Is Gold Overrated?
September 20, 2010
SAN DIEGO (ETFguide.com) – People are jumping on the gold bandwagon just like they jumped on the dotcom bandwagon and the real estate bandwagon and every other bandwagon before them. Is this time different?
As I see it, gold has four major strikes against it. Let’s look at them.
Produces No Income
New findings from the Center for Retirement Research at Boston College show a massive $6.6 trillion shortfall in retirement income among Americans. And with certificates of deposit, bank savings accounts, money market funds, corporate and government bonds (NYSEArca: AGG) all yielding a lot less than before because of falling interest rates, Americans are strapped for income.
What about gold?
Unfortunately, investing in gold won’t help the average working or retired person to fix their retirement income deficit. That’s because a major drawback of gold is that it produces no income. And that’s bad news especially if you buy gold at the wrong price and it ends up going down or going nowhere.
Should people with an inadequate income stream or an income problem be betting the house on gold? The answer is absolutely not. And even individuals with sufficient retirement income should probably do a double take before overstuffing their investment portfolios with gold.
Proponents of gold investing are quick to remind curious onlookers that gold has never been worth zero. And while this is an interesting argument it conveniently omits a few things.
First, just because gold has never been worth zero doesn’t mean it’s always been a good investment. In fact, there have been many long periods of time when gold’s performance was nothing short of awful. Are our memories that bad that we’ve already forgotten them? Let me help you remember.
After reaching a record high of $850 per ounce in January 1980, gold prices fell over 40% in two months. And even then, the worst wasn’t over. It took gold 28 years to reclaim the $850 level. Will we see a repeat incident of gold’s historical head fake?
Today, the fact that gold has become such a popular trade should raise some red flags. The crowd is rarely right and if they are it’s usually short lived.
High Ownership Cost
Another overlooked facet of gold investing is the high ownership cost. If you’re considering making an investment in physical gold, don’t dismiss or ignore these significant expenses.
Acquiring physical gold in the form of coins or jewelry involves paying high transaction costs, commissions and possibly even sales tax. And then there’s the additional cost of insuring the gold and storing it in a safe location. All of these things reduce the gold investor’s return. Is the presumed “safety” of gold really worth all of these very real and very high costs?
Unfriendly Tax Treatment
Strike four against gold is its unfriendly tax treatment.
All gold and precious metals investments, including gold ETFs (NYSEArca: GLD) and silver ETFs (NYSEArca: SLV) are taxed by the Internal Revenue Service as collectibles, which is subject to a higher long-term capital gain rate of 28 percent versus securities. Under current tax law, most tax payers will pay a maximum long-term capital gain rate of either 5 or 15 percent depending on their income tax bracket.
Incidentally, this year’s zero percent tax rate on long-term capital gains for individuals in the 10% or 15% marginal tax bracket applies to securities but does not apply to collectibles like gold or silver.
What Problems is Gold Solving Again?
Gold fails to attack the crux of America’s financial problems. As mentioned earlier, inadequate income is a $6.6 trillion dollar problem for working people between ages 32-64. And as an asset that produces zero income gold is the wrong answer for America’s income problems. (On the other hand, overheated gold sales definately solves the income problem for gold hawkers, jewelry stores and coin dealers.)
The October 2010 ETF Profit Strategy Newsletter contains a detailed analysis of gold without the hype and the hoopla surrounding today’s gold market. It does technical analysis on gold to see if it matches up with gold’s fundamentals. If you've been watching the run-up in gold prices from the sidelines and haven't yet enjoyed the ride, don't despair.