While the Standard & Poor’s 500 Index (NYSE: SPY) rose more than 30 percent, the exchange traded fund for gold, SPDR Gold Shares (NYSE: GLD), fell nearly 30 percent. It was no better for companies in the sector: Goldcorp (NYSE: GG), the world’s biggest publicly traded company in the sector by market capitalization, was off by more than 40 percent for the year. Over the same period, Newmont Mining (NYSE: NEW), another major firm in the sector, plunged by nearly 50 percent.
This clearly wasn't a good year for gold.
Investing in Gold? You Better Understand It
For those looking to profit from buying and selling gold, understanding the nature of the asset is imperative.
Unlike a company such as Wal-Mart (NYSE: WMT) or Pepsico (NYSE: PEP), gold is not an investment. There is little demand for gold in the functions of the economy. It not like an industrial metal such as coal or copper. Even silver has a far higher industrial usage than gold. By far, the great majority of The Yellow Metal is purchased for its role as a safe haven asset or for use in decorative things like jewelry.
That means that when there is little confidence in an economy, the price of gold rises. This results from gold being in demand due to paper money falling in value. That is what happens when inflation sets in for an economy. That causes buyers to prefer The Yellow Metal to paper money. There is really no economic or financial justification for that as gold and fiat currencies have the value that is ascribed to each as a medium of exchange.
People just think that hard assets, like gold, have more value in tough times since they are tangible (i.e. you can hold a gold coin in your hand), versus things like paper money, which are only worth what the government says they are worth. In reality, though, paper money and gold are very similar.
Can You Profit from Gold?
Many have profited from buying and selling gold, but it can be a bumpy ride due to the way the price of The Yellow Metal fluctuates in response to economic and political events.
This year was the worst since 1981 for The Yellow Metal, as economies are recovering from The Great Recession. Unlike Wal-Mart or Pepsico, The Yellow Metal does not pay a dividend. Buying gold is a classic case in “dead money” investing. There are stocks in the gold industry, such as Goldcorp and Yamana Gold (NYSE: AUY) that do pay dividends, though.
Gold is not a long term holding, like Pepsico or Wal-Mart.
It is for those who like to trade, rather than buy for the long term. Like many commodity classes, it can be very volatile. That is hardly the case with Wal-Mart, which has a beta of 0.42, and Pepsico, which has a beta of 0.41. With those low betas, the share prices of Pepsico and Wal-Mart move up and down less than half as much as the stock market as a whole.
Gold can be held for the long term, should there be a desire for diversity in a portfolio through the inclusion of precious metal holdings. But it should not form the foundation of a portfolio for an investor. Too much of its value is based on speculative features, rather than the foundations of fundamental economic demand.
Where do you see gold going in 2014?