As I mentioned yesterday, I’m currently in Las Vegas for the 2013 MoneyShow, and I have been delighted to talk with many of you about where Wall Street is headed. This time around, I’ve received a lot of questions on the value of investing in gold, so today I’d like to present what I consider to be the pros and cons of the yellow metal.
Why Gold Now?
Gold is in the headlines today because it has just dropped below $1,400. This is a psychologically important number because gold is now back around where it was following last month’s dramatic selloff. Back in mid-April, gold tumbled more than $200 an ounce after some Fed policymakers announced that they wanted to slow bond purchases.
I think that gold’s biggest problem has been confidence in financial markets. As central banks—our Fed, the Bank of Japan, European central banks—pump money, financial assets rise. So a lot of investors naturally want to participate in that.
The other thing weighing on gold is the U.S. dollar. When the dollar rallies, it sends commodity prices down. When the dollar is weak, commodity prices rise. And there’s no inflation right now, largely due to the strong dollar. This puts downward pressure on most commodities—whether it be gold, copper or oil.
Gold does well when investors get nervous. But it still isn’t a perfect hedge against the market. The market could fall 13 days in a row—and gold could fall right alongside it—only to rally on the fourteenth day. We saw evidence of gold’s volatility in the past month. As I mentioned, gold had its big drop several weeks ago, but the next day it saw record buying pressure.
Amid all this choppiness, there is a silver lining: If you look at overall buying pressure for gold this year (from sources like the U.S. Mint, etc.), you’ll see that it is higher than last year. So while gold is trying to find a bottom here, there is decent buying pressure supporting it.
The Bottom Line:
With that said, I have nothing against holding gold. But before you invest in gold, know this: When you buy gold, you tend not to get any yield. So if you’re really looking for a commodity play that gives you bang for your buck (even in a low-inflation environment), I recommend that you look to black gold instead.
Refiners—especially Midwest refiners—are in a league of their own because they are able to buy the crude oil on the cheap, and turn around and sell their refined product for a profit. On top of this, these companies oftentimes reward their shareholders handsomely—with an average 4.9% dividend yield, refiners tend to yield more than the 1.9% average for the S&P 500. As a starting point, last month I highlighted CVR Energy Inc. (CVI) as a recommendation, and that still holds true.