Gold Is Losing Its Luster

February 13, 2009 | By: Jake Berzon

Certainly arguments can be made for owning gold - the only non-fiat currency - as a hedge against inflation, for diversification and wealth preservation. Such arguments work best in an inflationary environment. However, when the economy shrinks as it is bound to do for the foreseeable future, despite huge cash injections by the Government, the case for gold becomes a much weaker one.

Many gold lovers will no doubt chime in saying that this is just the beginning, that gold has much more appreciating to do and that the top is nowhere in sight. While this viewpoint may have some merit, I would like to point out that for 20 years prior to 2004 gold prices went nowhere. So, merely wishing it higher doesn't seem to work.

Technically, gold is now trading marginally lower than at the peak, which it reached almost a year ago. In fact, looking at the GLD chart, you will notice that over the past year it has made several lower lows and lower highs - hardly a bullish signal.

Fundamentally, volleying against gold are several important factors:

1. Gold is not an income producing asset like bonds and dividend paying stocks.
2. Falling prices and increasing inventories of copper, aluminum, nickel, zinc and most other industrial use metals.
3. Shrinking economy and contracting asset values for virtually everything, including real estate.
4. High price of gold relative to oil and agricultural commodities. (See Spend your Gold on Wheat and Oil and Ag Commodities on sale.)

Anyone buying gold at current levels is essentially speculating - either betting that people will rush to gold as stock and bond markets deteriorate further (creating a speculative bubble) or betting on inflation picking up sooner or faster than markets are currently anticipating (betting against the market). In either case it is a gamble - not something I like to do with my money.

While short term aberrations and extreme volatility can create great opportunities, longer term valuations tend to revert to their mean and often much faster than most people expect. Thus, I prefer to leave some money on the table and walk away, rather than gamble away profits trying to pick the always illusive top. This is especially true when markets trade based on speeches by government officials and their future direction is entirely dependent on political whim of the powerful few.

Disclosure: Long OIL, DBA.

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