5 Reasons Gold is a Bad Idea — Is It?

Since I could remember, gold was supposed to be the go-to-play. If all else fails, gold will be there. At the same time, analysts and bloggers everywhere keep screaming gold is going plus $1000, yet it is never able to keep the momentum.

That being said, what is so great about gold? While there are many ways to play it (Yamana – AUY and Gold Trust ETF – GLD), I have never really been a fan of anything dealing with the coveted commodity.

I happened to be cycling through various financial articles and came across somebody else who seems to share my opinion on gold. He came up with five reasons why gold is a BAD idea, and I thought we might dissect them a little bit.

Reason No. 1: There is no inflation

There are many backseat drivers that are claiming that the Federal Reserve does not truly fight inflation. This is just another Wall Street lie. In reality, inflation during the last bull market occurred due to massive amounts of private capital leverage. Indeed, the Federal Reserve did keep interest rates too low for too long in the early part of this decade, but do not forget that the stated goal of the central bank is to fight inflation.

Many gold promoters argue that gold is a great weapon for inflation; however, assets everywhere are decreasing, and the Central Bank is trying to fight inflation. All this does not leave a great environment that fosters ramped inflationary runs.

Reason No. 2: Gold prices are easily manipulated

Unlike paper currency that is impossible to manipulate in any way, gold can be accumulated by a group of connected buyers for the sole purpose of eliminating supply from the market. A successful cornering of the market can result in volatile swings in price. Unsuspecting buyers acquire bullion at higher prices only to see a flood of supply hit the market resulting in damaging price collapse.

This argument can really be used with any commodity, which make them all somewhat risky; however, if the right people get their hands on it, then they can drastically manipulate the price. Although cornering the market is not all that easy, it is still possible.

Reason No. 3: Gold is in limited supply

Those who want to return to the gold standard fail to appreciate that at some point a lack of supply could have disastrous consequences in a gold-based system.

Wars are fought over commodities in short supply. In addition to fighting inflation, the Federal Reserve is also charged with promoting a stable currency. With gold, prices can be far from stable.

This goes hand in hand in with the previous reason that any commodity is unstable. Look back at the boom cities that grew and failed while relying solely on gold. Because there is a limited supply, nobody can really moderate the use.

Reason No. 4: Gold was dead for 20 years

The trouble is that the gold rush is not likely to last. In fact, there has been tremendous resistance for gold at $1,000 per ounce. Do you really want to buy at the top? I don’t think so.

How can anything succeed unless everybody is on board. I stated earlier that everybody is screaming for gold plus $1000, but there is such strong resistance at $1000. While the dollar rises and falls, so are investors buying and selling gold. With no solid foundation, how can gold ever move higher?

Reason No. 5: The dollar is the global currency

If you can remove the clouds of crisis, the clear skies ahead provide comfort to me that gold has seen its best days. Those worried about massive deficits need to recall that our country was founded with debt, debt that was ultimately paid back.

We make good on our debts, which is why even during this crisis, buyers of Treasury securities remains strong. Note that such buyers could just as easily buy gold. They are not.

In short, the dollar rules the world. When thinking about gold, we must look long-term. Can anybody safely say gold will keep increasing? Its been in a rut for the past 20 years.