500,004 Reasons I’m Not Buying Gold

Short-term outperformance cannot be sustained over the long term.

Reviewed by: Allan Roth
Edited by: Allan Roth

Gold is hot, having just eclipsed $2,000 an ounce, before the pullback so far this week, and has been attracting waves of assets again.

The SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU) have shown stellar gains in a not so great stock market. As of Aug. 5, 2020, GLD is now the sixth-largest ETF on the planet, with $78.84 billion in assets and growing daily.

All the COVID chaos has made the world a very uncertain place. In such times, people seek any port to get out of the storm. When it comes to investing, that port is often gold, and once again the conversation has turned to buying gold ETFs. That conversation includes concerns about:

  • The world's upcoming financial crisis
  • Owing trillions in debt and fiat currency being at risk
  • Governments trying to print their way out of debt and the deflation of paper money
  • Political upheaval destabilizing markets
  • Gold always being a safe haven in times of crisis

But I’m not biting, and here’s why:

I Never Buy Anything After It’s Been Hot

It’s all too human to chase performance, but buying high typically doesn’t turn out well.

In the chart above, money flows into GLD after it has been hot, and out of GLD after the decline. This is a predictably irrational strategy.

In fact, Sumit Roy of ETF.com noted on Aug. 19, 2011 that GLD had assets of $76.7 billion, slightly eclipsing the SPDR S&P 500 ETF Trust (SPY) to become the largest ETF in the world at the time. The metal peaked a few weeks later at $1,900. Eventually, investors pulled money out of the ETF only to return after it had been hot.

It’s easy to predict that money will flow out of GLD when the price cools off. While the fund return since 2010 hasn’t been good, the investor returns were far worse due to poor timing.

If I were to buy, perhaps 2018 would have been the time when gold prices were down. I thought about buying a little as part of my InDent strategy when bestselling author Harry Dent came out against gold. InDent was my imaginary flagship ETF that invests inversely to Harry Dent’s predictions.

Gold: Not A Good Hedge Against Inflation

First, we have no clue what future inflation will be. We’ve been running deficits for a long time with low inflation. Japan has been printing money for decades and fighting deflation. Yet even if we do have high inflation, Mark Hulbert of MarketWatch shows gold hasn’t been a good inflation hedge. Stocks are much better.

Gold’s value has a long history of keeping up with inflation, much like a U.S. Treasury bond. The big difference is that gold is far more volatile and can underperform inflation for long periods of time.

Gold Lacks Industrial Value & Produces Nothing

Gold has value because we say it has value. It’s pretty and it’s rare. At least bitcoin has some utility value in transactions. Elisabeth Kashner, FactSet director of ETF Research, says:

Stocks and bonds represent a claim on the assets of a company or government, producing cash flows which come from productive activity. Gold produces nothing but sparkle. You can't eat it, live in it, or grow food with it. Its value derives solely from a buyer's willingness to exchange money for it.

ETFs: An Expensive Way To Own Gold

I love ETFs as a way to get low-cost, tax-efficient investing. With one or two ETFs, I can own thousands of companies across the globe.  But buying a gold ETF will produce the return on a single asset reduced by the expense ratio. Since I’m a long-term investor, paying a 0.40% annual expense ratio over decades for GLD isn’t the most cost-effective way to buy gold.

Certainly, buying gold coins will have the equivalent of a bid/ask spread but, over decades, owning the coins would be more cost-effective.

Reasons 5-500,004: Learning From My Mistakes

If my first four reasons haven’t convinced you, here are the next 500,000 reasons. I used to know everything, or at least I thought I did. After a minor gold pullback, I bought 10, one-ounce gold coins on Feb. 15, 1980, with my college graduation money. Why? For all the same reasons people are buying gold today.

I was sure it was a brilliant move. Over the next four decades, it tripled in value, turning my $6,640 into $20,167. It almost kept up with inflation. Had I heard of John Bogle and his S&P 500 Index fund, I would have made $500,000 more.

I learned that buying into capitalism is a better bet than buying gold. I didn’t just get burned; I got incinerated! So I’m considering my $500,000 mistake another 500,000 reasons not to buy gold today.

In conclusion, I have no idea of how gold and gold ETFs will perform going forward in the short term. In the long run, however, I expect a zero real return.

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.



Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is www.DareToBeDull.com. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter