Have you seen any advertisements or received solicitations lately to buy gold? They may look or sound something like this:
Experts predict gold will soon trade at $3,500 an ounce. Why? Because:
- The world's upcoming financial crises
- We owe trillions in debt
- Governments are trying to print their way out of debt and paper money will be deflated
- Political upheaval
- Terrorism and nukes
- You need gold today — call 1-800-555-XXXX
These pitches may be scarier than a John Carpenter horror film, but they aren’t new. They tend to surface after stock market meltdowns, political upheaval or economic uncertainty, preying upon jitters over potential economic collapse.
Gold hype was particularly common a few years ago, as the price surged to $1,656 an ounce by the end of 2012, up nearly 500 percent from $279 an ounce in 2001. By the end of 2015, prices had dropped to $1,061. It’s now at about $1,285, and the scare tactics are beginning to return.
Today’s fearmongering sounds much like it did when I fell for the same tactics, such as this 1980 prediction that gold would soon hit $3,500. After a minor gold pullback, I bought 10 one-ounce gold coins on Feb. 15, 1980, with my college graduation money. I was sure it was a brilliant move. Fast forward to Nov. 3, 2017, and my $6,640 investment is worth $12,690, an annual return of a whopping 1.7 percent.
Had I the wisdom to invest that graduation money in Vanguard’s S&P 500 Index fund instead, I’d have earned 10.2 percent annually and my investment would have been worth $385,687, nearly $373,000 more than my “smart” gold investment.
A closer look
But the marketing hype is telling us that now is the time to buy, as gold is set to surge.
While it’s reasonable to recognize that the world is going through significant turmoil at the moment, it’s not so reasonable to think it will lead anyone to use gold to pay for groceries, or just about anything else. I suspect that’s even less likely than using cryptocurrencies such as bitcoin.
The problem is that such possibilities defy prediction. For instance, when the Federal Reserve expanded the money supply after the 2008 recession, many experts predicted high inflation would follow and the dollar would buy far less. Yet since then, the actual inflation rate tracked by the Fed has been averaging about 1.4 percent annually, roughly 2 percentage points lower than the 3.4 percent average annual inflation rate from 1913 through 2008.
Gold’s value has a history of keeping up with inflation, much like a U.S. Treasury bond. The big difference is that gold is far more volatile and can underperform inflation for long periods of time, as evidenced by my own dismal returns. Gold is volatile because it has little intrinsic value and tends to trade based on our fear and greed, which are also volatile. The odds are high it will continue to underperform other assets such as stocks.
But an even more important lesson is that fear sells and motivates. In short, people continue to use the same sales tactics because they work. Can we say what type of investor this could appeal to?
If mistakes are the best teacher, my advice is to learn from the costly one I made. Don’t fall for fear tactics on gold or anything else being pitched to you. If owning a little gold makes you feel better, go for it, but don’t bet your financial future on it. Two common ways of owning gold are to buy gold coins or an exchange-traded fund that owns gold, such as the SPDR Gold Shares (GLD). I advise keeping gold ownership well under 5 percent of your net worth.