gold buyers: please be careful!

I read an article today that frightens me: apparently, SPDR’s gold ETF (GLD) now has more money invested in it than their S&P500 ETF (SPY). What this means is that investors are, in mass quantities, pulling out of stocks and investing in gold. I understand the lack of confidence in both the stock market and the US government, but this is a bad idea on many levels:

• Stocks are shares in companies that (in theory) produce something of value. Gold’s value is mostly arbitrary.

• As a side note: I say “mostly” because there are some useful applications of gold, such as in semiconductor bond wires. As an engineer in the semiconductor industry, I’m greatly irritated that those who are buying gold just to sit on it are driving up prices for those who actually want to use it.

• Gold is highly volatile, and over the long term, has had very poor returns. Compare this chart with this chart. Consider the fact that gold is just now coming back up to what it was in the late 70’s-early 80’s — and that’s not even accounting for inflation. Also consider the fact that the stock market chart above is logarithmic!

• This is a story that has played out over and over again throughout history. This has happened before, and it will happen again. This is not the first time consumer confidence has been shot. This is not the first time that the media has gone ballistic over the economy. And every time, we have recovered. Every time, the people who flew to “safety” have lost their shirts.(And gold, as the charts above indicate, is anything but safe!) Those of you who lived through the 70’s should know better. Hell, those of us who lived through 2009 should know better!

If you’re still insistent on buying gold, fine. But please, be careful. There’s a word for the kind of run-up gold is experiencing right now: a bubble.