Is Gold for Fools? Experts Say Beware the Hot Commodity

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I am fascinated by the hype about gold. Is this the right time to buy? Before you jump on the gold bandwagon, consider these facts.Investors tend to buy and sell at the wrong times, driven by emotion and incompetent advice from their "financial professionals." Burton Malkiel, the author of A Random Walk Down Wall Street, recently noted in an article in the Journal of Indexes that more money entered the market at the height of the internet bubble in late 1999 and early 2000 than had even done so ever before. More money left the market before the recovery in 2002. This pattern repeated itself in 2008 and 2009.

%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% Malkiel also made the surprising observation that institutional investors fall into the same pattern. Their market timing skills are no better than those of amateur investors.

This information should give you pause about timing your entry into the gold sweepstakes. And there are other reasons to be cautious.

The big selling points for gold and other commodities is that they offer excess returns, increase diversification and are a great hedge against inflation. Sounds good. Unfortunately, the reality contradicts the hype.

A comprehensive study (still behind a subscriber wall) published in 2004 titled Commodity Futures in Portfolios by Truman A. Clark, former professor of finance at the University of Southern California, concluded:

1. The addition of commodities to a portfolio did not provide returns in excess of the Treasury bill return;

2. The addition of commodities to a portfolio did not improve diversification for stock and bond portfolios; and

3. "Commodity futures do not appear to be effective inflation hedges for stock and bond portfolios."

Clark concluded: "The evidence indicates that the purported benefits of commodity futures are exaggerated."

At a recent conference, Vanguard Group founder John Bogle set forth his views on this subject with typical candor: "I for one, have no conviction that commodities belong in anybody's portfolio, at any time, under any circumstances. Did I make that clear?"

I am not suggesting that you can't make money speculating in gold or other commodities. You can do so by buying low and selling high. If that's your plan, remember there's no evidence that anyone has market-timing skill (Glenn Beck included).

If you want to gamble in commodities, and understand the risks, go ahead. However, if you decide to do so, remember that "fool's gold" can refer to the speculator as well as the commodity.
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