Beware pat predictions about the price of gold

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(MoneyWatch) "Secure a crash-proof retirement through gold and precious metal investment." No sooner had the digital ink dried on my recent post, "Retirement planning in an uncertain world," that I received this email solicitation. It contained a number of confident predictions about how the lack of a gold standard for our currency and the inevitable hyperinflation that follows will ruin all conventional investments in stocks and bonds, thereby sinking your retirement... unless, of course, you invest in gold.

Based on these dire warnings, should you run out and buy some of this precious metal? Not so fast. The basic premise of the post I referenced above is that nobody knows for sure what will happen in the future. So you should be very wary of "experts" who are certain about the future and are hawking a particular investment. A real red flag is when a solicitation persuasively throws around statistics that "prove" why their investment is the best for your savings and mixes facts with speculation.

This quote from the email offer is particularly suspect: "... a gold backed IRA is the fool-proof way to safeguard the value of investments ...."

Color me skeptical. I've never heard of any investment vehicle that's fool-proof against all retirement planning risks.

Another dubious claim: "It won't be an exaggeration to say that in a few years a $1 will be worth pennies when compared to a 2013 dollar. After all, a 1913 dollar is only worth 2 pennies in 2013."

I guess 100 years is the same as a few years to the writer -- now that's longevity risk!

The solicitation also used seemingly compelling statistics on the rise in the price of gold since the financial crisis to "prove" its point. "In 2008, the price of gold increased 2.6 percent from the previous year. But after the economic recession in 2009, it grew 12.8 percent. Between 2010 [and] 2011, because of a volatile financial market, its price grew a whopping 50.6 percent."

It goes on: "The best part is that it [gold] is not volatile. Its value does not swing to the extremes. It is constant and reliable."

Be extremely wary of solicitations that throw around statistics about high rates of return. Statistics can be manipulated simply by choosing the beginning and ending points of the measuring period. For example, according to a recent post by my colleague Larry Swedroe, the price of gold hit $850 per ounce on January 21, 1980, when predictions of hyperinflation were rampant. By April 3, 1980, it dropped to $486, a plunge of more than 42 percent. The price bounced along between $300 and $400 per ounce for 22 years, eventually falling below $300 per ounce from 1998 through 2001, a crash of 65 percent from the 1980 high.

So much for the price of gold being "constant and reliable."

I'll have admit to buying gold above $600 per ounce during the gold frenzy of the 1980s and later selling it in the $300s. That experience actually taught me a good lesson: Don't buy anything or invest my money based on predictions in the popular media.

The trouble with these over-the-top solicitations is that they mix legitimate concerns, such as the growth in the money supply and inflation, with pitches for their investments. But just because I'm concerned about some of the same issues raised in the solicitations doesn't mean I should trust someone who speaks with certitude about imminent hyperinflation -- or most other financial events, for that matter. I'm well aware of how wrong such predictions can be. Instead of relying on predictions of the future, I'd much rather be prepared for different scenarios in case they happen.

My previous post suggested a two-step strategy for planning your future life and finances:

  • Step 1: Plan to support the life you want, using your best estimate of the future regarding the economy, capital markets, your life expectancy and so on.
  • Step 2: Be prepared in the event that your forecasts are wrong.

Does hyperinflation and a runaway price for gold really reflect our best estimate of the future? Not for me. There's another possibility to consider, one that actually took place in the 1970s, 80s and beyond. Concerns about hyperinflation were common back then, too, and our leaders eventually addressed these concerns and took corrective action. As a result, hyperinflation didn't happen, and people who bought a lot of gold were disappointed by the losses they incurred.

Could this happen again? It could, and I certainly wouldn't invest a lot of my retirement money in gold because of the possibility that gold might actually drop, not increase, in the years to come. And if my best estimate is wrong and hyperinflation does occur, is a gold-backed IRA the only, best way to protect against that possibility? Probably not.

Stay tuned for future posts that apply the two-step strategy to investing for your retirement and take a closer look at the role of gold in your retirement income portfolio.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.