Gold is one of the most touted investment these days. The theory for buying the precious metal is almost something along these lines: Central banks around the world are printing money and trying to debase their currencies; therefore, gold should rise in value. The theory seems to make sense, and many famous hedge fund managers believe this to be true, here are just a few of many examples:
Gold represents the best play on potential currency devaluations as well as a hedge against possible high inflation, if central bankers continue their aggressive stimulation policies. Balestra Capital Q3
At this year's annual Robin Hood conference, which was held virtually, the founder of the world's largest hedge fund, Ray Dalio, talked about asset bubbles and how investors could detect as well as deal with bubbles in the marketplace. Q1 2021 hedge fund letters, conferences and more Dalio believes that by studying past market cycles Read More
If the Fed is willing to deploy this new set of desperate measures in these frustrating, but non-desperate times, what will it do then? We don’t know, but a large allocation to gold still seems like a very good idea. David Einhorn Q3 letter
This monetary policy, $3 trillion of bond buying in the United States, $3 trillion in Europe and another $2.5 trillion to $3 trillion in Japan, is unprecedented.
If and when people lose confidence in paper money because of repeated bouts of quantitative easing and zero-percent interest rates—it could happen suddenly and in a ferocious manner in the commodity markets, in gold, possibly in real estate. Paul Singer Elliott Management
Our core thesis, that quantitative easing in the United States and other countries will lead to inflation, and that investors will respond by buying gold, remains intact. The massive quantitative easing that the world’s central banks have carried out has been masked by the relative weakness of the developed economies, but we would advise investors not to be complacent. By the time inflation becomes evident, gold will probably have already moved, which implies that now is the time to build a position in gold. John Paulson year end letter 2011
Notice a theme? Nearly everyone buying gold has a near identical thesis. When everyone is using the same exact reasoning for a certain investment there likely is no edge for the investor. The theory of central banks printing can and is used to justify buying gold at any and every price, but at a certain point it becomes priced into the market.
Furthermore, many investors argue that it is much easier to get an edge in small cap stocks, since they have far less analyst coverage. Apple has 68 analysts covering the stock according to Reuters data. Citigroup (which has a different calculation) noted this fact when they recently initiated coverage on Apple Inc. (NASDAQ:AAPL) a few weeks ago, stating ‘As the 51st buy rating out of 56 ratings on Apple shares, ours is not unique.’
There is no way to calculate exactly how many people cover gold, but I would argue it has far more coverage than Apple Inc. (NASDAQ:AAPL). Both sell side analysts and blogs have more write ups arguing to buy gold than to buy Apple Inc. (NASDAQ:AAPL). When searching google for “buy Apple” 2,890,000 results are returned, however, gold has 8,340,000 results. Using that number as a base, 300x as much coverage is devoted to Gold. How can someone gain an edge when so many analysts cover the precious metal?
A more important point is that a stock like Apple Inc. (NASDAQ:AAPL) will have many analysts covering it, but they all have different points to bring, and have different earnings models. The thesis for gold however is identical as stated. How can anyone think that they will have an edge on a security which thousands of analysts cover, and for which all the facts are available (you do not even need to read hundreds of pages of SEC filings)? There are no forecasts for how much revenue gold will earn in fiscal 2013, so what exactly is the thesis? Any and every price can be used to peg the intrinsic value of gold based on the argument. However, a stock requires an earnings forecast and multiple of that earnings to peg future value. To parrot other famous investors seems to be the answer.
Finally, many big hedge funds have been losing money on long investments in gold recently. The Paulson Gold Fund is down 29.66 percent YTD, according to Lyxor data. Balestra Capital mentioned above lost money as well.
Hutchin Hill the famous quant fund which bet against JPMorgan lost on gold in August.
Rubicon Fund Management lost money on gold recently.
It is impossible to predict what gold will do in the future, but the best time to buy was likely before Central banks started printing and gold was at $270 an ounce only 12 years ago.
Disclosure: No position in gold or Apple.