Related topics: gold, investing strategy, ETF, metals and mining, mutual funds
Gold has been the investment phenomenon of the decade. In the past 10 years, investors in gold have made nearly five times their money. Over the same time, Wall Street has gone sideways.
But few investments seem to attract more myths and hokum than gold and other precious metals. At the risk of inflaming those on both sides of the issue, here are 10:
1. Gold is overvalued. How can anyone know this? Nobody even knows what gold is worth, so it's impossible to say with any confidence that it's overvalued (or undervalued, for that matter).
Some perfectly intelligent people, such as Dylan Grice, a strategist at SG Securities, argue that when compared with the ballooning money supply, gold is still low by historical standards. And even if gold is in a bubble today, it may have a long way to go. As I pointed out earlier this year, at a comparable stage the Nasdaq Composite Index ($COMPX), in 1998, and real estate, in 2003, still had a couple of years to run.
2. The smart money got out of gold long ago. Really? People have been saying that for at least five years. Yet hedge fund honcho John Paulson has got nearly $4 billion of his company's money in the SPDR Gold Shares (GLD, news) exchange-traded fund. George Soros has $650 million in the ETF.
Every month, Merrill Lynch conducts a survey of the world's top fund managers. About six years ago, when gold was about $400 an ounce, I suggested they start asking the money managers about gold. Initially, they got few responses. Few cared enough even to venture an opinion. More recently, while interest has risen, the skepticism has remained.
For the past two and a half years, apart from a brief moment in early 2009, money managers have pretty consistently told the interviewers that gold was overvalued, and usually by a wide margin. During that time, it's risen from around $850 an ounce to nearly $1,300.
3. Gold is a haven. Remind me never to buy life insurance or a new set of brakes from someone who thinks this metal is "safe."
From 1980 to 2000, it lost more than four-fifths of its purchasing power. During the 2008 crash, it fell nearly a third. If that's safe, I'd hate to see volatile. Gold is just an asset, like anything else.
4. Gold is real money, while money created by the government is just paper. What nonsense. The only thing that makes anything "money" is that other people -- meaning society -- accept it as such. A fund manager was recently telling me about someone she knew who had bribed his way out of a crisis in Africa with bottles of liquor. She pointed out that, if society really fell apart, the best "money" would be the things people need, such as food, cigarettes and liquor.
(My tip for Armageddon? Stock up on Charmin Ultra Soft. You'll be amazed how valuable it becomes when we're down to leaves.)
5. Gold stocks are a more profitable way to invest in gold than metal. The most dangerous tense on Wall Street is the perpetual present. The reality: Gold stocks are sometimes more profitable and sometimes less so. It all depends on the price you pay.
For years, many big mining stocks were overvalued. The metal was a better bet. But during the 2008 crash, gold stocks plummeted even further than the metal. That left them an absolute steal. Anyone who bought the big miners at the lows has more than doubled his or her money in two years, and anyone who bought the smaller ones has quadrupled it.
