Q: Gold seems to be on a tear lately. Am I too late to get in on it?
A: With the price of gold reaching an all-time high in early 2008, a new frenzy predictably emerged for the precious metal.
Unfortunately, over the long term, gold has a track record of disappointing investors, so caution is warranted if you are considering the addition of either gold stocks or bullion to your portfolio.
True, but it's more than triple its 2001 price, while the stock markets are down nominally. The DOW and NASDAQ are actually down in real terms because the US dollar is worth so much less.
Three reasons are typically cited in support of investing in gold, and each should be challenged and critically analyzed.
The first reason is to protect against inflation. In reality, the recent rise in gold occurred while inflation has been generally low and expectations about future inflation have also remained low.
Really? Let's examine this assertion.
First of all, gold isn't a local commodity -- it's global. This should be obvious to anyone with half a brain cell, and as such, it becomes necessary to look at inflation globally.
The US dollar is the world's reserve currency and the US economy is the 'consumer of last resort', in that US consumption has historically been the engine driving global economic growth. The US floods the world with paper dollars in exchange for real goods.
As the US money supply increases(this is how Austrian economists actually *define* inflation, and it's increasing at 17% year/year!) the US exports its inflation to its trading partners and nations whose currencies are pegged to the dollar. Inflation in China is at 7%. Inflation throughout the Middle East is at over 10%. And the US continues to cut rates and print money, faster than ever!
Inflation is a global phenomenon, as nations' money supplies have been growing out of sync with economic productivity, which is part of the reason we have a global credit bubble in the first place. And, we're not immune from this bubble in Canada either.
As a result, instead of gold, which doesn't always move with inflation, you might want to consider owning inflation-protected real-return bonds. As their name suggests, these bonds pay interest rates that adjust with inflation, thereby minimizing the impact of any increase in inflation.
That's a fantastic way to lose your shirt. People are far too trusting.
In buying inflation protected bonds, one is implicitly trusting that the government is reporting real inflation. Been food shopping or filled up with gas lately? Does that feel like a 3% increase?
It's true to an extent that (price) inflation has been contained in Canada -- the rising Canadian dollar has partly offset those effects, but a quick look at the USD/CAD chart shows that the Canadian dollar is no longer rising versus the greenback -- it's holding in a tight range.
All those jokes about the US dollar being weak and plunging miss this most important point. If this continues, it means that the US dollar is going to drag the CDN dollar with it.
Is this what the new Bank of Canada Governor is planning? Not employment targeting, not inflation targeting, but exchange rate targeting? We're doomed!
The second reason people invest in gold is to benefit from a falling U.S. dollar. Because gold is priced in U.S. dollars, it historically has tended to move in the opposite direction of the greenback. That occurred last September, when the U.S. dollar dropped and gold rose. However, the price of gold has risen more than the dollar has declined, suggesting that its movements are affected by more than the U.S. currency.
With that in mind, you may find that investing in a global portfolio of stocks and bonds is a more prudent option. That portfolio could hold its value even if the U.S. dollar declines further.
It's also important to understand that stocks and bonds have historically provided better returns than gold. Consider what would have happened had someone bought gold and the stocks of the TSX at the beginning of any month since 1970 and held those investments for a period of 10 years.
That person would have found that stocks outperformed gold eight per cent to five per cent. In addition, gold punished investors with a negative rate of return 38 per cent of the time, while stocks did not produce a negative rate of return.
This reporter must have shit for brains. Invest in global stocks and bonds? Now? Good luck!!
I see no indications of any real insight into The Big Picture here. Embarassing, really.
What is happening right now is the demise of the current global monetary system. It's been backed by nothing for 37 years, and now it's getting wobbly. It's hard to say what a dollar is today. JP Morgan has $90T in derivatives, but the whole world economy is only worth some $50T. See what I mean?
And THIS is why people are moving to gold and silver most of all. It's money you can hold in your hand, with intrinsic value.
The third reason for investing in gold relates to diversification, and the ability to offset declines in other investments. However, there is no proof that gold provides this advantage. In recent market declines, gold prices have dropped along with stocks.
HAHAHA. This writer is such a tool. I'm ashamed my hometown paper published this.
Gold has been among the best performing assets since 2001. THE TSX Composite index hasn't even come close.
If finance is about using information about the past and present to plan for the future, this writer's lost in the woods. Seriously. One day he will be hungry and looking for food, and I hope people take pity on him.
It is true that gold could regain its position as an "unrelated asset," but you may find your best option is to stick with a wide variety of investments.
While diversification does not guarantee a profit or protect against a loss in declining markets, if you're a disciplined, long-term investor, you may discover diversification is a much better strategy for the long haul than counting on gold.
Before you invest or make changes to your portfolio, speak with your financial adviser to determine which investments would be appropriate to help you reach your long-term goal.
Finally some decent advice. Of course people should diversify. Hold some cash, hold some gold, hold some silver, hold some select stocks/ETFs(eg: Agriculture, Energy) and, say, inverse ETFs.
Better advice: Find an adviser who understands WHY the economy today is the way it is. This clown doesn't seem to have a clue.
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