I have been doing my usual reading and I must have read six or seven different posts about why gold is great, and why now is the time to buy gold (actually, there was one about silver, but it is the same thing – DO NOT BUY SILVER!).
Look, without a doubt, gold can and most likely will continue to go up in the short term – as long as there are huge fears of inflation in the future. But gold will go back down, it always does, and it may not go as low as it once was (since it is a finite resource), but it will go back down.
Why I Don't Invest in Gold
Here are some things that bother me a lot about gold:
- It is purely speculative – the only thing gold has backing it is what other people are willing to pay for it. There are no earnings, there are no assets, just the metal itself. Yes, there are companies that use it, but they pay for it just as an individual pays for it. IF you buy gold, you are only buying it in the hopes that it increases in price (unless you think doomsday is coming and hard assets will have to be used for barter…which most likely will not happen…ever…)
- Everyone is talking about it – the sure sign of an asset bubble is when everyone is talking about it. Like I said above, I have read about gold everywhere. Also, it is all over the news, you see it on CNBC, its everywhere. This points to a huge bubble!
- Look at the charts of the last bubble! We are nearing this level of speculation. And then look what happened a year later. You decide.
- Institutions are NOT buying gold. If you look at the institutional ownership of GLD (see below), institutions do not even own half of the assets. This shows that it is being driven up by individuals who are looking to profit from the ride. Most funds and stocks push over 70% institutional ownership. If the big banks aren't buying it, should you? Usually they know what is going on well before the general public.
- Finally, gold pays no dividend. You spend your hard earned capital on this stuff, and it pays you nothing to hold onto it. And that is if you buy it in a fund. If you buy real gold, there are all kinds of costs – you have to pay a premium per ounce, you have to store the stuff (safe, safe deposit box, broker, etc), then you have to find a buyer. Why not invest in a solid dividend paying stock?
Now, I'm not saying its time to sell gold. It still could go higher. But I don't think investors should be buying any more gold, and if they do have a position in it, they should monitor the position closely for any pullback in price.
Readers, what are your thoughts on buying gold?