Why buying gold stocks may ruin your investing returns

Here's why shares in Newcrest Mining Limited (ASX:NCM), EVOLUTION FPO (ASX:EVN), and Northern Star Resources Ltd (ASX:NST) fell back to earth today.

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I wrote just yesterday that gold stocks weren't a buying opportunity, despite the fact that a number of miners experienced a positive lift on the back of Greek worries.

Today shows precisely why that is, since gold miners have lost most of yesterday's gains, if not more.

Newcrest Mining Limited (ASX: NCM) has fallen 1.2% in trade today. EVOLUTION FPO (ASX: EVN) is down 5%, and Northern Star Resources Ltd (ASX: NST) has lost 6.5% as of the time of writing.

Why did these stocks rise and then fall again so quickly? There are a few reasons:

  1. Gold is seen as a hedge against inflation and uncertainty

It is widely believed that gold holds its value well during a crisis. True once perhaps, but that isn't necessarily the case any longer.

In the event of a total currency collapse it would be great to have your assets in gold, but in more normal economic times there's simply no guarantee that you can get your initial investment back when you need it.

Gold now trades around its lowest price in more than five years. All those people who bought gold during previous rounds of uncertainty – the start of the Greek crisis, conflict in Ukraine, you name it – made a very poor investment.

  1. Short-term thinking

Market shocks like the Greek debt woes and other problems likely to impact the ASX on a given day bring all the speculators out of the woodwork.

It's entirely possible that people bought gold miners yesterday because they know that gold usually rises during uncertainty (they were chasing short-term profits) and it became a self-fulfilling prophecy. If you are really trying to use gold as a hedge against risk, I'd say it's pretty obvious you need to hold it for more than 24 hours.

Buying into this kind of event is an easy way to lose money.

Even looking over the longer term, gold isn't a viable investing strategy for any more than a tiny part of your portfolio – unless you're an expert. You will miss out on massive 'opportunity costs' in terms of reinvested earnings and dividends that can cripple your portfolio over the long term, unless you can successfully time the market.

Needless to say it's difficult to predict when uncertainty is likely to occur, although I will accept that some major events like the dot-com crash and the GFC could have been anticipated in advance.

Timing the market is a fool's gambit (lower case 'f') and even if you bought at the bottom and sold at the peak, the ASX has FAR outperformed the price of gold over the past 30 years. The ASX is up about 1,100% from its launch, compared to gold up 250% in the same time – and that's excluding dividends.

Don't even think about timing the market – what's important is time IN the market, allowing quality companies and reinvested dividends to do the hard work for you.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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