Gold? Bah!
It is too much to hope that those so-called experts and journalists who have been so assiduously promoting gold as a ‘safe haven’ will now apologise to the thousands of ill-informed investors who have lost heavily over the past 18 months.
They really should say sorry and promise not to do it again. Yet apologists are already arguing that the fall is just a blip that reflects economic uncertainty, conveniently overlooking their own prior argument that economic uncertainty was sure to keep driving the price of gold up to $2,000 an ounce.
As I have stated frequently in this column—and now feel obliged to hammer away again ad nauseam—gold is a gamble, not an investment. It brings in no income. Indeed, it can cost you money in storage and insurance fees to hoard it.
Gold is entirely reliant on someone else coming in and offering more than you paid and for that process to continue ad infinitum. That process has come to a shuddering halt.
Various reasons have been put forward as to why gold has fallen from a peak of $1,900 an ounce to below $1,400 and why this past two weeks has seen such a dramatic tumble. To translate for those who think in pounds rather than dollars, after remaining fairly steady around £1,050 for some time gold tumbled first below £1,000 and then to £900 an ounce. Meanwhile, Morningstar analysts have kept their long-term gold price forecast at $1,100 for the past two years.
The plan for Cyprus to sell gold to finance its deficit is the immediate reason for the latest slump, especially as Italy and other eurozone countries may be forced to do likewise. It is suggested that the fall in commodity prices generally has dragged gold down. So much for gold having a value all of its own. Other excuses are a slowdown in the Chinese economy and the growing belief that Western economies and Japan, despite being buoyed by quantitative easing, will not suffer from inflation getting out of control.
Take your pick. It hardly matters. What does matter is that when any asset shoots upwards at an unsustainable rate it will inevitably drop back with similar velocity. That rule, incidentally, applies equally to shares, which ARE a genuine investment.
The price of gold has tumbled because it raced away so quickly, sucking in new investors who feared that they were missing the bandwagon. Those who thought that the rise in gold from $400 an ounce in 2000 and from $800 an ounce in 2008 was a reason to buy in 2011 entirely missed the point. It was a justification for buying in 2000 or 2008, before the price soared, not afterwards.
This is so blindingly obvious and yet it is the most common mistake that investors make, which is why so many leap onto the bandwagon just as the first wheel falls off. Then when they finally sell at a massive loss, they resolve not to invest again, a resolve that dissolves after they have missed another bandwagon.
Here’s one bandwagon I would encourage anyone to get on: dividend-paying company shares. Figures collated by Capita Registrars show that over the past six years since the financial crisis started to emerge companies quoted on the London Stock Exchange have between them paid out an average of £1,000 in dividends for every man, woman and child in the UK. That is £1,000 EVERY year.
We are already well on the way to a record payout of more than £80 billion this year. It will take more than a recession in Europe, flatlining in the UK and a collapse in the gold price to put a stop to it. The figure is quite staggering. Is any of it going into your pocket?
It is quite true that dividend-paying companies have gradually been rerated so that most are offering yields of 3-4% rather than 5%+, though it is amazing how long it took for investors to cotton on to how cheap shares were when the FTSE 100 index was well below 6,000 points. Worthwhile investments have to be sought out now. It is worth the effort, though.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
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