No Shine for Gold

02/18/2015 9:00 am EST

Focus: MARKETS

Jack Bowers

Editor, Fidelity Monitor & Insight

Gold and silver prices have rebounded on the back of new global debt fears and negative bond yields in Europe. But the rally is unlikely to last, cautions Jack Bowers, editor of Fidelity Monitor & Insight.

Investors buy precious metals when they are worried about inflation or when they lack confidence in paper currencies (and the governments that back them).

But the deflationary effects of the oil bust far outweigh the inflationary impact of the EU’s new bond-buying program.

And the idea that gold is robust and fiat currencies are fragile is ridiculous. If central bankers were to meet and talk about a joint sale of gold, the price of the commodity would crumble overnight.

Over the very long run, precious metals can only keep even with inflation. Consider the 35 years ending December 31, 2014. Inflation rose at an annual rate of 3.5%.

The price of gold increased 2.8% per year (a real return of -0.7%), intermediate government bonds were up 7.8% annually (4.3% after inflation), and the S&P 500 climbed 12.0% per year (8.5% real return).

Going forward, these long-term returns are all likely to be some two percentage points lower due to the growing influence of advancing technology (which reduces inflation by creating abundance out of scarcity and forming new types of competition).

In real terms, what goes up always comes back down in the world of precious metals, usually when least expected.

Lacking intrinsic value, gold and silver are essentially pure plays on investor emotions, climbing rapidly on fear and crashing as solutions to tough problems take shape. They are among the least predictable commodities around.

Granted, it’s possible to earn a positive real return in Fidelity Select Gold (FSAGX), which holds mostly mining stocks. Such firms aim for a long-term profit by extracting gold for less than its market value, delivering value to shareholders.

But at what risk? Select Gold is four times more volatile than the S&P 500. At that level, it’s more of a gamble than an investment. And that’s why we still rate it a Sell.

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