Time For Me To Go To Lunch

2014-02-24_0721I love my wife.  I really do.  I work out with her in the morning, I go to work with her at 9 a.m., I work with her all day, I come home and have supper with her (and the kids) , we watch television together, and then we go to bed.  We sound like the modern day “Waltons” don’t we?

Well . . . we are not.

Every once in a while Jill kicks me out of the office because I am driving her nuts.  Last Wednesday was one of those days.  I decided to give Jill a break from my charming personality and drove home for lunch.  I made myself a nice roast beef sandwich, sat down, turned on the television and immediately became depressed.  It was not the programming that made me depressed; it was the commercials.

I have not studied the demographics of those who watch TV at noon on a weekday, but judging from the commercials, it must be a combination of senior citizens and people who have been in an auto accident, been fired, never attended college or even finished high school, or are currently unemployed or under-employed.

The ads are outrageous! One in particular was directly targeting seniors.  The commercial employed a worn out celebrity using scare tactics to convince seniors to invest their IRAs in gold, or otherwise suffer the same losses that so many did in 2008.

Hmmm . . . This really ticks me off.

Last year was not a good year for gold. While equity markets, such as the S&P 500 were up about 32%, gold collapsed. [1]  Investors who bought gold on its way down or simply held it after its peak have not yet seen a substantial recovery from their losses. Furthermore, it is entirely possible there will not be an increase in its value any time soon. The reasons are simple: gently rising interest rates and mild, if any, inflation.

We spoke last week about how the Fed is moving to taper its quantitative easing program and will be purchasing fewer bonds, buying $65 billion of bonds a month instead of $85 billion a month.  So, it is only logical that interest rates will go higher, right?  After all, the biggest bond buyer on the planet has told everyone it will buy less.

Although interest rates generally started moving up in 2013, and are still trending in that direction, this may not be the case for the short end of the Yield Curve (a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates).  The Fed has pledged to hold down rates on short-term issues, at least for the next two years, but has not made that pledge for bonds with maturities longer than five years.

However, this does not mean that interest rates will take off immediately.  Instead, I expect that interest rates will gradually move higher.  And, I expect rates to fall back again with the next downturn in the economy.  Cutter Family Finance readers know that historically, the market has had a correction every 5-6 years with 2008 being the last, but that’s a story for another day. [2]

As for the yield on gold . . . well . . . there isn’t one. As interest rates move higher, gold owners risk falling farther behind those who own interest-bearing securities and assets.

At the same time, inflation is unbelievably low under current economic conditions. The Fed’s printing presses has generated over $3 trillion over the past five years and yet inflation remains at about 1.5%. [3] This is a testament to the deflationary pressures on our economy, where wages continue to fall and consumers continue to pay off debt. This isn’t a good situation for gold.  Precious metals love an inflationary run where currency loses value. During times of low inflation, or even deflationary pressure, gold will naturally drift lower, just like other commodities.(Speaking of currency, the two trends mentioned above, gently rising interest rates and very mild inflation, are the perfect recipe for a strengthening dollar. This gives investors confidence that their dollars will not lose significant purchasing power, while also attracting more investment because of higher yields.)

As I do every time I discuss gold as an investment, I will point out that I am not talking about investing in gold as a protection against calamity. Whether or not gold would serve a useful purpose in the event of a total financial collapse is debatable.  The way I look at it is, you can’t give gold to the cashier at Stop & Shop in exchange for bread.  However, I understand why folks hold a certain amount in case of such an event.  It helps them sleep at night.

The purpose of my article today is to point out the risks of holding gold as an investment, speculating that the price will go higher and hoping to cash it in for funds to purchase other things.   I want our seniors, who often rely on their IRAs for income, food and shelter, to understand what could happen to their quality of life if they invest everything they have in gold.  It could change drastically.

Driving back to the office after lunch I reflected on those commercials, it made me realize all the misconceptions and misinformation that is being hurled at folks.  In my opinion, investing in gold is not an appropriate strategy for most pre and post retirees.  While the price of gold might bounce back a bit from its current lows, it appears that current economic trends are all working against an increase in its value.

Expect gold to have another difficult year, no matter what worn out celebrities tell you on the television commercials.

Be vigilant and stay alert, because you deserve more!

P.S. Those commercials also made me realize just how glad I am to be able to teach my local classes for Pre and Post Retirees to make sure that they are getting the right answers to their questions.  If you would like to attend one of our upcoming classes and make sure you aren’t being led down the wrong path, give us a call.  It’s a lot better than sitting on the couch with those commercials!

1: http://tinyurl.com/jwnwqmz, 2: http://tinyurl.com/nzmwpxs, 3: http://tinyurl.com/lh5z36

Photo courtesy of Microsoft Office