Signal From Static: Disadvantages of Investing in Gold

Signal From Static: Disadvantages of Investing in Gold

Disadvantages of Investing in Gold
Whenever inflation rears its head or turmoil infects the markets, pundits pushing gold begin yelling louder, ignoring the disadvantages of investing in gold. 

Recently, the “gold bugs” (as they’re known) have been trotting out their predictions for the shiny metal’s price in 2023, suggesting, for instance, that gold could hit “$3,000 or $4,000 an ounce.” Given that gold is currently selling for less than $2,000 per ounce ($1,826 at the end of 2022), these predictions are both mouthwatering and, in my view, nonsensical. That said, they certainly appeal to investors who saw both stocks and bonds take a whacking in 2022.

One proponent of higher gold prices claims that central banks around the globe are buying and will continue buying gold, pushing prices higher. He also reports that central bank purchases hit an almost half-century record of $20 billion during 2022’s third quarter. What goes unsaid, however, is that gold’s price fell 7.5% during the period. So much for demand driving up prices.

Higher inflation is also providing gold bugs with reasons to think the metal will soar. And yet, the latest reads on inflation have been falling, not rising. During 2022, when inflation hit a high of 9.1% in June, gold fell. In fact, in the run-up to that June inflation reading, gold’s price declined fractionally, and it then fell further into the year’s end.

Gold simply isn’t a reliable hedge against inflation. Yes, gold rose in price dramatically during the 1970s—the last time inflation was running hot. But as you can see in the chart below, gold is still well below the inflation-adjusted high it reached way back in January 1980. That’s four decades of losing value after inflation. Where’s the protection?

Gold a poor store of value
*Price reached mid-month, which is why the line (showing month-end prices) does not touch this point.
Note: Chart shows the price of gold along with its price adjusted for inflation at the end of each month from 4/30/68 through 12/31/22. The inflation-adjusted price is based upon changes in the consumer price index. Sources: Adviser, Dow Jones, U.S. Bureau of Labor Statistics.

Finally, gold bugs always fall back on “technical” signs that the metal is poised to rally, using measures such as 50-day and 200-day moving price averages to identify “breakouts” and other signaling nonsense.

The pundit who’s currently predicting gold will rise to between $3,000 and $4,000 also saw a rally coming in August 2021. He wrote, with some suspicion, that gold’s price was being suppressed by manipulators in the futures markets and that “we could see gold at $2,000 to $2,400 per ounce.” At the time gold was selling for $1,815 or so—about where we are today.

Gold for your portfolio? Bah! The disadvantages of investing in gold are historically clear. As I like to say, the best investment you can make in gold is to put some around the finger of someone you love.

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