In the midst of market turbulence, many investors are blindly rushing to gold without any concern for the long-term consequences of doing so.
Franklin Allen and Jeremy Sigel, both finance professors at The Wharton School of the University of Pennsylvania, have been speaking out about the risks of investing in gold, or even worse, investing based on sentiment. Due to wide fluctuations in prices, I dont think its a good buy-and-hold for a long-term investment, Allen said.
According to Sigel, gold prices tend to ride waves of investor emotion.
In times of financial stress, in times of inflation, when there is fear for the [currency], gold does well, he noted. Once the fears are past, gold goes back down.
Before gold broke the $1,000 an ounce mark in mid-March, the previous peak was in 1980, when gold was valued around $850 an ounce. Although many were probably moved to invest back then, gold actually lost value over the 28-year period with inflation factored in. On the other hand, Standard & Poors 500 Index grew more than 12% a year over the same period.
Stocks can generally perform better against inflation since companies are able to raise prices. On the other hand, the supply of gold is continually growing, which may explain why their prices have not appreciated significantly over the long term.
According to Morningstar, gold investors have been doing relatively well lately. Over the past four years, investors have seen average annual returns of 28%, but the main problem is that a majority only seem to turn to gold once they see prices begin to soar, and then when it falls down again, they become easily discouraged and sell.
When you buy at a period of high anxiety, its a terrible investment, Sigel reinforced.