Another history lesson: Long ago, people drank old to reserve their youth. Silly them! Poisonous, too. It was recently discovered French King Henry II’s famous mistress, the lovely (and two decades older than him) Diane de Poitiers, died from gold poisoning. She would have been better off avoiding the sun and not smoking.
Thankfully, folks don’t drink gold now. (Though people do inject themselves with botulinum toxin. Honestly, this quest for youth will kill us.) Yet investors should learn from Diane de Poitiers, lest they harm themselves with too much gold.
Gold fades in and out of favor as a hot investment. Not surprisingly, it tends to spike in popularity after a big run-up—which explains why it was so popular in 2010. (That an investment is popular—talked about and advertised endlessly in the media and seen by many as “the thing”—should be enough to deter you.) Gold is a commodity. An investment class like any other. There’s nothing inherently special about this metal making it immune to losses. Gold as a safe harbor is bunk. Sometimes it rises. Sometimes it falls.
Many have some sort of emotional attachment to gold. Perhaps it stems from ancient history, or watching too many Western movies where fortunes were made and lost during the Gold Rush. Or maybe it’s from the now-abandoned gold standard for currencies. Since most currencies began to float freely (though some are still pegged—usually to the dollar), gold’s usage has been mostly for adornment and limited industrial purposes.

Booms and Busts—But Mostly Busts

But is gold a safe investment? And if it’s not safe, does it at least rival stocks? It’s easy to check—simply compare its returns to stocks and bonds. Ample free data exists from myriad sources for gold and stocks, from Morningstar, Google Finance, and Yahoo! Finance, to name a few. And there are several ways to compare.
The Bretton Woods agreement was finally dissolved in 1971, separating gold from currencies, but there were lingering controls as the world moved off the gold standard. Gold didn’t trade freely—not really—until late 1973. Since then, world stocks returned 2,229 percent, an annualized 9.1 percent.1 The S&P 500 did better—returning 3,552 percent, an annualized 10.5 percent.2 Ten-year US Treasuries did ok, returning 1,642 percent for an annualized 8.2 percent.3 Amazingly, super-safe Treasuries did better than gold—gold returned just 983 percent, 6.8 percent annualized.4
Another way to see that is: $10,000 invested in the S&P 500 became $365,200—or $256,900 more than the same amount invested in gold. So, gold’s long-term returns aren’t really so great, but that’s still not the whole picture. Gold is also prone to extreme boom-bust periods—normal for most commodities.
Since 1973, there have been six periods I’d call sizable gold booms—shown in Figure 35.1. There are little, smaller bursts in between, but these six are the biggies. The booms last anywhere from 4 to 22 months—but average about 11 months—and take up 15 percent of the total period.5 Compare that to stocks, bonds, even real estate—which all rise more often than they fall. Strip out those six short periods, and gold returns -67.6 percent, an annualized -3.6 percent loss.6 Miserable. For example, gold lost money from 1982 until 2005—23 years. Can you stomach a money loser that long?

Timing Pros Only, Please

To thrive with gold you must time—both in and out—near perfectly, or be content with long periods of losing results. It goes sidewise choppily and down for very long periods, then skyrockets and then again disappoints. So don’t ask, “What about gold?” Ask, “How good of a market timer am I?” And ask, “What were the last great timing calls I made?” I know I’m not a good enough timer to time gold. Are you?
Figure 35.1 Gold Booms and Gold Busts—Are You a Market Timing Pro?
Source: Global Financial Data, Inc., Gold Bullion Price-New York (US$/Ounce) from 11/30/1973 to 12/31/2009.
For example, did you load up on US Tech stocks in the early and mid-1990s? Then, did you short Tech in March 2000? Did you short global stocks in 2001, then buy them back in March 2003 and hold them through 2007? Did you buy oil, another commodity, in January 2007, right before its last steep surge, and sell in July 2008? Did you buy emerging-market stocks in Fall 2008? Or developed-country stocks in early 2009, when sentiment was black? Did you sell euro and buy dollars in April 2008? Then reverse that in March 2009? If you didn’t time those right—pretty big, significant swings—what makes you think you can get out of gold at the peak and then back in at the right time for the next gold boom? If you can time gold, which booms only about 15 percent of the time in the long term, you can surely time almost anything else and don’t need any advice from me. Go to it.
Amazingly, many normal people who never, ever would think they could time the stock market, bond market, pork bellies, or currencies are content to own gold thinking it is “safe.” To them I say it’s just a commodity—volatile like any other. There is nothing golden about gold.
If you’re a confident and great timer, great. If not and you do it wrong, you may end up waiting a very long time for that payoff you (wrongfully) hope comes wrapped in a safety blanket. And just maybe you have the constitution to hold onto an asset for a long period—years even—that steadily loses value, waiting. But I doubt it. And consider this: As hot as gold was in 2009, it still lagged stocks—rising 24.8 percent to the S&P 500’s 26.5 percent and world stocks’ 30.0 percent.7
Feel free to buy gold—for earrings, necklaces, and electrical wiring. But for your portfolio, gold has less luster unless you’re a super-duper timer.
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