For a few years now, the public hasn’t focused much on gold prices, and I haven’t written about it in these articles. However, the recent sabre-rattling in the Korean peninsula has the price seeming to make a run at $1,300 per ounce, and there is renewed interest. So let’s have a look at gold prices, gold as an investment and investments in precious metals in general.

We have all probably seen the ads on TV advertising gold and silver coins and bullion and have probably wondered if we are being scammed or if this is something we should take seriously. In the interest of full disclosure, I do own some gold and silver coins and bullion but not a lot as percentage of my retirement savings – probably less than 0.0001 percent. I think it is prudent to hold some of these “hard” assets because their value is unlikely to ever be zero. I also own stocks in precious metals mining companies, which I think are a much better investment than bullion.

I’ve also dabbled in speculation in exchange-traded funds, or ETFs. My stepfather was gung-ho on buying silver. So after he badgered us, we each bought into a silver ETF with the price at $8 per ounce. When he passed away several years, later the price was $32 per ounce. When my mom got the brokerage statement, she asked me what do, and I immediately said, “Sell it!” It’s a big casino, out there and it’s better to be lucky than good. (The current price is around $17.) I’ve also lost money on gold stocks, so I don’t have the formula for success.

So let’s look at the record and some myths about gold. A chart from shows the average annual price of gold since 1995 and, even if gold does hit $1,300 per ounce, it is still well below its price in 2010. If you had bought gold in 1980 at $850 per ounce, you still would have lost money in inflation-adjusted terms. The stock market (and even U.S. Treasury bonds) would have made you a far greater return on investment (and in the case of Treasuries, at least something).

Why invest in gold? Because it will never be worth nothing, unlike some other financial assets. That doesn’t necessarily mean it is a good investment.

Let’s look at some myths and realities about gold as an investment.

Myth: Gold is a good investment in times of war, national emergencies and natural disasters.

Reality: This is sort of true but needs qualifications. If you go back to the first Gulf War in 1991, the price of gold rose almost $100 to more than $400 an ounce in the run up to the fight. Once the public figured out that it was a 100-hour long war, and not much of a war at that, the price quickly retreated to the low $300 range. It was, as politicians like to say today, “a nothing burger.”

Or, take September 11, 2001: the price barely moved. I recall telling a colleague that if the World Trade Center attacks can’t get the price over $300, nothing can.

I was wrong.

Myth: What pushed gold prices up in the early 2000s was the bursting of the dot-com bubble and a temporary blip in the stock market, and the rising price of oil.

Reality: These two factors worked in different ways.

I recall speaking to a group during the dot-com bubble, and they wanted to know what was wrong with the price of gold. Gold was stuck around $270. My answer was that there was nothing wrong with gold that a few thousand points of the Dow (stock market) couldn’t fix. Thinking of their 401(k) retirement accounts, I assume, most of them gasped. The point is, gold is an alternate investment and when other alternates are flying high, gold won’t do well and vice versa. Remember gold prices soared after the 2008-2009 financial crash.

Regarding the price of oil, much of physical gold demand comes from the Middle East for social, political and religious reasons. I have read but can’t confirm that about two-thirds of the world’s annual output of gold disappears somewhere between Beirut and Hong Kong. India is the world’s largest importer.

The point is that when oil prices are high, like they were in the early 2000s, Middle Eastern incomes were rising, and they bought a lot of gold, driving up the price. There are fundament economic reasons related to supply and demand that explain gold prices.

Myth: My preferred method of betting in the gold casino is on gold stocks, BUT you need to know what you are buying. To know what you are buying, you need to do your research. I know from experience because I’ve been burned.

Reality: I’m not giving stock tips here because I’ve learned that I can lose friends doing that, but I will explain why I hold this opinion. The simple answer is that stocks are more leveraged to the price. In other words, if the price of gold goes up 1 percent and you own physical gold, you have a 1 percent gain. If you own stock in a gold producer (particularly smaller companies because they generally have less complicated balance sheets, although not always) that 1 percent flows directly to their bottom line, which generally provides a greater than 1 percent increase in earnings and stock prices. It also works in reverse, however, so be careful. It’s like the signs they post in some casinos: “Never gamble with money you can’t afford to lose.”

Good luck.

“Why invest in gold? Because it will never be worth nothing, unlike some other financial assets. That doesn’t necessarily mean it is a good investment.” — John Dobra, mining consultant

John Dobra is an associate professor of economics at the University of Nevada, Reno’s College of Business and has almost 30 years experience consulting for mining companies. Dobra is a senior fellow at the Fraser Institute, has been published in academic journals and has testified in Congress on mining issues.


Load comments