Economists suggest gold investments are risky

Aug 16, 2011

As the price of gold continues to rise and public uncertainty of the economy increases at a similar pace, many investors are turning to a traditional fail-safe: gold. However, it's a growing bubble that may be ready to burst, according to economic experts at Kansas State University.

The federal deficit and a deteriorating economy have many investors fearful of the United States economy entering a period of stagnation, causing stock prices to be driven downward, said Lloyd Thomas, an economics professor at K-State. In this period of uncertainty, many are selling stocks and corporate bonds and putting their money into gold.

Recently, gold prices have skyrocketed as high as $1,800 an ounce, and Thomas said the price might continue to creep higher as economic concern grows. "People believe that gold is a hedge against uncertain times," he said. "In the long run, gold prices have kept pace with inflation. People are flocking to it."

Other financial experts agree, citing a perceived security in tangible investments during uncertain times. Ann Coulson, an instructor for K-State's program, said that the weakened U.S. dollar and real estate market, "wild ride" of the stock market and low interest rates have caused many investors to turn to gold.

"Where to invest has become a question for many, and gold has risen to the top for some investors," Coulson said.

Coulson said there are many ways individuals may choose to invest in gold, including jewelry, coins, bullion or gold bars, exchange traded funds, gold mining stocks, gold mutual funds and gold futures and options. Jewelry and coins are typically not good choices, she said, and gold bars raise many storage and cost issues. Exchange traded funds give the investor the opportunity to own gold without an actual delivery, and gold mining stocks' value is only partially dependent on the value of gold.

Diversified investment -- like gold mutual funds -- often offer the most protection, Coulson said.

"Gold futures and options are not for the novice investor," she said. "Investing in gold through an infomercial on late-night TV is also a bad idea."

Both Coulson and Thomas agreed that the price of gold may continue to rise, but cautioned that the increase most likely will not last. From 1960 to the present, Thomas said, gold has gone up an average of 8 percent a year, while inflation rose at less than 4 percent a year. In the last 10 years, gold has gone up 17 percent a year.

"In the long run, gold has gone up," Thomas said. "But in 2000 the price of gold was $300 an ounce. It has gone up six-fold since then, and it might go up higher than what it is right now. It's gone up too fast -- it's a bubble."

Thomas compared his gold predictions to the housing market. People were lulled into thinking housing prices could never fall, but they fell more than 30 percent in most American cities.

"The same thing could happen to gold; it's not risk-free," he said. "In the last 10 years it's gone up 17 percent a year, but the price of things we purchase has only gone up 3 percent a year. That's unsustainable. It's my own opinion that gold prices will collapse -- I just don't know when."

Although the price of gold is high, it may be a good investment as the price continues to climb -- for now. Unlike investing in stocks or bonds, Coulson said, there is no income associated with gold. Money is made from buying low and selling high. She agreed that the price is destined to fall at some point.

"Gold as a piece of a diversified portfolio might make sense, but if an investor invests solely in gold, that is a great risk," she said. "It is not a safe investment unless you are buying gold bars and burying them in your backyard, and even that is not safe because the price is dictated by what buyers are willing to pay for gold."

Thomas suggested that the only way to make a gold investment virtually risk-free is to look at it as a long-term investment since, in the long run, gold prices do tend to go up. As a 50-year investment gold may be a safe bet, he said, but it is not a guarantee in the short-term.

"On a 100-year horizon, sure -- buy gold and leave it to your grandchildren," he said. "But in two, five or 10 years, prices could be lower than they are now. There's a lot of fluctuation. Prices have gone from $200 an ounce to $1,800. That just can't continue."

As the federal government attempts to pay interest on its growing debt, Thomas said the chances for increased inflation will go up. As this happens, gold prices may continue to fluctuate as investors pull money out of stocks. However, as the deficit slowly decreases, gold prices could fall in half.

"When investors become more confident in the economy, gold will be less valuable as an investment," Coulson said. "I agree with Warren Buffett: has no utility, so as a long-term investment it's not a good choice."

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User comments : 10

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Techno1
3 / 5 (6) Aug 16, 2011
People believe that gold is a hedge against uncertain times.


People are stupid.

Gold is only worth what one fool can convince another fool to give in exchange for it, just like anything else.

You cannot eat Gold, and you can't make useful clothing out of it, and excluding nanotechnology and a few other components, it's basicly useless except as jewelry.

So whenever money fails, Gold isn't a safe place to be at all, even though for some reason fools think it is.

You want actual assets: Land, businesses, food, etc.

Not a worthless piece of trinket metal which only has value because other people are irrational.

Whenever money fails, they won't want a trinket piece of jewelry. They'll want the necessities of life.

Also, I'm no economists, but I think there is a huge bubble still in the market which is about to burst. Unfortunately, idiots are doing the same thing over again, paying more for stuff than it's worth, especially stocks and technology.
Techno1
3.3 / 5 (7) Aug 16, 2011
Just the other day, HP, I think, cut $100 off the price of one of their mobile devices.

That to me is evidence of price gouging when you can cut the price of something which was only a few hundred dollars, and still make a profit off it, that is evidence the previous price was criminal gouging IMO.

If consumers just sat on their hands for a few weeks or months, they could drive these companies way down on their prices to the real fair market value, a few percent above cost, instead of the gouging, over-inflated price of everything.
Temple
5 / 5 (2) Aug 16, 2011
If consumers just sat on their hands for a few weeks or months, they could drive these companies way down on their prices to the real fair market value, a few percent above cost, instead of the gouging, over-inflated price of everything.


Really?

If I gave you the following two options, which would you choose:

1) Work your tail off to build a product you hope will be successful, if your timing is just right, you encounter no unexpected challenges, and you correctly guessed the desires of the market months or years in advance (no guarantees for any of that), you receive a few percent above cost (let's say R&D and marketing is part of cost).

2) You do nothing at all, you invest in a bond/security and you receive that same few percent above cost (potentially with less risk even).

I think I know which one most people would choose.
Shakescene21
3.7 / 5 (3) Aug 16, 2011
Gold has been the best investment of the 21st Century, so far. Gold has gained every year since 2000, more than quadrupling in price. In the meanwhile, stocks have been a huge disappointment.

Jim Rogers, who has made hundreds of millions on his gold investments, has stopped buying gold because he thinks it has gone up so fast and so far. But he isn't selling and he'll buy if the price drops back to bargain levels. The main driver of gold prices is rampant printing of paper money by governments, according to Rogers. He is derisive of the stupidity of central banks, but he should be grateful because they have helped him become a billionaire.
rwinners
1 / 5 (1) Aug 17, 2011
Techno, you may have a degree, but you have no understanding of history, particularly economic history.
People are buying gold because they do not trust currency.. any currency. Until the world currency (national deficit) problems are cured, gold will continue to rise. So will other commodities. And, depending on the solution, they may not ever come down again, in terms of dollars.
rwinners
1 / 5 (1) Aug 18, 2011
Addendum: The last time that gold really go going was in the 1970s and the oil embargo/energy price surge. But then, there were far fewer people on this planet who could afford to buy gold or other precious items. We seem to be in the latter timeline of a monetary explosion. Gold and other 'things' hold value. Money does not.
COCO
1 / 5 (1) Aug 18, 2011
Ron Paul 2012
MDG
not rated yet Aug 21, 2011
Before the 1970's since WW2 the Gold Price was "Manipulated" by central banks, to maintain a stable price, and the inter-bank trading price was fixed.....
The reason Gold rose in the 70's was that the Price was unhooked from the exchange rates, economies were allowed to grow "without the bound" that gold placed on it.
Gold was seen as the Limiting factor for wealthy countries (and corporations) getting wealthier.

The Rise of Gold, could be really regarded as the FALL of the value of "Paper money", as gold rose, its buying power didn't change much, but the buying power of the "money" fell considerably....
Gold in a bubble ?? or is it merely finding its true market driven value, given the USA has devalued it's currency by releasing more dollars, and bonds than the US economy could ever pay back..... (unless they continue to deflate their debt) but debt deflation, (through inflation of the fiscal market) doesn't work, because an economy in the debt spiral needs more debt......
LuckyExplorer
1 / 5 (1) Aug 22, 2011
I hope this bubble will burst!

This time it will not hit the poor and normal people that much as other crashes did.
This could bring the super-rich back to the bottom, where they belong to.
antialias_physorg
1 / 5 (1) Aug 22, 2011
Oh boy..am I glad that I cashed my stocks 4 weeks ago. Couldn't have been timed more perfectly (sheer luck - as I will be the first one to admit).

Gold will probably burst, too, in the short run, because its value is only supported by belief in its worth (rather than any real value).

It's like any other investment. As soon as the number of investors tops out (as they must because neither the number of investors nor the available capital is infinite) the game's up.
Alternatively we'll see a rise in gold prices with an attendant hyperinflation (which will reduce the 'value' of gold the hard way)

I guess it's time to buy property.

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