5 Reasons to AVOID the Gold ETF GLD

by ETF Base on September 26, 2011

The gold bugs have certainly been gloating of late (well, excluding the prior 2 trading sessions) seeing as how bullion prices, miners and precious metals ETFs have been holding up well while most other asset classes spiral downward in a volatility vortex.  In the short term, sure, gold has performed well and may well continue for some time to come.  However, on a long-term basis, there’s no reason to believe gold, and especially, the most popular gold proxy ETF (GLD) will outperform other conventional asset classes, and in fact, it should probably be expected to actually underperform.  Here’s why.

1) You Don’t Even Know WHY You’re Buying Gold – This is sadly true of most retail investors buying gold coins, gold ETFs and more.  Sure, it’s the water-cooler conversation of the day and it’s “cool” to be anti-establishment and agree that the entire financial system is screwed, so gold is the only true currency.  And while that all sounds compelling, it’s just platitudes.  Seriously, we’ve known the system is screwed up for decades and it always will be.  And during some of those recent durations, gold lost double digits in no time flat while stocks flourished.  That’s not to say you shouldn’t own any gold and that it may not perform well, but do you understand why you’re actually buying it and what prior price history suggests it may do in the future?

2) Markets Are Efficient and You’re NOT – While there are some anecdotal accounts of investors being able to exploit gaps in market efficiency, the reality is that for the most part, especially for retail investors like you and I, markets are efficient.  Any future price spikes you anticipate due to currency, economic or inflationary events are already intrinsically reflected in the spot price for gold.  The only way gold meaningfully outperforms other asset classes from here is if you know something everyone else doesn’t (or if you’re even more pessimistic than a VERY pessimistic bunch).  I love when analysts say, “Gold will be at $2,000 an ounce by year-end”.  Well, then why isn’t it trading at $1998/oz now?

3) No Cash Flows – While the recency effect has brainwashed young and enthusiastic retail investors, the reality is that over long periods of time, an asset with no cashflows is simply not expected to outperform stocks, even in an inflationary environment.  Think about it.  Gold does not pay a dividend, it doesn’t buy back shares and it can’t be acquired by a large competitor.  The only thing gold has going for it is its scarcity which is already reflected in its price.  There are no recurring cashflows delivered to the investor over time like a stock, a bond, or other higher yielding hybrid investments like preferreds.

4) Bubble – Glenn Beck.  That’s all I have to say.  But seriously, you can’t listen to CNBC on TV, the radio, or Fox News or any conservative/money programming without being constantly bombarded by gold commercials.  And the claims are getting to be more an more outrageous.  A guy with a raspy voice and a scary music overlay touting: “Convert your IRA to gold”…” The only asset class that has held up”… “Your 401(k) has turned into a 201(k).  It’s ridiculous.  And people are listening.  GLD recently surpassed SPY as the largest ETF in the world by assets.  By calling gold a bubble, it does not imply I’m calling a top, simply that this will end badly at some point.

5) Taxes You Didn’t Consider – Thousands of retail (and professional) investors are unknowingly buying into GLD without the knowledge that they will be taxed at a much higher rate than the long-term capital gains rate.  That’s because the straight bullion gold tax rate is aligned with the “collectibles” tax rate with GLD being subject to that higher rate whereas miners and diversified precious metals ETFs aren’t.  If you’ve gotta own gold in some fashion, you may well be better off in other gold-related ETFs where there’s actually a lower tax rate and cash flows to boot.

Disclosure: Ironically, the author does have a small long position in GLD for some time now and is avoiding a sale due to the high tax rate on capital gains cited herein.

{ 10 comments… read them below or add one }

DavosSherman September 27, 2011 at 12:44 pm

You’re a F*cking moron. Name the 7 stages of a bubble!

Go ahead, name them your effing d*&chebag.

1% of the world is vested in gold. There is enough of it above ground to fill a effing Olympic sized swimming pool.

On the bubble list we are at stage 2. Go find me some credit to fuel this bubble retard.

http://www.askaboutmoney.com/showthread.php?t=24601

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ETF Base September 27, 2011 at 1:06 pm

You should seriously consider some anger management courses.

And you’re counting on some thread on bubbles as your sole investment strategy? Good luck with that. Mortgage the house, put it all in GLD. Let us know how you do in 10 years.

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Max September 27, 2011 at 3:37 pm

Great article. So are you looking to sell the GLD when you have less gains, to save on taxes? That sounds pretty good. Or you could give me the money, I’ll pay the taxes. And why exactly did you buy GLD anyways? Did you not know what you were buying or why?

To the mortgage quip, I don’t know, if he did it the last 7 years he would have annualized around 20%…not a bad deal. Of course, we’re all very certain that will never happen again…totally. But betting the house? Very irresponsible, you’re right!

Almost as irresponsible as invoking the name Glenn Beck, particularly as if it had power of it’s own, capable of making arguments where there are none, blustering at those who’s views jive it’s parties, and generally being a total pain in the @ss. oh wait.

Sick article though.

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DavosSherman September 27, 2011 at 3:55 pm

F*ck you.

The only reason not to invest in GLD is because it is a derivative ponzi. But Sprott has a good fund.

Let me know how your equities, cash and securities go for you.

http://2.bp.blogspot.com/-gjwib_BOfGk/ToHkisvE34I/AAAAAAAAFbE/3NSMr7LXxCU/s1600/Gold.JPG

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ETF Base September 27, 2011 at 4:00 pm

Oh yeah, Sprott’s fund, with the wild premiums on the closed-end; another great investment. Good luck buddy; if you don’t have a coronary first.

http://www.etfbase.com/sprott-phys-gld-pairs-trade/

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DavosSherman September 27, 2011 at 4:31 pm

My lucks been good. Actually great.

I’m up 656% in gold.

Lagging in silver only 300%.

Got out of Real Estate turning 250% and turned on deal making 350% in 90 days.

Got out of equities and securities turning another mega % profit.

The only pain I suffered was paying 38% tax on a 250K AGI.

This is about wealth protection and yah just don’t get it.

You really should read Minsky’s bubble work, especially before you tell others something is in a bubble when it isn’t.

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Bart Stratton September 29, 2011 at 10:29 am

The reason to be out of GLD is the LME allows it to hold shares of the funds custodians to hold shares of the fund as a proxy for gold -that’s wrong.

Gold is on course to become a tier 1 asset and the its price is supported by bank buying, as well as fund buying.

I’ll be worried when Wall St. figures out how to give punters 100% financing on gold.

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Bret @ Hope to Prosper October 2, 2011 at 9:58 pm

I had a friend who sold his house before Y2K and bought a bunch of gold, guns and canned food. That didn’t work out too well for him. Unfortunately, he didn’t hold onto the gold.

@Davos, I guess all of those great gains you have made in the market can’t buy you any class. Clue for You: If you have to resort to F-Bombs to make a point, you have already lost the argument.

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Joe Morgan October 5, 2011 at 11:41 am

Great point about the F-Bomb! lol!

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Elliott October 8, 2011 at 2:23 pm

Does anyone else feel like the “behavior” of gold prices has changed recently? A few months ago gold would shoot up on any bad news. It seemed like there was a nearly exact inverse relationship between gold and equities. For the last month or so that seems to have broken down. If I had cash to spare I’d be inclined to wager some on long term out of the money puts on GLD.

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