The case against gold

Some advisers shun the precious metal, arguing that it's simply a trading vehicle

Sep 23, 2019 @ 4:02 pm

By Jeff Benjamin

With the price of gold up nearly 18% since the start of the year, some market watchers are calling it a "crowded trade." That's just one of the reasons some financial advisers give for steering clear of the precious metal at this point in the market cycle.

"Gold is a little overbought and everybody is asking about it, and if there's a consensus out there, it's best to bet the other way," said Dennis Nolte, vice president of Seacoast Investment Services.

"You just don't want to buy something when everybody's eyes are on it," he said.

In juxtaposition to the so-called gold bugs, who tend to be persistently enthusiastic about the prospects for gold, some financial advisers view gold as at best a trading vehicle.

"We use bonds to temper down volatility, not gold," said Tim Holsworth, president of AHP Financial Services.

"I don't speculate, so I don't buy gold," Mr. Holsworth said. "I would only be interested in gold if I thought the markets were going to crash, and that's not the case."

For Tim Doehrmann, founder of Eagle Ridge Wealth Advisors, the biggest problem with gold is in valuing it as an investment.

"There's really no good way to value gold," Mr. Doehrmann said.

"It doesn't produce anything, the way a company can produce cash flow, earnings, and dividends," he said. "It's been a store of value for thousands of years, but that value has just bounced around."

This year, the price of an ounce of gold has been as low as $1,270 and as high as $1,542, which is just above where it is currently trading.

Last year was a relatively mundane year for the price of gold, which ended 2018 down 1.2%.

There have been some big swings in recent years, and each one typically triggers a debate about the value of investing in gold.

Gold gained 12.6% in 2017, lost 27.8% in 2013, gained nearly 28% in both 2009 and 2010, and spiked 31.6% in the run-up to the recession in 2007.

"Some people think gold is a secure thing, and they usually want to turn to it in inflationary and recessionary periods," Mr. Doehrmann said. "But people have been calling for a recession since that last recession. And if you have no idea what the market is going to do and you can't value commodities like gold, how will you know when to invest in them?"

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While gold has a reputation as a hedge against inflation, so do Treasury Inflation-Protected Securities, which would be Mr. Doehrmann's preference for his clients.

As a commodity, gold is unique in that, unlike most commodities that are used up, gold is virtually perpetual. Once it's mined, whether it's stored as bullion or used to make jewelry, it doesn't ever go away or expire.

But while gold might last forever, the tailwind behind its price does not, said Paul Schatz, president of Heritage Capital.

"Gold typically has long super cycles and a terrible long-term track record to buy and hold, and it doesn't produce earnings or pay dividends," Mr. Schatz said. "Contrary to popular opinion, gold is not a great hedge against inflation because it typically rallies long before inflation appears and declines long before inflation ends."

Mr. Schatz said that while he isn't anti-gold, he doesn't believe in leaving a gold allocation in a portfolio as a long-term position.

"Gold is best used as a trading vehicle or strategic or tactical holding," he said. "I would never permanently allocate to just owning a gold fund or the physical metal."


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