With gold, you're golden: Fisher's financial mythbusters

gold-price-chart-with-gold-bars

Another history lesson: long ago, people drank gold to preserve their youth. Silly them! It's poisonous, too: French King Henry II's famous mistress, the lovely Diane de Poitiers, died from gold poisoning.

Thankfully, people don't drink gold now (though they 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 favour 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.

Gold is a commodity like any other. There's nothing inherently special about this metal that makes it immune to losses. Gold as a safe harbour is bunk: it rises and falls.

HOW DOES GOLD STACK UP AGAINST STOCKS?

So if it's not safe, does it at least rival stocks? It's easy to check - simply compare its returns to those of stocks and bonds.

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 until late 1973.

Since then, according to figures from Global Financial Data, world stocks returned 2,496 per cent, an annualised 8.0 per cent. The S&P 500 did better, returning 3,988 per cent, an annualised 9.2 per cent.

10-year US Treasuries did OK, returning 1,760 per cent for an annualised 7.2 per cent. Amazingly, super-safe Treasuries did better than gold, which returned just 950 per cent, or 5.7 per cent annualised (according to FactSet Inc).

Another way to see that is: $10,000 (£7,153) invested in the S&P 500 became $405,761 - or $301,467 more than the same amount invested in gold.

So gold's long-term returns aren't so great, but that's still not the whole picture. Gold is also prone to extreme boom-bust periods - which is normal for most commodities.

Since 1973, there have been six periods I'd call sizeable gold booms, shown in Figure 1 below (click to enlarge). There are smaller bursts in between, but these six are the biggies.

gold-price-movement-since-1973

The booms last anywhere from four to 37 months but average about 15 months, and take up 15 per cent of the total period.

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 -79.9 per cent, an annualised -4.5 per cent loss. Miserable.

For example, gold lost money from 1982 until 2005 - 23 years. Can you stomach a money-loser that long?

HOW GOOD OF A MARKET TIMER ARE YOU?

To thrive with gold you must time - both in and out - near perfectly, or be content with long periods of losing results.

It goes sideways 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?'.

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 Autumn 2008? Or developed country stocks in early 2009, when sentiment was black? Did you sell the 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 in and out of gold right?

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 pay off 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 per cent to the S&P 500's 26.5 per cent and world stocks' 30.0 per cent.

Feel free to buy gold - for earrings, necklaces, and electrical wiring. But for your portfolio, gold has less lustre unless you're a super-duper timer.

Ken Fisher is founder and chief executive of Fisher Investments.


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