did in the past. This is what it means to lose "purchasing power".
This is where gold comes in.
The perception is that buying gold hedges against this risk that the dollar will become less valuable. Because gold is a hard asset and the oldest form of currency, it is believed to have a more stable value than the dollar, which fluctuates based on a variety of factors like stock market conditions, international trade and Federal Reserve actions. Using this logic, the "hedge" is that when the prices of all these other things in the economy eventually peak and reverse lower, gold will thrive.
In reality, it is really just a hedge against how we think others will react in times of economic fear.
The fear starts with feeling that real estate values and stock market prices will fall (for whatever reason). This stems to fear that the economy will fall into recession. Finally, because the U.S. Dollar is intrinsically linked to the economy, there is fear that the dollar will collapse. This all leads to the notion that buying gold might be a good idea because if the dollar dissolves the nation will be left with gold as its currency.
That entire thought process is flawed because the reality is that gold is an asset, not a currency. No one buys gold with the intent of transacting goods and services. They buy it because they think it will become more valuable should everything else they own plummet in value. The entire essence of thinking something will rise in value is based on believing that someone else will want it and be willing to pay you more for it. To that end, those who own gold are doing so as an investment, not as a means for bartering the exchange of goods and services.
If you consider buying gold at any point, ask yourself why...
- Because you can touch/feel it? There are many physical assets you can hold that may or may not rise in value, from antiques to baseball cards to classic cars.
- Because someone on TV said to buy it? By now I hope you know how we feel about taking advice from the financial media.
- Because you will earn an immediate return on it? Actually, no you won't. Gold does not pay a dividend like a stock and it cannot be rented out for income like a house can.
- Because you already own a lot of stocks? I would be willing to bet you lunch that if we looked at the distribution of your assets that there is probably something you do not own that is as good as, or better than, gold as a long-term investment.
I realize I sound somewhat negative when it comes to gold, but I am more so annoyed about the misconceptions that exist.
In The Market...
The S&P 500 lost -0.2% this past week. Let's look under the hood:
(price data via stockcharts.com)
Last week's loss snaps the 5-week winning streak for the S&P 500, which had gained +4.6% over that span. Most sectors were negative as the overall market struggles to eclipse the previous S&P 500 record high from January.
This comes as no surprise. I felt the market would run into some headwinds right now, as I wrote about in recent weeks. We sold our Health Care sector position (XLV) last week, as it appeared to be sharing in the struggle to get above its previous peak. Take a look:
(chart created in stockcharts.com)
The risk/reward slanted in the favor of selling this fund and capturing the nice gain we had earned in the prior weeks. The price ran back up to the previous high just as we anticipated it might. But it appeared to lose a bit of momentum when it got there, so we felt it was wise to sell and reinvest the proceeds into another area of the market that might have more upside. I normally do not go into too much detail recapping these types of decisions, but because most accounts owned this Health Care fund it is worthwhile to share our thought process.
In Our Portfolios...
What's New With Us?
I posted another short video on our "Video Q&A" page, which discusses our investment beliefs. Take a look:
Have a great week!
Brian E Betz, CFP®
Principal
