Why You Should Not Invest In Gold In 2011

By David Bakke | August 12, 2014 AAA

Just about everywhere you turn these days - on television, the radio and the internet - there is someone telling you that now is the best time to invest in gold. And on first glance, this seems like sound advice. Gold is currently trading at more than $1,500 per ounce - up from $500 just five short years ago. But don't let the numbers (or the advertisements) fool you. There are actually five good reasons why you shouldn't put your money in gold:TUTORIAL: Commodities: Gold

1. The Bubble Will BurstGold has been on a steady rise for quite some time now, but fear is driving a lot of this rise. Investors typically turn to gold in times of trouble, and the present day is a perfect example. However, as history shows, the flight to gold eventually creates a bubble that will ultimately burst. It is not a question of if; it's a matter of when. Irrational exuberance plays a huge role in this effect.

The gold bubble has been building for many years, and while there is a chance that gold prices will continue to rise in the short term as investors jump on the bandwagon, there is a strong likelihood that the trend will reverse. Investing your money at or near the peak prices of gold is an extremely risky proposition with limited upside potential. (For related reading, see 5 Steps Of A Bubble.)

2. Gold Isn't Actually Immune to InflationTraditionally, gold has been considered a hedge against inflation. Therefore, as gold enthusiasts proclaim, now is a great time to invest. They claim that the money the Fed has been pumping into the economy will eventually create runaway consumer prices, and therefore, higher inflation.

But the facts do not back this up. To the contrary, inflation has actually been on a downswing. In December, 2008, it stood at 2.9%, and currently it is running right at around 1.2%. Therefore, gold enthusiasts are stuck with counting on a few other economic disasters to hit, which would justify their investments. Neither of these is likely to occur, and if the economy either continues at its modest growth rate or actually flourishes, it's bad news for gold holders. As an example, from 1980 to 2005 (a time period of steady economic growth), gold earned you a minimal return on your money, while other industries offered far greater returns. (For related reading, see What You Should Know About Inflation.)

3. The Future of the Dollar Isn't GrimA key bet that gold owners are counting on is the collapse of the U.S. dollar. When the dollar falls, investors tend to gravitate towards gold. Moreover, because gold is priced in dollars, a weaker dollar directly leads to higher gold prices. Since June, 2011, the dollar has dropped about 10%, and during that time, gold has shot up by approximately 14%. However, the reports of the death of the dollar have been greatly exaggerated.

In fact, a key support in gold is the fact that other currencies and economies are performing more poorly then the dollar and the U.S., respectively. For example, last November, the dollar shot up by about 3.5%, caused by the government debt problems in Europe and potential for contagion. Consequently, gold dropped by right around that same percentage. With European countries continuing to experience sovereign debt and the real potential for default, the weak euro will act as a support for the U.S. dollar. (For related reading, see Profiting From A Weak U.S. Dollar.)

4. Gold Supply is not LimitedGold holders frequently claim that gold is in limited supply. However, consider the following facts: in 2005, only 16% of the demand for gold came from investors with the majority of demand coming from industrial users and jewelers. However, today, investors reflect almost 40% of the demand, making any price of gold more a result of investor demands rather than real consumer demands. Moreover, with gold prices rising, gold mining companies are ramping up production greater than ever in the search for new gold. Inevitably, this will lead to an even larger supply, which will suppress gold prices.

5. The Gold Boom is Speculator DrivenBuying gold today is nothing more than a bet that someone else will want to pay you more for it tomorrow. Considering that the recent spike in gold is significantly driven by investor fear, rather than any solid economic indicator, this makes investing in gold even riskier. There is often no real value or basis for investing in gold. (For related reading, see What Is Wrong With Gold?)

TUTORIAL: Commodities

Final ThoughtsThe price of gold has enjoyed an unprecedented rise of late. However, it is clearly that eventually the spike will end, and could even crash if the economy turns around. Rather than be a victim of the gold bubble, look to many of the other more viable, and safer, options for investing rather than gold. What are your thoughts on investing in gold? (For related reading, see Does It Still Pay To Invest In Gold?)

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