Gold Bugs: Don't Get Too Excited

Charles Sizemore Economy and MarketsAfter looking dull for years, gold is finally sparkling again. With the market in convulsions, and Fed Chair Janet Yellen broaching the possibility of negative interest rates, the yellow metal is up over 14% in the few short weeks of 2016.

Hey, I get it. People are scared. And justifiably so.

Frankly, I’m a little scared about where all of this is going.

But before you run out and fill up the trunk of your car with precious metals (and maybe some canned goods and ammo), let’s look at gold with a cold, analytical eye.

Gold isn’t so much an investment as it is an emotional ideology. Being a “gold bug” isn’t just a matter of passionately believing in the investment merits of gold. It’s an identity, and an extreme one at that. It reminds me of a radical political movement or even a religious cult.

Investors already have an odd way of developing feelings for the assets they buy, and not just gold. Even if you insult a man’s stocks, you might as well be insulting his wife or mother. A weird possession takes hold.

But with gold, the attachment goes deeper. There is a fundamental belief that gold is the “one true store of value” or the “one true currency,” and that all imposters are heretical.

Don’t be that guy. I’ve met him. He’s a buzzkill at parties and way too intense.

But I digress.

Let’s strip away all the ideology and try to look at gold on its own merits. I would argue that the “barbarous relic” does indeed have its uses but that it’s still the wrong hedge to own in this market. So let’s break down the arguments in favor of gold:

#1. Gold is an inflation hedge. Ok, I don’t necessarily argue with this point. Over the years, gold has indeed proven to be a decent inflation hedge.

The big problem here is that an inflation hedge is only valuable when you actually have inflation. We don’t, or we have very little. In fact, with crude oil prices still looking wobbly, consumer price inflation isn’t even 1%.

This goes contrary to what a lot of Americans are thinking. The logic is that, thanks to all the loose monetary policy of the past several years, rampant inflation is right around the cornrner.

It seems straightforward enough. But you could have made the same arguments about Japan at any point over the past 20 years, and you would have been wrong.

Fact is, all the monetary easing in the world will have little impact on inflation at a time of aging demographics and hobbled banks, which is where we are today. And in Japan, they’re still fighting outright deflation.

So yes, I’ll cede to the gold bugs that gold is indeed an inflation hedge. But if you buy it now, you’re effectively buying expensive insurance for a risk you don’t need to insure.

#2. Gold is a crisis hedge. I’m a little more sympathetic to this view. I’m a big believer in having a true “zero hedge” in the event the world really does go to hell in a hand basket.

So yes, having a little gold bullion buried in the backyard, along with some shotgun shells, isn’t the worst idea. (But hey, I’m from Texas. We’re all nuts.)

But as far as safeguarding a portfolio, I’m less convinced of gold’s value as a crisis hedge.

When the world gets truly shaky, investors tend to flock to the U.S. dollar and to U.S. governrnment bonds rather than to gold. In fact, the price of gold actually fell during the 2008 meltdown, and I would expect more of the same in the event of another global crisis.

So, by all means, keep a few gold coins stashed away somewhere safe… just in case. But don’t overload your investment portfolio with the stuff.

#3. Gold is a store of value. This one I just don’t get. Besides being a bright and shiny object, I really don’t know what gold has going for it.

It has little in the way of commodity value, outside of its modest use in electronics and dentistry…

It damn sure doesn’t pay any interest or dividends…

And it pretty much ONLY trades on sentiment – that’s it. So assigning a real value to gold is just about impossible.

Sure, gold can be a store of value – sometimes. But there are long stretches of time when it isn’t. Take, for instance, the 20 years between the 1980s and 1990s – when gold lost value almost every year.

My advice? If you are hell-bent on owning hard assets, choose something that generates income. It could be a rental house, a commercial building or even a piece of farmland.

Granted, you shouldn’t expect any of these to appreciate in price in the deflationary economy we’re facing. But you’ll at least collect rental income along the way, and your judgment won’t be impaired by the politics and ideology that tend to swirl around gold.

Charles Sizemore

Editor, Dent 401k Advisor