Is the Bull Market in Gold Kaput?
Gold bugs are fretting and rightly so. Although gold (NYSEArca: GLD - News) has been up for 11 consecutive years, 2012 has been a bumpy ride.
Since the beginning of the year, gold has recorded a gain of around 6.25%, which is less than the S&P 500's (NYSEArca: SPY - News) surge of 11.76%. Likewise, the beloved yellow metal is even underperforming broader precious metals (NYSEArca: GLTR - News) exchange-traded products (ETPs), which include sliver (NYSEArca: SIVR - News), platinum (NYSEArca: PPLT - News), and palladium (NYSEArca: PALL - News).
From a technical angle, gold now trades below both its 50 and 200 simple day moving average, which in Star Trek talk basically means to abandon ship. Is the bull market in gold over?
A 'Lost Decade' and Some Perspective
The 2000-10 performance for the S&P 500 has been called the 'lost decade' because buy-and-hold investors of this particular stock index fared worse than bonds (NYSEArca: AGG - News) along with other major asset classes like gold (NYSEArca: IAU - News).
Investors that owned dividend focused stock ETFs like the iShares Dow Jones U.S. Select Dividend Index Fund (NYSEArca: DVY - News) or emerging market stocks (NYSEArca: VWO - News) did much better than S&P 500 investors. Going back to 2000, a dividend stock strategy experienced average gains of almost 8%.
Gold bullion began 2000 at $318.70 per ounce and closed 348% higher at $1,421.40 per ounce at the end of 2010. Amazing as gold's bullish run has been, it still doesn't solve one of gold's biggest shortcomings; it produces no income.
The $6.6 Trillion Question A shortage of retirement income is one of the biggest predicaments facing Baby Boomers. The Center for Retirement Research at Boston College pegs it as a $6.6 trillion conundrum. The Center's analysis included major sources of retirement income like Social Security, traditional pension plans, personal savings, and 401(k) retirement plans.
What have investors been doing to fix this? Instead of tackling this $6.6 trillion problem, too many retirees have been concentrating their investments in gold - an asset that produces zero income.
What does this mean? It means any substantial decrease in gold prices will undoubtedly massacre these unsuspecting folks. And while they wait for gold prices to recover, they'll get nothing in exchange for waiting. At least S&P 500 investors got dividends during the 'lost decade!' (For anyone that doesn't think a decline in gold prices is problematic, tell that to the people who bought gold at $834 per ounce in 1980 and sat on dead money over the next 27 years.)
A Better Income Strategy As pointed out, physical bullion generates no income. And because gold produces zero cash flow, it presents a major conundrum for retirees or anyone whose main investment goal is to generate more income.
While owning physical gold is psychologically comforting and while it may hedge against future increases against inflation or a breakdown in the paper currency market, it isn't the panacea for everything. Last time I checked, gold isn't eatable. (Gold shavings don't count.)
For a $100,000 investment in gold, ETFguide's April Gold Income Trade generated $1,500 in monthly income. Not only are we converting gold into an income producing asset, but our ETF strategy attacks the problem of not enough income. It also reduces a gold investor's cost basis, which can thereby reduce market risk.
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