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In the contrarian spirit of playing devil’s advocate four reasons are put forth as to why you shouldn’t buy gold today. Words: 553
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Reason 1: Gold ETF Redemptions
Did you know that the seventh largest holder of gold in the world is not a country, but an exchange traded fund? Yes, gold ETF SPDR Gold Shares (GLD) has amassed the seventh largest gold reserve in the world. This fund holds more gold than China, Switzerland, Japan, the United Kingdom or the European Central Bank.
So why does this matter? Because should big investors (hedge funds, pension funds) who hold this fund (and many do), decide to dump their shares or are forced to liquidate their holdings because of investor redemptions, who will buy up the excess slack? This excess supply would surely drive the price of gold down making for some unhappy gold bugs.
Reason 2: Gold is Overbought
Gold is overbought at today’s price level. When anything becomes overbought quickly, as gold has in recent months, it has a habit of correcting just as quickly.
According to Bob Prechter, CEO of Elliot Wave International, the precious metals are “heavily overbought” and the “path of least resistance” will be to the downside for many months. “[Gold’s] going to go much further [down] than people think.”
If the current recession takes a double dip, which we think is highly possibly, as does Nouriel Roubini, investors around the world will flee to the dollar again. When the dollar gets propped up, gold falls and when it starts to fall, you can bet these speculators will be abandoning ship just as fast as they boarded. This could leave you, dear reader, with a sinking boatload of gold in the middle of the vast and hopeless ocean.
Reason 3: Inflation Hedge Alternatives to Gold
In the past, gold served as the best inflation hedge out there… but gold’s monopoly as the only inflation hedge is over. Now, investors have a wealth of options such as currency ETFs, TIPS, short US Treasury ETFs, other baskets of commodities, and stock in companies that can raise prices on pace with inflation. While none of these vehicles is the perfect inflation hedge, each attracts money away from gold and the less demand for gold, the less upward price pressure there will be.
Reason 4: Economic Environment is Improving
The run up in gold is based on fear, not on increased demand. Right now, owning gold is a “fear trade.” The price of gold is not up because people are buying more jewelry or Indian saris. It’s up because people are scared of hyperinflation taking over, the mountain of debt crushing the US, and the fiat money system collapsing.
What if Chairman Ben, and all his merry henchmen, is actually doing the right thing? While it is hard to say this with a straight face, what if everything returns to normal and we experience a nice V-shaped recovery? Or, more plausibly, what if deflation wins the day? Both these scenarios will have serious downward consequences on the price of gold.