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Gold?
Old 12-02-2012, 05:37 PM   #1
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Gold?

Question from a very unsophisticated potential investor.

Am 100% risk averse, but have been getting some "feelings" from friends, and a few goldbug websites that owning physical gold may be a good hedge right now.

Would like to hear some thoughts from those who know about these things. Mainly, safety... thinking four or five years out.
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Old 12-02-2012, 06:09 PM   #2
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I will continue to buy CDs or deferred annuities. I am not having anything to do with gold. Like you, I am 100% risk averse.

Quote:
Originally Posted by imoldernu
Question from a very unsophisticated potential investor.

Am 100% risk averse, but have been getting some "feelings" from friends, and a few goldbug websites that owning physical gold may be a good hedge right now.

Would like to hear some thoughts from those who know about these things. Mainly, safety... thinking four or five years out.
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Old 12-02-2012, 06:30 PM   #3
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Another thing you'd have to research pretty deeply to feel comfortable with. It's sort of just a collectable, with whatever value traders want to agree on. I have used it as a minor short-term hedge, which might not be bad just now, but it's not part of my AA.
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Old 12-02-2012, 07:20 PM   #4
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I buy an ounce a year......from the time it was $300 to its current price around $1700.

It isn't a big part of my net worth but it has grown over the years and is a fall back for whatever emergency I might have. If I don't, my 4 kids will split the gold some day.

Who knows whether gold will go up or down over the next few years. My gut tell me it will go up because most of the world is going deeper in debt and gold is considered safer than most currency. But........I wouldn't bet either way. And, it is fun to look at from time to time.
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Old 12-02-2012, 07:50 PM   #5
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I have a friend who is a goldbug and she recommended it to me back when it was last trading around $1,100. Would have been a great buy at that time had I known.

I think for the inexperienced investor it is a risky play, especially since it is currently trading near all time highs. The fact that I hear radio commercials telling me it's time to buy gold tells me it's time to steer clear.
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Old 12-02-2012, 08:08 PM   #6
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I have about 7% of my portfolio invested in precious metals. I consider this part of my portfolio to be highly speculative.
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Old 12-02-2012, 08:34 PM   #7
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Insurance makes sense when you buy it but don't need it. When you need it the price is so high it doesn't make financial sense.
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Old 12-02-2012, 10:14 PM   #8
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The price was too high at $1350.00 but I bought it and took possession...

It's fun to dig it up every now and then and play with it on those big up days

I also like Silver Eagles and ATF along with lots of food and water....
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Old 12-02-2012, 10:26 PM   #9
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I bought gold certificates at ~$900 so it has been a good hedge so far. It's less than 2% of my portfolio. I also bought silver at ~$14, which has been an even better hedge. But I would not buy at current prices.
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Old 12-02-2012, 10:43 PM   #10
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The Permanent Portfolio opts for 25% in gold, but that's too rich for me. A few % as diversification seems reasonable IMO. Historically PMs do well during times of negative real interest rates as we have now. There are many ways to participate: physical, funds, and mining stocks are some.
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Old 12-02-2012, 10:59 PM   #11
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Permanent Portfolio

You're right about the Permanent Portfolio at 25% gold. Harry Browne designated the 4 asset classes in it under the theory that the 4 asset classes chosen were uncorrelated, to ensure that if any class moved downward sharply (like stocks in '08-'09) at least one class (like Treasuries in '08-'10) would move in the opposite direction. The goal was to ensure a smooth inflation + 3% or so real gains. The Permanent Portfolio fund in which I invested some money in '08 intended for college worked exactly as designed; this year will probably be its worst.

For most investment portfolios 3-10% hard assets is a norm. There are always exceptions, but the middle aged guy next to me on the plane to Asheville who was investing all of his portfolio in gold and silver was convinced that the Austrians were correct, so he would have to be correct. I like to hedge my bets.
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Old 12-02-2012, 11:05 PM   #12
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If I could figure out the fundamental reason that gold has value, I'd be more interested in buying it. Stocks have value because the anticipated future earnings of the company are worth something. Bonds and CDs have value because someone has promised me payment. Gold's actual value as a raw material is not very high (we can produce more than we use every year in industry, and our current existing stocks would meet industrial demand for a long time). Its price is supported only by the belief that other people will continue to buy into this "gold is a store of value" story. And it has worked okay over longish periods, though it definitely has not been a constant, steady "store of value" at all times.

I prefer to invest in things I can understand and explain, and gold's fundamental value ain't one of them. "When people get scared they want more gold--just because!" is not a satisfying foundation for investing in something. I can see having some small fractional coins around (silver, too, maybe better) as "SHTF" insurance (because the mythology of gold's enduring value might survive the zombie apocalypse), but, as others have said, water, fuel, and ammunition might be handier for buying things in such a scenario.
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Old 12-03-2012, 12:17 AM   #13
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I have seen the academic literature about how Gold is a hedge against inflation. How gold can be a noncore leaked asset which goes up when the rest of your assets go,down,etc...but Ben of the studies I have seen factor in two important points...for an asset class to work as a hedge you have to be able to buy and sell it to maintain the proper allocation. BUYING AND SELLING GOLD does not happen so easily as other assets. For one thing it is taxed differently and more heavily when you profit from it...as far as I can tell it is an asset that can maintain value but not really grow more than inflation..and the transaction costs wipe out some of its maintenance value...
In short, not a fan.
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Old 12-03-2012, 12:19 AM   #14
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Quote:
Originally Posted by urn2bfree
I have seen the academic literature about how Gold is a hedge against inflation. How gold can be a noncorrelated asset which goes up when the rest of your assets go,down,etc...but None of the studies I have seen factor in two important points...for an asset class to work as a hedge you have to be able to buy and sell it to maintain the proper allocation. BUYING AND SELLING GOLD does not happen so easily as other assets. For one thing it is taxed differently and more heavily when you profit from it...as far as I can tell it is an asset that can maintain value but not really grow more than inflation..and the transaction costs wipe out some of its maintenance value...
In short, not a fan.
Sorry but on the iPad I don't see how else to correct the swarm spelling corrections that the iPad inserted that made no sense except to repost this with the corrections
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Old 12-03-2012, 12:55 AM   #15
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Quote:
Originally Posted by samclem
If I could figure out the fundamental reason that gold has value, I'd be more interested in buying it. Stocks have value because the anticipated future earnings of the company are worth something. Bonds and CDs have value because someone has promised me payment. Gold's actual value as a raw material is not very high (we can produce more than we use every year in industry, and our current existing stocks would meet industrial demand for a long time). Its price is supported only by the belief that other people will continue to buy into this "gold is a store of value" story. And it has worked okay over longish periods, though it definitely has not been a constant, steady "store of value" at all times.

I prefer to invest in things I can understand and explain, and gold's fundamental value ain't one of them. "When people get scared they want more gold--just because!" is not a satisfying foundation for investing in something. I can see having some small fractional coins around (silver, too, maybe better) as "SHTF" insurance (because the mythology of gold's enduring value might survive the zombie apocalypse), but, as others have said, water, fuel, and ammunition might be handier for buying things in such a scenario.
Articulated what I felt, but lacked the words to say. +1
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Old 12-03-2012, 08:25 AM   #16
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Originally Posted by MichaelB View Post
Insurance makes sense when you buy it but don't need it. When you need it the price is so high it doesn't make financial sense.
+1
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Old 12-03-2012, 09:00 AM   #17
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Originally Posted by GrayHare View Post
The Permanent Portfolio opts for 25% in gold, but that's too rich for me. A few % as diversification seems reasonable IMO. Historically PMs do well during times of negative real interest rates as we have now. There are many ways to participate: physical, funds, and mining stocks are some.
I think the negative interest rate is big part. Here is an article about negative rates and gold prices

http://www.marketoracle.co.uk/Article37602.html
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Old 12-04-2012, 09:15 AM   #18
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https://personal.vanguard.com/us/fun...FundIntExt=INT

From the prospectus:
Quote:
The Fund may also invest up to 20% of its assets directly in gold, silver, or other precious metal bullion and coins.

https://personal.vanguard.com/us/Lit...ceDomain=false
I invested ~5% (the recommended AA at the time) as a hedge against inflation during the 80s & 90s. As can be seen from HFWR's chart above, it didn't do a very good job during that period (when inflation averaged 5.5%/year during the 80s and 3%/yr during the 90s). Watching my investment shrink year after year, I finally sold it around '00, then watched the run-up.

I didn't get hurt too badly (the mining stocks portion and other metals in the fund took some of the sting out) but I can't afford another 20 year period of that kind of stagnation.

I have to agree with samclem - "I prefer to invest in things I can understand and explain, and gold's fundamental value ain't one of them."

Owning coins/bullion can be an even bigger pain; you pay more than the quoted value when buying, and get less when selling.

Bottom line, while gold may keep pace with inflation (during periods other than the 2 decades I had it), that's all it's likely to do; it's trickier to actually beat inflation. It might make more sense to invest in one of the other "inflation + " investment vehicles that one can understand. YMMV.

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Old 12-04-2012, 10:32 AM   #19
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Google "the future of gold" for literally millions of opinions.

Everyone has an opinion, and a rationale for predicting the future... Many already mentioned in this thread.

In digging around some of the "expert" predictions, it seems that the consensus revolves about the relative equivalency of the dollar, relative to the international . Some of the discussion subjects:

Inflation/hyperinflation
Long term debt obligations (estimates to 100 trillion)
Deflation
Interest rates
War
Wealth inequality
Infrastructure
Oil based equivalency
and of course many more....

.... to which, I'd add the subject of finite wealth...

In any case, in the longer term, ignoring the interim short 'down' cycles, it looks as if gold could be a good place to stash some excess capital, if not just for 5 years, at least 10 years.
.................................................. ..
off topic
As an aside to this, and one of the positives for the 'currency equivalency'
part of the equation, is the recent advancement in natural gas as an alternative to the oil equivalency. In particular, the singularity of the US in
not only advances in the extraction process, but more importantly in the
ability to process product through a distribution system that is unequaled in the world. The infrastructure build out of the pipeline distribution system leaves a gap between producing and distributing the product in all of the countries that could be competitors. If the current projections for long term energy resources is correct, this could put a solid base under the dollar relative to world currencies and this in turn could become a stronger tie to gold.
Could this be a possible global shift in economics.?

As to investing, though, still have no clue.
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Old 12-04-2012, 11:47 AM   #20
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Quote:
Originally Posted by imoldernu View Post
Question from a very unsophisticated potential investor.

Am 100% risk averse, but have been getting some "feelings" from friends, and a few goldbug websites that owning physical gold may be a good hedge right now.

Would like to hear some thoughts from those who know about these things. Mainly, safety... thinking four or five years out.
Taking a look at that chart posted above by HFWR, you can see my last purchase quite clearly. I bought some gold coins in the last stupid craze in the early 1980's. Have kept one Canadian Maple Leaf to remind me of the folly.

One does not purchase an asset that is showing an exponentially rising slope for a few years and expect to do really well. That is buying high and we all know how that ends.
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