999 Reasons to Not Own Gold

Money Masters July 22, 2015  4 Comments

This week’s shocking (to some) dive ever closer to $1,000 got me reminiscing about gold and remembering some long-learned lessons about it.

I was a teenager. Richard Nixon took the United States off the gold standard. It didn't mean much to me at the time since I was more focused on starting high school, but I do remember that many of the grownups I knew were freaking out. They talked a lot about how the dollar was being debased (or, as many of them put it, “going to hell”). Until then, gold had had a stable price of about $35 per ounce.

Just a few years later, it became legal again to buy gold in this country. Not surprisingly, there was a bit of a mad rush for it. By the late 1970s, as Nelson and William Hunt were trying to corner the silver market, gold prices had climbed significantly. By 1980, gold broke above $600 per ounce. I paid a visit at the time to a friend who lived in an old farmhouse in rural Virginia. It turns out she was a gold bug. When I commented about the difficulties of storing gold, she said it wasn't a problem. She was hiding her gold under some towels in the kitchen. Of course, she and her husband also slept with a shotgun.

Over the course of the next 20 years, the price of gold drifted lower. By the late 1990s, speculators were much more interested in stocks that had “dot com” in their names than they were in precious metals. But when the Internet bubble burst, investors rushed for gold once again. Over the course of about a decade, they pushed the price up from less than $300 per ounce to more than $1,800.

If you smelled a bubble in the making, you were right. The problem, as usual, was with the timing. I personally took some heat when I authored an article called "Shorting the Gold Bubble" in September 2010 just as gold broke above $1,300 per ounce. In hindsight, my call was too early. It took about another year for gold prices to peak; and it took almost three years before they saw the $1,300 level again. Yet if you had shorted an equal amount every time gold rallied $100, your average price would have been $1,550 per ounce. Today gold is selling for less than $1,100 per ounce.

So where do we go from here? I expect gold prices to continue falling and to drop through the psychologically important $1,000 mark. Unlike most commodities, gold has little practical value. You can't refine it for a thousand purposes like oil, you can't put it on your breakfast table like wheat or orange juice, you can’t build a house with it like lumber, and most dentists I know stopped filling cavities with it. Oh yes, gold does make nice jewelry, and that market should be perking up a bit as the price wafts downward. But no matter how you slice it, gold doesn't pay interest and it doesn't generate dividends. And if you don't want to hide it under the kitchen towels, you have to spend money to store it.

In addition, like many commodities, the price of gold is negatively correlated with the strength of the U.S. dollar. With the Federal Reserve set to raise interest rates, the dollar is likely to go higher. This does not bode well for gold.

One nice thing about gold is that it can help reduce the overall riskiness of a diversified portfolio. For that reason alone, it makes sense to own a little gold, I acknowledge. But unless you're betting on a widespread collapse of global economies, or at least a collapse of the U.S. dollar, I really don't see any reason why you would want to overweight gold in your portfolio right now, even after its price switches from four digits to three.