The Gold Rush: Trust the Experts, Not the Hype

Staff Writer
Columbus CEO

Throughout the United States and the world, investors and companies of all shapes and sizes seek opportunities that will earn them good returns on their investments.

They try to manage risk effectively, which can take the form of everything from the risk that interest rates will rise to the risk that a foreign government may collapse. In the course of effectively reading the landscape, they hope to make a reasonable profit as legally free from tax as possible. This is true for the individual investor as well.

Since 2010, the average consumer has been inundated with advertisements for gold bullion, gold-backed IRAs, and even to sell their own “scrap gold” to every jewelry and pawn shop from Washington to Maine. If you’re a thinking person, you have probably deduced that the opportunity for record profits in gold has passed. But, if that’s true, why do the commercials continue? Is there still an opportunity? The first factor to consider is inflation.

Will Interest

Rates Skyrocket?

Using the Consumer Price Index, there have been two instances of double-digit inflation since 1968, when the federal government stopped regulating the price of gold. Those were during 1974, in the wake of the 1973 oil embargoes, and the period from 1979 to 1981, as a result of another energy crisis and the Iran-U.S. hostage situation. Both periods saw unemployment over 7 percent, had rising energy prices and saw the average gold price triple in three years.

In 2012, there are elections looming, as there were in 1973 and 1979. Unemployment is well above 7 percent. Energy prices have soared … again. We are at war with the Taliban and al-Qaeda in Afghanistan and also dealing with Iran and the nuclear threat it poses. And guess what: The price of gold has nearly tripled in three years. While past performance is no guarantee of future results, there isn’t much of a historical case for a continued increase in gold prices.

Inflation hasn’t really moved much to date, but interest rates will rise. However, those expecting the double-digit rates of the late 1970s and early ’80s will be disappointed. Looking beyond this country and at the broader picture, which contains countless variables, the outlook favors a modest rise in rates at reasonable intervals, probably not to exceed 3 percent to 5 percent a year.

‘Buy, Buy, Buy!’

With these words ringing in our ears, Jim Cramer on his CNBC show “Mad Money” and others like him have led thousands of Americans to armchair-quarterback their investment accounts. Those with the patience to sit through his obstreperous ranting might have heard Cramer say near the end of 2011 that gold may be poised for a rally. Should you listen to this clanging cymbal to determine what is right for you and your family? In a word, no.

Owning gold can make sense if done in the right way and for the right reasons. Owning the physical metal is an ordeal of sorts (storage, purchase, sale, security, etc.), and the yield is generally less than owning it inside of a mutual fund or exchange traded funds. There is the old 3 percent to 5 percent rule of thumb, which states that most risky assets could be held by an investor if they do not exceed 5 percent of one’s overall portfolio. But that’s still just a rule.

What to Do?

The fact is that the financial world is dizzyingly complex. Predicting the market or the price of gold is impossible. What we know is that gold already did what it has historically done when the economy acts the way ours has in the last three years.

Equally as concerning is what happened to gold after those periods of rising gold prices and rising inflation. Three years after these increases, the price per Troy ounce was down as much as 20 percent from its peak.

Even more relevant is the fact that gold prices have never been volatile. Gold was basically the same price from 1717, when Sir Isaac Newton set the price in the United Kingdom, through 1918. More recently, following the economic trauma of 1979 to 1981, gold prices stayed basically the same until 2004, appreciating less than 0.5 percent annually.

At the end of the day, defer to trusted experts and don’t give in to the hype. The best advisors don’t try to be stock pickers; they work hard at knowing who their clients are and where they want to go, and they work hard at making sure risk is appropriate and managed for each individual situation.

Many advisors suggest investing in instruments where the amounts of volatile assets such as gold are determined by other experts. The bottom line is that someone who knows your overall financial picture, knows where to find quality answers to difficult questions and acts in your best interest will always be a better alternative than the latest craze on Wall Street.

Mike McMeans is a member of the Central Ohio Financial Planning Association and an Infinex Financial Advisor with FC Financial Services, located at Farmers Citizens Bank. He can be reached at (614) 946-6073 or

Reprinted from the April 2012 issue of Columbus C.E.O. Copyright © Columbus C.E.O.