Why gold is a sucker's bet

A top portfolio manager explains why typical gold investing is about as useful as owning a pile of bricks.

By MSNMoney partner Nov 10, 2010 1:17PM
Gold © Comstock Images/JupiterimagesThinking about joining the recent gold rush? With the price of the yellow metal soaring, the temptation is understandable. But author and philanthropist Rick Ferri, the investment manager behind Portfolio Solutions, bucks the hype.

Dan Bortolotti of the Canadian Couch Potato blog chatted recently with Ferri, who likens typical gold investing to owning a pile of bricks.


So many investors are piling into the ETF SPDR Gold Shares (GLD), Ferri notes. "But it's a piece of paper," he says. "They are not going to issue you gold bars. If the banking industry collapses, how are you going to get your gold? If Armageddon comes along, you might say, 'That's OK, because I own gold.' But you don't own gold, you own GLD. I suppose you could go to the vault in London with your piece of paper and ask for your gold -- assuming that airlines are still flying. Good luck with that."

Ferri is a champion of low-cost index investing and believes in assets that produce income via dividends or interest. "You can take a bunch of bricks and pile them in your backyard and look at them every day and say, 'Go up in value, go up in value,'" Ferri says. "But you can't say, 'What kind of dividends are my pile of bricks going to pay me this year?' Because it's zero. How much interest am I going to get from my pile of bricks? None."


Read the rest of Bortolotti and Ferri's discussion here.


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26Comments
Nov 10, 2010 4:56PM
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While the article makes some valid points let's look at the last ten years in the typical comparitive fashion:  1yr = gold up higher than the market, 3yr = gold up higher than the market, 5yr = gold up higher than the market & 10yr = gold up higher than the market. 

Last I checked INVESTORS are trying to make money on their investment and as such GOLD as been kicking azz and taking names for a decade.  I don't hold gold bullion but invest through a gold fund and a prec. metal mining fund when I added them in 07 at a time when gold was $860 and ounce.  One has done a little better than if I had owned gold bullion one a little worse so my DIVERSE investment mix is delivering like GOLD.  Moreover we know that investing 101 speaks to diversivfication so EVERYONE should have 5% gold, I currently still have 10% and will most likely get down to 5% when it looks like the dollar stabilizes.  Like anything else, there will be panic and profit - taking so when gold falls it will most likely be hard.  And just like i did when Real-Estate took a dump, I'll be ready to be back in when it's close to a bottom. 

Nov 10, 2010 3:57PM
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Funny my gold investments are up 100%+ over the last few year and my low cost index funds are down.  That's why I own various asset classes... if Ferri thinks the only asset classes are equities and bonds then he is someone who make his $$$ make sure you're fully "invested" in a class of product that give him a return.  


Nov 10, 2010 7:06PM
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All of you citing how well your gold investments have done are completely missing the point. Enron was up 400% in 4 years right up until the collapse. The same could be said about Healthsouth, Washington Mutual, Lehman Brothers, and Colonial Bank. All were good investments until the day they became bad investments. Citing past performance proves absolutely nothing. The fact that the gold bubble hasn't popped yet doesn't mean that it can't. It's that foolish rationale that lead to the Great Depression and the most recent recession. An investor in 1925 could have easily bragged that the stock market had never fallen 98% in 3 years. History repeatedly proves that logic wrong.

 

Gold is only valuable because people BELIEVE that it is. Unlike a corporation, there are no cash reserves or capital assets backing that PERCEIVED value. If the investing public woke up tomorrow and decided gold was no longer "cool", it would become valueless overnight.  You can't hold look at a hunk of gold and tell what it's worth unless the guy on CNN tells you what it's worth. For that reason, it suffers the same whims that fiat money does. It's 100% perception, 0% intrinsic worth.

 

And like others have pointed out, in a truly apocalyptic economy, gold will still be useless. Food, water, shelter, and protection will be the traded currency. Give me a gallon of water... you can keep your heavy hunk of metal, thanks.

Nov 10, 2010 9:59PM
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Oh, C'mon, author says there's no dividends or interest to spend from a pile of gold or GLD.  What about the CAPITAL GAINS from selling some or all of it when you need some cash for crying out loud.  Sheesh, does he think investors are idiots?  Sure, I have 40 different stocks in my portfolio and also GLD and EGO.  Gold has a place because it is an inflation hedge.  It's beaten the S&P the last 5 years.  What's not to like.
Nov 10, 2010 6:03PM
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Physical gold and physical silver will see us through the upcoming currency wars, the demise of the once mighty US$ and the guaranteed default by our government on our debt.  Otherwise, the government would have to hyperinflate which has no connection to inflation.

 

The big banks cannot and will not be permitted to default-guaranteed.

 

Trust my words, readers; I have been in this field for over four decades and have an open mind that cuts through all the BS.  Watch oil and copper as well.  We all NEED oil and that is the hyperinflationary barometer.

 

Take heed of these final economic warnings or you will be on your own and not bailed out.

Nov 10, 2010 5:39PM
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"If the banking industry collapses, how are you going to get your gold? If Armageddon comes along, you might say, 'That's OK, because I own gold.' But you don't own gold, you own GLD."

 

If true Armageddon comes, which I highly doubt, the only asset of real value will be food stuffs and ammo to protect it.  Until then diversify.

Nov 10, 2010 5:25PM
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While I am not an expert investor, I do make money the majority of the time now.  In my opinion, I suppose if you invest in funds that everyone else is rushing to buy, you may make fairly well as long as you keep your eyes open. However, as mentioned already, gold has gone up & it always goes back down. How much higher will it go before the decline? If I were to invest in an actual metal (i.e. buy coins, bars, etc), silver outperforms gold by a sizable margin, from when I bought it back in 1996/97 even to this day as I watch prices fluctuate. Gold, to me, should be bought when prices are down & the economy is well to hedge against future downs, not bought in a down market when prices are high & will inevitably decline.
Nov 10, 2010 4:56PM
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As far as the comment "it is just a piece of paper" what do think a stock is. You may not get the Gold bar as above however with the stock do you really think they are going deliver you product or

assets when Armageddon comes along? Paper is paper do not be fooled.

 

However you are correct paper vs. the metal leaving stocks out of it would be the best a good reminder.

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And you can't eat gold, too. Blah, Blah, Blah.

No one said the world was coming to an end(armageddon), just ending as you(msn money staff) know it. You could pile up your u.s. dollars in a bank account, collecting hardly any interest, and look at it, too. Its about purchasing power. The u.s. dollar is going to lose purchasing power for the forseeable future. Gold will do well in that environment. Maybe, there are no guarantees with GLD, but I rather own it when this country has a "funding crisis" and we will have one.

Nov 10, 2010 6:54PM
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This guy obviously is referring to gold mutual funds or other paper representations of gold investments.  The gold I've owned for the last 8 years is in a safe and is real.
Nov 10, 2010 4:15PM
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1st rule of investing in metals,take possession of your goods. You will sleep better. lol

Nov 10, 2010 6:51PM
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Started collecting gold coins 15 years ago. Dollar cost averaging is the only way to invest in anything  Light bulb

Nov 10, 2010 6:45PM
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This new backlash against gold is amusing. last week a similar story ran and there were readers comparing gold to the .com stock bubble burst and one guy even said it was like tulip bulbs - a fad that would burst (I still don't know what he was talking about).

 

Gold a fad? Gold has been part of the human economy for 6,000 years. It is, by far, THE most historically reliable measure of value in the history of this planet. Don't forget, gold has seen hundreds of human fiat currencys come and go. If I had to bet as to which one will be standing after the other is consigned to the bins of history - gold or the U.S. dollar - I'm putting my money on (and into) gold.

Nov 10, 2010 6:34PM
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PHYSICAL GOLD AND SILVER ,HOW MUCH DO THESE JOKERS THINK THEY WOULD HAVE GOT IF THEY STOCKPILED GOLD AND SILVER 10 YEARS AGO AND SOLD IT IN OPEN MARKET OR ON  EBAY NOW ,,,,EXACTLTY LOOKS LIKE A GOOD HEDGE BET TO ME,SHOW ME A STOCK THAT HAS PAYED BETTER RETURNS THEN GOLD AND SILVER FOR 10 YEARS,THERE MIGHT BE ONE OR TWO BUT NOT MANY,AND ITS A PHYSICAL ENTITY NOT A VIRTUAL STOCK.

Nov 10, 2010 6:30PM
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I bought gold and silver in a mint overseas to put within my IRA back in 2003...  I'm up over 400% in my portfolio.  So say what you want about the metals... everything goes up and down...I'm up for now whereas if I was still in the stock market, well we all know that story.
Nov 13, 2010 4:10PM
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I have made more profit on my "pile of bricks" than he has no any of the stocks he is pushing. However he is right about buying paper gold get the real stuff and get it in your hands.
Nov 11, 2010 10:40AM
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In the short term ( 6 months maybe a year) gold and silver will rise.

 

As long as the dollar stays weak gold silver oil, etc  will rise in value, but look out if the dollar gains its footing and strenghtens, gold oil silver will accelerate down quickly in value.

Nov 11, 2010 9:07AM
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Ferri is a champion of low-cost index investing and believes in assets that produce income via dividends or interest. "You can take a bunch of bricks and pile them in your backyard and look at them every day and say, 'Go up in value, go up in value,'" Ferri says
Nov 11, 2010 6:02AM
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If Armageddon comes along...

"It’s a solid propellant missile," he told the Times. "You can tell from the efflux [smoke]."/Richardson~Examiner

 

 

Clinton gave China the ability to launch ICBMs, and they do it regularly to stress   Taiwan, as does NKorea to show their might.

Not that far a reach to think  China is flexing its muscles at a time of the Obama/G20 meetings.

And, lil obama's ego wont tell US they know its from China sub!

Oh well, due to lack of GOLD to hoard,  I think I will start stockpiling more chocolate!

Nov 10, 2010 8:23PM
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While the 1.3 billion Chinese continue  to believe that gold is a nice and comfortable investment and at the same time the Chinese Blue Collar  workers payroll increases while the payroll job figures and the continued Blue Collar Depression in US. I suggest to rethink what is driving gold prices and it's value.Smile

 

 

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