You can’t turn on the TV without hearing about gold and how you should buy it. It is on commercials as well as being endorsed by political commentators such as Glenn Beck and others. The captain from Law and Order: SVU is even on there peddling gold to the public. “Our currency is becoming devalued, we must buy gold for when the world ends” is the mantra.
There has been speculation that gold will go as high $3000 an ounce! What a wonderful time to own gold, if that is the case. Since the decline of the stock and bond market that began in October 2007, there has been an increase in the value of gold of over 100%. Which equates of course, to an average annual return of 50% or more. This is tremendous and anybody who bought gold at that time would have doubled their money.
Is gold a bubble? Is it part of a broader commodity bubble? Or is it a genuine increase in the value of the precious metal that will allow those buying in now to reap the rewards of old ownership? To be sure, this has been a wonderful increase, and the pull of celebrities constantly telling you that gold is where you need to place your money is intoxicating. I have heard it suggested that gold will get to a 1:1 ratio with the Dow Jones Industrial Average! As of this writing, that would make it $12,282 an ounce!
Unlikely and $3000 is also unlikely. Of course it is not impossible. Those of you who have already bought gold will of course be upset with me for saying so, but this is not the time to worry about whether I am right or not.
It is a time to be cautious. As it always is when people are shouting from the rooftops that something is great. I am reminded of the client of mine who pulled all of the money out of his retirement account to invest in real estate in Phoenix in 2006, because people were “doubling their money in a month or two”. I urged caution, and to maybe take a portion of that money and invest it in the volatile real estate market.
That particular client’s wealth is wiped out. Gone. Not because real estate wasn’t at one time a great investment. The blame of course is on the investor. But I also blame the fact that so many people were urging the investment of real estate. The loans that were not only bad for themselves, but bad for the banks, because as everybody says, “Well, they aren’t making any more land, so real estate should always go up”.
The same holds true for gold. I am fairly certain that we can create gold, but from what I understand the process would be so expensive as to make it not worth it. But keep in mind that the real estate market was not supposed to tumble either.
Once again, I am urging caution. While it may seem like an attractive investment, the appreciation of gold is not something you want to put your trust in. Despite the celebrity endorsement.