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The case against investing in gold

Abdullah Shibli
***Gold prices are known to fall, and there is no sovereign authority regulating the gold market, unlike the stock exchanges.***
THE Dow Jones, an index of stock prices of major companies in the US, crossed the 13,000 mark on March 14 for the first time since 2008 when the most recent downturn in the world economy started. While this event did not in any way affect any real economic variables, such as output, employment or prices of consumer goods, it did provide a moral boost for the average American investor, and can be seen only as a psychological milestone for the wo (man) on the street, since the rich have their money stashed away in off-shore banks and tax shelters but the rest of the majority are still struggling and do not save much,
as I discuss below.
This upswing in the stock market is in sharp contrast to another media buzz. Many erstwhile gurus, including David Stockman, who served as Ronald Reagan's budget director, are advocating investment in gold citing, among other factors, the fear of inflation. Stockman's reasoning, outlined in his book The Triumph of Crony Capitalism and in well-publicised interviews on TV, is that recent easy money policy, quantitative easing and low interest rates, in the US will inevitably lead to inflation in the future. One might even add, to this fear of inflation, a dire prediction of the collapse of Euro Zone made by Nuriel Roubini.
So the question on everyone's mind nowadays is: cue stocks profitable again or is gold a much safer
longer term trends.
At this point, I would like to ask for the indulgence of my reader and add a personal note to this discussion. I sometimes think my father's life was blissful, since he never had to make any investment decisions during his lifetime. In his early life, as a Munsef during the British-era, he earned very little and was able to save little too as he had a large extended family that he supported. He made no contribution to the Provident Fund but had faith in the government's pension plan. Only later, towards the end of his career, after he was appointed to the East Pakistan High Court, could he save for his retirement. But he never bought a house, nor did he own a piece of land during his lifetime. Things were very simple in his life: he had immense faith in the
bet? I searched for "stocks vs. gold" in Google and came up more than a quarter million results. Choice of safe investment vehicles in recent years has been a tricky issue since most hitherto safe investments, for example real estate, stocks, and commodities, except oil and metals, are experiencing low returns and have exhibited considerable volatility. This has led to a search for alternatives and is fueling the recent popularity of gold as a safe and high-yielding asset. One need not go very far to see why. From 2000 to 2010, price of gold has increased 300%, and if we consider more recent data, the boom in gold price has been phenomenal. However, before anyone starts selling stocks or other forms of securities, and we shift en masse towards reinvesting in gold, it is worth taking another look at personal investment returns, and
largesse of his creator.
The challenges I face every day are more complicated. Again, to go back, my father retired at 62, the mandatory age for Bangladesh Supreme Court justices, and then passed away ten years later in a rented flat in Dhaka. I don't know if I will be able to retire at 62 even if I wanted to. My 401 (k), the retirement fund, lost considerable value in the recent crash, and although the stock market has bounced back, I am no longer confident that we can live comfortably on my retirement income alone, even if it is supplemented by my wife's income. Thankfully, there is a safety net, the Social Security Fund, and the equity in the house.
Let us now ponder for a second why the stock market has this immense influence on the US economic landscape. After all, stocks are often consid-
ered not even worth the paper they are printed on. There are three explanations. First of all, the middle class has its retirement savings invested in mutual funds. Second, the wealth effect of a rising stock market provides a clear signal for the average worker to save and invest. With real estate in a slump in many states, the stock market, or its many derivatives, provides the only asset that seems to be going up. And finally, the rising stock prices often indicate that times are getting better, and the economy is mending.
One might well ask: how about gold and silver? Admittedly, the price of gold has risen sharply over the last few years, as stated above. However, gold prices are known to fall, and there is no sovereign authority regulating the gold market, unlike the stock exchanges. The last time the gold market experienced an unbroken run was during the 1970s when rising oil prices and inflationary forces took a choke hold on the US and world economies. However, the price of gold went down subsequently and declined from $590 an ounce to $273 an ounce between 1980 and 2000.
Obviously, if an investor can hold gold for 30 years the yields would be good but, on the other hand, if you had to sell in 1990 you were out of luck. It is the oscillation that creates problems. Also, if you have to believe in Stockman, it behooves well to take note of what else Stockman said: "I invest in anything that Bernanke can't destroy, including gold, canned beans, bottled water and flashlight batteries." Well, I will say none of
these forms of investment appeal to me! Stockman suffered a personal financial loss, estimated at $13 million, along with losses suffered by as many as 15,000 Collins & Aikman employees worldwide, a group he advised!
Finally, let me throw in a word of caution. According to the EBRI, a non-profit that studies employee benefits, about 60% of US workers have less than $25,000 in savings and investment. Lack of savings is going to be a drag and will catch up with policy makers' apparent lack of concern about national debt, similar to what we see in Greece, and force adoption of austerity measures even in the US since the government cannot borrow for an indefinite period of time from the foreign markets.
The writer, an Economist, lives and works in Boston.