Since the beginning of the year, gold has recorded a gain of around 4.16%, which is far less than the S&P 500's (NYSEArca:SPY - News) 11.84% gain. Gold is even underperforming broader precious metals (NYSEArca:GLTR - News) exchange-traded products (ETPs), which include sliver (NYSEArca:SIVR - News) and platinum (NYSEArca:PPLT - News).
For individuals that have overdosed their investment portfolios on too much gold, it'll be just like the movie "The Treasure of the Sierra Madre" where gold provided more damage than help.
Gold bugs are never short on arguments for the 1,000 reasons you and everyone else should own gold. "Gold has never been worth zero," is just one example.
Gold bugs are also quick to point out the shortcomings of other types of investments, particularly stocks. 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%. But that was still far less than gold.
Gold bullion began 2000 at $318.70 per ounce and closed 348% higher at $1,421.40 per ounce at the end of 2010. Although gold's bullish run has been amazing, it still doesn't solve one of gold's biggest shortcomings; it produces no income.
Bigger Problems than Gold
The immediate concern for investors and retirees is not the U.S. government's uncontrollable $16 trillion debt dungeon. (Yes too much debt is a problem, and yes U.S. investors should have an investment mix that prepares for these many "what ifs.") The problem is too many individual investors have been building their investment portfolios with both eyes focused on the U.S. government's balance sheet, instead of their own.
As a result, people are snapping up gold coins, gold ETFs, Goldfinger and anything else that shines yellow. Gold has been bought and sold as a hedge against inflation, a hedge against political instability and other unknown calamities. In a subversive way, these same people have been unwittingly increasing their financial risk by over-concentrating their money in gold investments.
Here's what 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 Smarter Income Strategy
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 might hedge against future increases against inflation or hold up during 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 $1,250 in monthly income. The ETF Profit Strategy Newsletter shows you how to convert your gold investments into an income producing asset. And that's something not even gold coins – in all their glory – can do.
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