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Vitaliy Katsenelson
Vitaliy Katsenelson
Articles (126)  | Author's Website |

Five reasons to avoid the gold rush

June 18, 2009 | About:

The arguments for why one should sell the cat, pawn the mother-in-law and use the proceeds to buy gold are well known: The Fed is printing money faster than you can read this, which will result in inflation; the government is borrowing like a drunken monkey, so the dollar will be devalued; this will debase all currencies, so the only thing that will save you is the shiny metal. However, here are some arguments why one should think twice before jumping in bed with gold bugs. 

1. For investors (not speculators) it is very hard to own gold because you cannot attach a logical value to it. Unlike stocks or bonds, gold has no cash flow and has a negative cost of carry — it costs you money to hold it. It is only worth what people perceive it to be worth right now.

2. The gold ETF SPDR Gold Shares (GLD) is the sixth largest holder of physical gold in the world. If its holders decide to sell (or are forced to sell; think of hedge-fund liquidations), who will they sell it to? 

3. In the past, gold had a monopoly on the inflation and fear trade. Not anymore. Now you have competition from Treasury Inflation Protected Securities (TIPS), currency ETFs, short US treasury ETFs, etc. (If you want to know more, I make this case in my book)

4. If, because of points two or three above, gold fails to perform as expected, the perception that gold is worth something may start disappearing. 

5. Over the last 200 years, gold was really not a good investment. It may have a day in the sun, but it may not. And the cost of being wrong is fairly high.

The best way to deal with the risks of dollar devaluation and high inflation — with a much lower cost to being wrong — is, instead, to own stocks of companies that have pricing power of their product. When inflation hits, they will be able to raise prices and thus maintain their profitability. Also, companies that generate a large portion of their sales from outside the US will benefit from the declining dollar. 

There is a wild card in the price of gold, though: China. If it decides to switch partially from owning US Treasuries to owning gold, the price of gold will skyrocket. (John Burbank made this case at the Value Investor Congress in Pasadena in May).

Vitaliy Katsenelson


About the author:

Vitaliy Katsenelson

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).

Visit Vitaliy Katsenelson's Website

Rating: 4.7/5 (9 votes)


Hondafan78 - 8 years ago    Report SPAM
We will NOT experience inflation for several years!

The biggest two reasons for this are:


Wage Push

Demand Pull inflation

wages are low and will not 'push' inflation up.

demand is low so can not 'pull' prices of goods up.

Until wages increase (lower unemployment rates) and demand increases (increase production/manufacturing), inflation can not occur.

This topic in particular is being discussed at this site: http://biggreenpie.com/forum/inflation-what-goes-wont-quite-while
Stockvalues - 8 years ago    Report SPAM
Vitaliy is absolutely right - it is hard to justify large long term commitments to nonphysical gold these days, except that, which one wears around their neck and fingers!
Kfh227 - 8 years ago    Report SPAM

How do you explain the fact that we have inflation right now?

As we pull out of the inflation, people will spend less?
Bearuo - 8 years ago    Report SPAM
There are many worse reasons NOT to own gold than what Vitaliy points out. Gold is controlled by the US Treasury's Exchange Stabilization Fund using fiat money. If somehow they lose control of gold's price electronically, trading will be stopped and confiscation is almost certain. Gold is also not the best inflation hedge ... compare gold's appreciation relative to inflation - terrible!

GLD is best thought of as a far out of the money option hedge. It has no expiry, remarkably liquid, and still relatively cheap. Long GLD is for North Korea, Iran, terrorism, and sudden disasters - natural and financial, e.g., treasury dump.

Good stocks take care of usual inflation.

Long electronic gold only, because significant profits, if any, will come fast and needs to be cashed out ASAP. Physical gold is too difficult to liquidate and more likely to be confiscated.

Value_barbarossa - 8 years ago    Report SPAM
The only true value to gold is the untaxed intergenerational transfer of wealth. At that it can't be beat.
Value_barbarossa - 8 years ago    Report SPAM
Also Bearuo,

You'd be far more likely to have electronic gold seized than physical gold. I could easily hide $1 million worth of Gold (provided it doesn't plummet, which I think possible), but if you've got your money tied up in GLD...good luck.
Bearuo - 8 years ago    Report SPAM
You are right. GLD's prospectus is downright scary and certain to be seized first before physical. But even less confident storing physical.

May want to edit the earlier post ... sharing a bit too much.

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