Gold

[greg]

CFB: In one sense you're right, that gold and beaver cheese are about the same. My primary reasoning for pushing gold is that if some sort of horrid mess happens, the middle class has very few defenses. They have their house, their portfolio, and their wits. And some have family, but my feeling is that the retired may be taking care of their kids and grand kids with the remainder of their pile. At 70 or 80 which you're quite a ways from, wits is not all you want to have to depend on if all else goes stinky. The rich will have their estates, special gated communities, land, Bahamas condo, etc., with hired help to assist. The really poor have tuned up their wits and skills way beyond my ability to match up in a direct confrontation. A bit of gold and cash on hand or easily accessible is good and possibly the only alternative to wits. Plus, I should see something like what I'm talking about coming and be prepared in advance. I'm already pretty much prepared for a stock market crash. The game is still young, and if we're lucky, the coming 2x4 will straighten us out quickly.

The big problem as you've hinted at is the timing issue. I personally think gold (after a substantial drop, probably some time this year, it may really take off). Because of the voatile nature of the beast, and it will remain an incredibly volatile substance far into the future, I've tended toward stocks such as CEF and GTU-UN.TO which just hold physical in Canada. I can stand some swing but not a huge portfolio drop. I buy for security not regular panic attacks, so I'm careful about amounts and how it moves. I think mining shares are almost pure speculation and because of their wild nature only keep about 40% exposure of all AU holdings. The CEF and GTU is for inflation protection, but I know that at some point it needs to be sold for whatever currency it pays out in. It's my primary inflation hedge at about 60% of total AU holdings.

It drives me crazy that someone might be worried about losing 4-5% in yearly compounding on 5-10% of their money squirreled away in gold. It tells me they are caught hook, line and sinker in the stutus quo and, in fact, may be pressing themselves right to the edge for that last little bit of money. They focus on the tree as the forest around them burns.

But I like T-bills too.

--Greg

 

[cute fuzzy bunny]

I see your point. I found my solution in zero debt and knowing that even if things get crappy but fall short of the mad max scenario, I'll still have at least a small leg up on everyone else. That whole "I dont have to outrun the bear, I just have to outrun YOU" idea. All I have to do it put food on the table, stick something flamable in the fireplace and drop by the river for a few buckets of water once a day...should it come to that.

In the meanwhile, the wife and I have broadly marketable skills, an income stream from our investments, and no need to sell any assets for really any reason.

But as an aside, I'd rather haul some powdered milk than a bunch of frickin gold if I had to "run for it". If it gets to the "run for the hills" stage, my money isnt going to be my biggest concern.

 

[sgeeeee]

. . . yet it seems the mention of an investment in gold, a tangible asset and 5000 year store of wealth, brings out that kind of response.

Mud is tangible.

 

[mathjak107]

im no gold bug either.but i do feel i should hold some ,no more than 5% ...even though an ounce of gold does buy pretty much what it did 100 years ago i wouldnt consider it an investment as my stocks have surpassed it many times over..its more an insurance policy against a total market and economic melt down.do i think that may ever happen? highly doubt it ...but non the less economically gold seems to theoretically at least hedge the bond portion of my mix against hyper inflation...since we never had anything even close to hyper inflation we have no clue as to how gold would react again when asked to do its job...if i understood hedging options with futures and calls and puts that may work alot better than gold even then too but since i dont i find hedging with gold and commodities funds easier and just another level of diversification in my mix....

 

[mikew]

I started this post stone cold sober and am finishing four hours later in not the same condition. Sorry but it is cherry blossom season and I am blossoming.

One thing that hasn't been mentioned is national reserves. As has been said gold doesn't back currency. I read a couple of years ago govts were looking to dump their reserves. I don't know if this is still true. Also everyone has some gold coins from their father etc.

I wonder if there is a lot more potential supply then the gold bugs are thinking? Isn't this similar to what happened to the Hunt brothers and silver in the 80's?

Also I wonder how much of gold's demand is from actual uses instead of hording?

Anyway, my feeling is that the boat has left this and I may need to catch the next one or take a nap because the room is spinning.

Mike

 

[bpp]

I'm stone cold sober too, and admit that I, too have a philosophical problem with gold. It is fairly useless stuff, except maybe for plating electrical contacts -- but note that even "gold-plated" is a synonym for gaudily useless. I don't even find it terribly attractive as ornamentation. The reasons for it to be considered valuable seem to be merely psychological: some other people consider it valuable, because yet some other people consider it valuable... A fiat commodity, if one will.

I'm willing to be convinced, but haven't yet been.

Bpp

 

[greg]

Wits are good. What owning and speculating in gold (and following the goldbug arguments) has done is give me a sense of "general proportion." And I understand, I think, the rejection of it by some. But . . . for example, there has been much discussion on this board about various related topics such as the survival of social security, one's house price, medicare, etc. All are at least partially related to this country's overall inflation rate. I believe gold is a measure of this in some way. Plus, if the actual inflation rate is higher than the gov'ts CPI figures, which I see, and say it's 3% higher on a $1000000 portfolio, then $30,000/year is currently being dissapated in stealth mode. This is probably more than many receive in pension, more than many will receive in SS--in other words, a big chunk of money over time. Plus, we are paying taxes on it too in a round about fashion in just trying to stay even.

This hurts retirees more than the younger, working people over time who probably haven't accumulated a large nest egg. This macro inflation issue is very important to my mind, and far more important than worrying about some future loss of a proportion of pension or SS. In a sense and behind our backs, I see our nest eggs being slowly drained. I don't even think most in gov't see things this way--as a conspiracy. I think they are just doing repeated short-term fixes of an immediate probem: "OK, time to pump again, it looks like things are slowing down again." We have been doing short-term fixes for too long--to my mind. Look at the So. American problem. They all like something for nothing every couple of decades. It just never works out well in the longer term. I'm worried this whole thing comes to a head in my life time. You can't keep fixing things forever with lower interest rates and the pump of paper and digital money.

--Greg

 

[unclemick]

Hmmm

For ER - in general stay balanced(your version for you).

For Romance and male hormones - and growing up out West - gotta have some PM - coins and rocks and mebe some timberland. Just a little bit.

heh heh heh heh

 

[Gone4Good]

A little gold in physical form is probably not a bad idea just in case. 

Seriously, how many people buying gold are actually taking physical delivery?

 

[Focu$ed]

A few points that have not been mentioned: Gold did have a spike in the 70s as did oil at that time. They were in a sense linked, as the countries who sell us oil buy gold and believe in gold as true wealth rather than bits of paper with dead presidents, as another person mentioned. In 1971 Nixon stopped letting them trade their paper dollars back for our gold (foreign countries had been able, up to then, to turn their dollars in to the treasury and redeem in gold). When this ceased, they had to buy gold on the open market to get rid of their paper dollars and get the gold they wanted. That drove up the price of gold, and started the real price rise which peaked in 1980. Remember the double digit inflation of the 1970s that was also concurrent with gold and oil's rise. I am a big foggy on what happened that changed this cycle, without going back to read up on it, but I believe there were political agreements that broke this cycle. In modern times, note that when oil prices really started rising a few years ago, gold started rising as well. Yes, part of this is due to increased global demand for oil, but some of it is that the oil producing countries note our inflation and are reluctant to keep giving up a finite resource for infinite dollars.

Another point: The central banks have done their best to hold back the price of gold, since they know gold is a gauge of inflation and is the antithesis of fiat currencies. Central banks, by nature, want to defend their fiat currencies. They have been very public about their gold reserve sales, but data released seems to show that the banks continue, among themselves, to have roughly the same amount of gold reserves. Gold sold by central banks has always been "oversubscribed" so someone is happily buying it. It may simply be passed around between them. There are pages more of explanations, but it does get quite complex. Also they were leasing gold at a minimal rate, and using it as a carry trade with other currencies, knowing they were safe because they could prevent gold prices from unexpectedly rising. I believe much more about this will be discussed in the next few years.

As for the gold price being too high now, and going down a lot from here, gold is still very cheap based on 1980 prices. I contend that it has been artificially held down and undervalued for the last 20 years. The current gold/oil price ratio is about the same as when they both started increasing a few years ago. I don't see oil prices dropping in the near future, so I don't see gold dropping in value, either.

I am no expert on any of this despite having done a lot of reading in the last 5 or 6 years. It does get very complex. I believe gold is going up much more, but if anyone does not really understand why, or isn't comfortable owning it, then there are other means to hedge againt inflation, so use what works for you.

 

[mathjak107]

all i know is with my profits the last 2 years in gold and oil i can pay the additional gas costs for many years to come....aaahhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh finally pay back is good......

 

[haha]

I don't even find it terribly attractive as ornamentation. 

If you ever get the chance, go to the Museo Del Oro in Bogota. It may not convince you of the utility of gold, but I would bet it will convinse you of its beauty.

That people have fashioned unbelievably beautiful things from gold, for many , many years. and in many different cultures is surely some testimnony to its widespread appeal.

Ha

 

[Lusitan]

I have thought about the WWII refugee stories and how there may be some truth in the fact that gold/diamonds would be useful to physcially have in a tight spot - doesn't need to be a Mad Max world, but some crisis of WWII proportions.

That said, here are two other questions:

(1) Where would you store your gold investments if you were truly using it as a hedge against this kind of disaster? Holding a precious metals mutual fund wouldn't do you any good (assume, for example, you were citizen of a country that was invaded and assets seized). So then you're faced with physical storage of gold.

You could hold it in your bank safe deposit box, if you've got one ... but if you don't you'd have to go out and invest in one. I'm not sure how much they cost but this would raise the cost of gold as an investment.

Or you could bury it in the backyard. I guess if you kept your mouth shut it would be relatively safe.

I thought about making a poll to ask where those of you who have invested in gold store it (no physical assets / bank / somewhere else) but even though polls are anonymous there may be a way for someone to trace who you are so I figure it's best to not even ask. (To avoid strangers digging holes in your backyard!)

In any case, truly using gold as a hedge against WWII type disaster definitely comes with its costs/risks.

(2) Even assuming you physically have gold during a crisis, how would you use it? I have no clue how physical gold is stored - coins I suppose, but at what size and approximate value? Would you really be able to get far trying to use gold as a medium of exchange for anything else? It's not like you could make change ...

Also, I wonder if we're reaching the point where society is close enough to gold to really place accurate value on it, even in times of crisis. Who would I go to in order to use my gold for something that I need? How would that person trust that what I have is real gold and not some modern synthetic? How would they have a clue as to how to value it? Maybe I'm wrong, but it seems that in years past, average people were more aware of what gold bought because of things like the gold standard, etc.

I suppose there are no absolute answers to these speculative questions. And I'm not knocking gold - the idea of holding some as a physical asset seems to have some merit as a hedge against disaster, at least in the past. I just wonder if it would still hold true in the future.

 

[samclem]

I guess if we did have a societal meltdown that gold might be handy (though Lusitan raises some good practical issues). It would probably be most useful in smaller denomination coins. But, if things get that bad, something you can eat would be worth even more, probably. If thing get that bad, ammunition would be handier than gold.


Maybe we'd be calculating our SWR in "rounds fired/traded per year"

 

[d]

If thing get that bad, ammunition would be handier than gold.

... making lead a precious metal?

 

[cute fuzzy bunny]

The thing is, when "things turned to crap" and people ran off with their gold, gold had a stable value against a number of currencies. That hasnt been the case for some time now.

In the event of a broad worldwide (or even substantially large regionalized north american) economic failure...I just cant see who the heck would give you much of anything for your gold. Maybe hit you in the head and take it if they wanted it, considering how desperate your situation would be...on the run with a chunk of metal as your currency...

Like Sam said, a nice shotgun and some canned food might be a better idea.

Which when you think about it, sounds like that Y2K business.

 

[Focu$ed]

A few random thoughts concerning gold and silver ownership:

First, I think a Mad Max scenario, or even Weimar (sp)? Republic meltdown like in 1920s Germany is a bit extreme. We have a few 10,000,000 Mark bank notes in our coin/currency collection just as a reminder, though, that such things are possible. What is more likely is simply a continual erosion of the dollar's value, only at a faster pace. What if the Pension Guarantee Corp. can't keep up with large corporations' pension plans going under, and they turn to the government to kick in pension relief money, or Fannie Mae or Freddie Mac blow up, or there is any other sort of a derivatives meltdown. The government always monetizes the debt to save the financial system. You know, the whole "too big to fail" argument. Remember not too long ago, Alan Greenspan and members of the G-8 met to discuss derivatives. There are concerns about possible derivative crises. If anything like this happened, and the govenment convened and decided to monetize large amounts of debt, the dollar would be decimated virtually over night. It doesn't even take anything that severe. They just need to keep printing money for wars, Social Security shortfalls, natural disasters like Katrina and Rita, etc etc. I believe the true inflation rate is much higher than we are being led to believe. And I also believe that the influx of cheap goods from third world countries have been keeping many of our costs very low, offsetting some of our inflation with low cost goods. I also know people who have tracked their own yearly expenses for common household goods and food and they report a much, much higher rate of inflation.

I don't think most people own gold or silver intending to use it to barter for goods in the street. They want it to act as a store of wealth in case of monetary instability. It has always held its value in a currency crisis, such as what happened in Argentina not too many years ago. I first found out that 911 was taking place when I happened to be looking at the gold spot price chart on KITCO and saw the price of gold shoot up like a rocket. I turned on the TV to figure out what on earth was going on, and saw the Twin Towers in flames. So, whether we completely understand it or not, people consider gold as a place of refuge when an economy or currency is in danger.

It is also a reasonable investment when you expect the dollar or other fiat currencies to decline in value. We had a strong dollar policy for a long time, and that did depress the price of gold. Now, it appears that the strong dollar policy is mostly lip service, as the government realizes we must have a weaker dollar for our exports to be even marginally competitive. The dollar index was at 120 about 3 years ago and is at 89 to 90 these days. It had fallen quite a bit further, to the low 80s, then rallied somewhat, as might be expected after a large decline. I think the rally is about over, and we will retest the lows. During the recent rally, gold continued to rise *at the same time* as the dollar, which virtually never happens, so this shows incredible strength and demand for gold. It may also signal "Big Money" getting into gold before the dollar resumes its downtrend.

As for holding gold or silver, short of the Mad Max scenario, a gold mutual fund, gold ETF or gold stocks will probably serve you well. There is even a company that sells digital gold that works like a standard checking account, only your deposits are in gold, held outside the US. Physical silver such as US American Eagles or Canadian Maple Leafs (or old US 90% silver change) would work well for small amounts of useable, spendable "crisis" cash. Gold in small coins, easily recognized around the world so that you do not need to have it assayed are: 10th or 1/4 ounce American Gold Eagles, Canadian Maple Leafs, approx. 1/4 oz. British Sovereigns, 20 Franc Swiss or French coins (approx 1/5 oz.) etc. The US Government still sends British Sovereigns with our pilots in their survival packs in case they are shot down over foreign lands. They believe gold is money and acceptable in any culture and country. If you don't have a whole lot of coins, they don't take up much space and you could keep a few nearly anywhere.

I have spent a lot of time examing these same issues, as you have, and wrestling with the "what ifs."

 

[greg]

CFB: I agree with you that in any sort of real and short-term crisis, gold will be about as useful as paper currency--maybe somewhat more, maybe somewhat less. In either case much less important than the crisis. All forms of money, a medium TO exchange, need civilization of a sort to work. In chaos, cheese and water is better. But when things settle down a bit, then . . . .

One last thing: Those that hold a significant portion of their assets in physical gold are, in a sense, playing the same game you play. If I remember an older post of yours correctly, you said that you had invested a significant portion of your assets in munis, basically because you didn't want to pay taxes for political, ethical or philosophical reasons related to current policies of our gov't. That's wonderful. When extreme goldbugs load up on physical gold, they are saying something similar. They are telling the world and gov't that they don't like the current economic system and how it is operating in destruction mode. They want out of our money system. This is sort of a core emotional response and somewhat primitive way of telling the powers that ARE to "kiss my a**; I'm out, and you can't touch me". It feels good. There are very few ways in our country to say you don't like the system and have it heard. Raising the price of gold with your own buying is one such way.

--Greg

 

[brewer12345]

I see your point.  I found my solution in zero debt and knowing that even if things get crappy but fall short of the mad max scenario, I'll still have at least a small leg up on everyone else.  That whole "I dont have to outrun the bear, I just have to outrun YOU" idea.  All I have to do it put food on the table, stick something flamable in the fireplace and drop by the river for a few buckets of water once a day...should it come to that.

In the meanwhile, the wife and I have broadly marketable skills, an income stream from our investments, and no need to sell any assets for really any reason.

But as an aside, I'd rather haul some powdered milk than a bunch of frickin gold if I had to "run for it".  If it gets to the "run for the hills" stage, my money isnt going to be my biggest concern.

Heheh, I figure that if the commode hots the windmill, my skills in making beer and other fermented beverages will be in heavy demand.

Sorry, but the gold bugs are nuts. Oh, and as this thread expands, I note we are nearing a full moon.

 

[unclemick]

Man!!! - you guys forgot the freeze dryed food.

I remember that stuff well in the 70's - living in CO then - turned out to be the backpacker's best friend. Now if you were a Mormon out that way - seven yrs worth as I remember was the culturally accepted amount.

I may be an old SW Washington unreconstructed liberal DEM of lunchbucket persuasion BUT:

Still like pickup trucks, dogs, and pump shotguns - along with rocks, coins and timber.

heh heh heh heh heh heh heh heh heh heh heh heh - skip the freeze dryed food for now.

 

[brewer12345]

pump shotguns

Yeah, but if you aren't a hunter what the hell do you do with the thing until the apocalypse somes? Its not like its a great thing for target shooting...

 

[HFWR]

Good for spraying lawyers...

 

[cute fuzzy bunny]

But when things settle down a bit, then . . . .

Honestly, I think that after things settle down a bit, gold would be nearly worthless.

One last thing: Those that hold a significant portion of their assets in physical gold are, in a sense, playing the same game you play. If I remember an older post of yours correctly, you said that you had invested a significant portion of your assets in munis, basically because you didn't want to pay taxes for political, ethical or philosophical reasons related to current policies of our gov't.

I have to go look for that post and figure out what i said, because thats the second time that came up. Unfortunately its 110% wrong. I never held a lot of munis. For a very short period of time I held a fairly small allocation of CA muni's. Somewhat related to that, I've posted that if two options are a wash, I'll take the one that doesnt involve me sending tax money to the government to piss away.

I dont see how anyone anywhere is going to give a rats behind about whether I have gold or not, or will change fiscal or monetary policies if I do, or that it will provide me any positive financial benefits in middling bad times, really bad times, or mad max times. Its a pretty hunk of metal that some people might profer a positive value to for a period of time...good bad or ugly.

Sorry cube-rat, there I go talking about your behind again

But if it works for you, go for it. I still havent heard a reasonable argument that says the asset is beneficial to hold for any other reason than the psychological aspects. I've never had the "is gold good" discussion before, and I can see why its placed in the same category as "mac vs windows" and "mortgage/no mortgage" and "early or late social security". People already have their minds made up and have collected the data that helps them feel comfortable with that decision. Not that the data and arguments will make any sense to anyone else or convince someone else to change their mind.

I held a little gold...3-5%...because sometimes people get nutty and run the price up. That happened. I sold. I probably wouldnt buy again even if the price drops severely, because the 'nutty' periods seem to be pretty far between. Sort of like shorting the stock market waiting for the next Great Depression.

 

[greg]

CFB: What you just said about your munis reminds me that you're closer to correct about what you thought than I was. But you still don't want to pay for policies that you don't like, so my point stays valid. Many goldbugs see serious problems headed our way and see few alternatives.

And I also agree that if you want to remain in the fat part of the bell curve you should. It makes sense. No one should do anything that doesn't make sense to them, especially the nuts . Good luck with your choices.

--Greg

 

[cute fuzzy bunny]

Actually I dont care at all about policies, its the waste. More than half my tax money gets pissed away for no useful purpose. Doesnt matter who is "in charge" or what "the policies" are. Might as well light it on fire.

I see plenty of serious problems headed our way. I've always seen plenty of serious problems headed our way. We'll either work them out or we wont. Odds on are that we will. If we dont, I still dont see how a hunk of metal is going to help me.