As Europe's sovereign debt crisis rages on, uncertainty over the fate of the euro is making investors gaga for gold again. Considered a haven from currency volatility, gold's promise of safety from currency volatility makes it all the more attractive in unstable times.
But while its appeal is understandable, the precious metal isn't necessarily your best investment right now -- at least according to writer and hedge fund manager James Altucher, quoted in Business Insider.
As Altucher sees it, stocks are trading at low multiples right now, making it cheaper than usual to realize earnings on your investments. Compare that to gold: Currently trading near all-time highs, there may not be a whole lot of profit potential left before it peaks -- and peak it will.
Altucher presents 10 compelling reasons to believe that gold's bubble is about to burst -- here they are, in a nutshell:
1. Gold has very few industrial uses.
What's more, in the few uses it does have, gold could just as easily be substituted by silver, a far cheaper metal. It's a no-brainer for the economic industrialist.
2. Gold has no dividend yield.
Dividend yielding stocks enjoyed a renaissance of sorts this year, with investors realizing a simple axiom, summed up nicely by Altucher: "Buy a stock that consistently increases its dividend, and eventually, the dividend alone will pay back your investment." So might it make more sense to invest in a stable, high-dividend-yield company.
3. Gold has no earnings yield.
Corporate profits have been on an upward trajectory for over two years now -- so in Altucher's estimation, it may be more prudent to put your money into innovative companies with great potential for growth than in a yellow metal about to reach its peak.
4. The U.S. should start selling its gold to pay down its debt.
Gold prices are sky high, so Altucher thinks it's likely that we'll see the government start selling off its reserve to push them down, and keep the investing focus on stocks.
5. Interest rates are at zero and the Fed is printing money.
As the economy settles into stability, interest rates are sure to rise. This will almost certainly mean a stronger dollar -- and when the greenback rises, look for gold to fall.
6. Soros and Paulson can't carry the market forever.
When these investing gurus poured funds into gold, the world paid attention, and many followed suit. But as Altucher notes, they can't sustain that level of buying forever -- and in fact, Soros has already started reducing his position in GLD.
7. Gold production is rising.
And demand isn't likely to keep pace. 2009 saw a spike in gold production, spurring a shift in the ratio of supply relative to demand. China, the world's leading gold producer, is hellbent on seeing as much profit as possible before prices decline -- even if it means saturating the market.
8. Gold sentiment is at an all-time bullish high.
Case in point: The gold-dispensing ATMs popping up around the globe, headed for the U.S. Not only laughable, but impractical, as there's not a whole lot one can do with it. And as history has shown us, when bullish sentiment over gold reaches a certain level, it's almost always followed by a pull-back.
9. Assets in GLD, the Exchange Traded Fund that tracks gold prices, are also reaching a level usually associated with a top.
If past performance is any indication, this signals that its decline is imminent.
10. The Oracle is a huge gold bear.
If you're still unconvinced, take it from Warren Buffett, the great prognosticator: "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 ExxonMobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take?"
If you want to trade these trends, here are a few ideas. (Click here to access free, interactive tools to analyze these ideas.)
If you think Altucher is correct:
Exchange-traded funds that benefit from falling gold and metal prices:
- ProShares UltraShort DJ-UBS Commodity (NYSE: CMD )
- ProShares UltraShort Gold (NYSE: GLL )
- ProShares UltraShort Silver (NYSE: ZSL )
If you think Altucher is wrong:
Exchange-traded funds that benefit from rising gold and metal prices:
- SPDR Gold Trust (NYSE: GLD )
- PowerShares DB Gold Fund (NYSE: DGL )
- Market Vectors Gold Miners (NYSE: GDX )
- iShares Gold Trust (NYSE: IAU )
- ProShares Ultra Gold (NYSE: UGL )
- SPDR S&P Metals and Mining (NYSE: XME )
Interactive Chart: Click on the time line to evaluate the performance of the SPDR Gold Trust against the S&P 500 index.
Kapitall's Alicia Sellitti does not own shares of any companies mentioned.