Investment services have had a great time and much success these past few years, touting what a great investment gold is and urging potential clients to get in on this "sure bet" for the future of their retirement accounts. Promises abound, such as "gold will protect you from an economic downturn" and "gold will protect you against the falling dollar."
These arguments, or more accurately these sales pitches, seem to make sense in the way they are framed. All things being equal, perhaps they do makes sense when considered in a vacuum, but investors would be wise to consider all of the possibilities and circumstances before jumping into a long-term investment in gold.
There many substantive variables that exist in the world around us relating to gold that will indeed affect the value of these investments in the months and years to come. Investors in this commodity would also be wise to consider the following very significant issues:
1. The supply of gold is not constant. New gold mines are popping up all the time and gold is actually now quite plentiful. According to the World Gold Council, 171,300 tons have been mined. As recently as 1975 that total was less that 100,000.
2. Investors hoard gold in tough economic times. And nobody can argue that we have been through one of the toughest economic times in history since 2008. What will happen to the price of gold once investors realize that things are once again getting better in the world and start selling their gold? Any time there are more sellers than buyers, the price will drop. This is basic economics. And make no mistake; they WILL get better, no matter what the doom and gloomers tell you.
3. State Street's SPDR Gold Shares fund (GLD), one of the more popular vehicles for owning physical gold without having to have it in your house, currently holds over $64 billion in assets, but that is down dramatically from the over $73 billion it held as recently as February of this year. Interest by investors in holding gold in their portfolio is clearly already beginning to wane. Another popular gold ETF that holds physical gold is iShares Comex Gold Trust (IAU).
Take a look at the one-year daily chart for GLD. It shows investors are beginning to leave gold behind for other choices. That will not bode well for the long-term price of gold, as we are already seeing a decline:
Now take a broader look at a 39-year chart of the price of gold, this chart should scare you if you are keeping gold as part of your "nest egg":
4. If the dollar does not weaken, and instead strengthens, that will mean additional declines in gold prices over time.
As a trade, certainly the price of gold and the related gold funds will go up and down, and should be traded like any other stock, with caution and an eye on chart action. But to buy and hold for a rainy day, gold is a much more risky investment than you might think.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.