Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Bursting The Bubble: Economists Suggest Gold Investments Are Risky

17.08.2011
As the price of gold continues to rise and public uncertainty of the economy increases at a similar pace, many investors are turning to a traditional fail-safe: gold. However, it's a growing bubble that may be ready to burst, according to economic experts at Kansas State University.

The federal deficit and a deteriorating economy have many investors fearful of the United States economy entering a period of stagnation, causing stock prices to be driven downward, said Lloyd Thomas, an economics professor at Kansas State University. In this period of uncertainty, many are selling stocks and corporate bonds and putting their money into gold.

Recently, gold prices have skyrocketed as high as $1,800 an ounce, and Thomas said the price might continue to creep higher as economic concern grows. "People believe that gold is a hedge against uncertain times," he said. "In the long run, gold prices have kept pace with inflation. People are flocking to it."

Other financial experts agree, citing a perceived security in tangible investments during uncertain times. Ann Coulson, an instructor for Kansas State University's personal financial planning program, said that the weakened U.S. dollar and real estate market, "wild ride" of the stock market and low interest rates have caused many investors to turn to gold.

"Where to invest has become a question for many, and gold has risen to the top for some investors," Coulson said.

Coulson said there are many ways individuals may choose to invest in gold, including jewelry, coins, bullion or gold bars, exchange traded funds, gold mining stocks, gold mutual funds and gold futures and options. Jewelry and coins are typically not good choices, she said, and gold bars raise many storage and cost issues. Exchange traded funds give the investor the opportunity to own gold without an actual delivery, and gold mining stocks' value is only partially dependent on the value of gold.

Diversified investment -- like gold mutual funds -- often offer the most protection, Coulson said.

"Gold futures and options are not for the novice investor," she said. "Investing in gold through an infomercial on late-night TV is also a bad idea."

Both Coulson and Thomas agreed that the price of gold may continue to rise, but cautioned that the increase most likely will not last. From 1960 to the present, Thomas said, gold has gone up an average of 8 percent a year, while inflation rose at less than 4 percent a year. In the last 10 years, gold has gone up 17 percent a year.

"In the long run, gold has gone up," Thomas said. "But in 2000 the price of gold was $300 an ounce. It has gone up six-fold since then, and it might go up higher than what it is right now. It's gone up too fast -- it's a bubble."

Thomas compared his gold predictions to the housing market. People were lulled into thinking housing prices could never fall, but they fell more than 30 percent in most American cities.

"The same thing could happen to gold; it's not risk-free," he said. "In the last 10 years it's gone up 17 percent a year, but the price of things we purchase has only gone up 3 percent a year. That's unsustainable. It's my own opinion that gold prices will collapse -- I just don't know when."

Although the price of gold is high, it may be a good investment as the price continues to climb -- for now. Unlike investing in stocks or bonds, Coulson said, there is no income associated with gold. Money is made from buying low and selling high. She agreed that the price is destined to fall at some point.

"Gold as a piece of a diversified portfolio might make sense, but if an investor invests solely in gold, that is a great risk," she said. "It is not a safe investment unless you are buying gold bars and burying them in your backyard, and even that is not safe because the price is dictated by what buyers are willing to pay for gold."

Thomas suggested that the only way to make a gold investment virtually risk-free is to look at it as a long-term investment since, in the long run, gold prices do tend to go up. As a 50-year investment gold may be a safe bet, he said, but it is not a guarantee in the short-term.

"On a 100-year horizon, sure -- buy gold and leave it to your grandchildren," he said. "But in two, five or 10 years, prices could be lower than they are now. There's a lot of fluctuation. Prices have gone from $200 an ounce to $1,800. That just can't continue."

As the federal government attempts to pay interest on its growing debt, Thomas said the chances for increased inflation will go up. As this happens, gold prices may continue to fluctuate as investors pull money out of stocks. However, as the deficit slowly decreases, gold prices could fall in half.

"When investors become more confident in the economy, gold will be less valuable as an investment," Coulson said. "I agree with Warren Buffett: Gold has no utility, so as a long-term investment it's not a good choice."

Lloyd Thomas, 785-532-4584, lbt@k-state.edu;
and Ann Coulson, 785-532-5510, lcoulso1@k-state.edu

Lloyd Thomas | Newswise Science News
Further information:
http://www.k-state.edu

More articles from Business and Finance:

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Significantly more productivity in USP lasers

In recent years, lasers with ultrashort pulses (USP) down to the femtosecond range have become established on an industrial scale. They could advance some applications with the much-lauded “cold ablation” – if that meant they would then achieve more throughput. A new generation of process engineering that will address this issue in particular will be discussed at the “4th UKP Workshop – Ultrafast Laser Technology” in April 2017.

Even back in the 1990s, scientists were comparing materials processing with nanosecond, picosecond and femtosesecond pulses. The result was surprising:...

Im Focus: Shape matters when light meets atom

Mapping the interaction of a single atom with a single photon may inform design of quantum devices

Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

Im Focus: MADMAX: Max Planck Institute for Physics takes up axion research

The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.

The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

 
Latest News

NTU scientists build new ultrasound device using 3-D printing technology

07.12.2016 | Health and Medicine

The balancing act: An enzyme that links endocytosis to membrane recycling

07.12.2016 | Life Sciences

How to turn white fat brown

07.12.2016 | Health and Medicine

VideoLinks
B2B-VideoLinks
More VideoLinks >>>