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Old 12-08-2010, 06:11 PM   #41
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The pervasive notion that gold is a reliable "store of value" is a strange one too. In 1980 gold peaked at ~$800 per ounce. Over the next couple of years it fell by 60% and spent the following two decades in a general downward trend. How is that a store of value? How is that an inflation hedge when CPI rose by 118% from 1980 to 2000, even as gold lost two thirds of its nominal value during the same time?

Even for the things that gold is supposed to be good at, it's actually pretty lousy.

That maybe true for the 5% of the earth's population who are fortunate enough to live in the country that is the world's reserve currency. Probably is true for the slightly larger number of people who live in the Eurozone. It may or may not true for people who live in the BRIC countries. However, I am pretty sure for roughly 1/2 the world's population that lives outside those place Gold has been a fine place to store value. I know that I'd rather have a had an ounce of gold than a billion Zimbabwean dollars over the last thirty years.
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Old 12-08-2010, 06:47 PM   #42
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Even if that is true, how is it relevant to an investment decision we'd make here? The question, I'm guessing, isn't what would or wouldn't have been a good investment for a Zimbabwean thirty years ago, but what is a good investment for us today. To that end, can gold be relied upon today as a "store of value" after having already more than quadrupled in price, knowing that the last time it did so was followed by decades of truly awful performance?
Clearly if you believe that that US dollar will continue to be the world's reserve currency and that during times of financial turmoil people will rush to buy US dollars and Treasury bonds than gold is pretty much a guaranteed loser compared to stocks or bonds. If on the other hand, you think that there is a real possibility that Mr. Bernanke and/or future Fed chairmen won't be able to reverse QE2 and other ease money policy within 15 minutes like he claims, that debasing of the currency isn't a good thing for the country, or that Chinese, and Arab, others may lose faith in the ability of Uncle Sam to pay back his loans, than Gold maybe a reasonable insurance policy.

As I said I am not sure if having an insurance policy will be enough to materially change my life if everything goes to hell and a handbasket. But having final understood gold as an insurance policy, or if you prefer an asset class with a low to negative correlation with other asset classes, I am better able to evaluated it.
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Old 12-08-2010, 09:52 PM   #43
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I think the lure of gold (other than as jewelry) is based on the concept that it is one of the few (perhaps the only) "successful" forms of money in historical terms. Think of all the forms of money you've ever heard of (dollars to drachmas) which are still in use and pick out the one which has been around the longest. I don't actually have a clue what No. 2 is, but the oldest, by far, is gold. It's been known as and been used as money since before recorded history. Several have argued that it doesn't actually work as an inflation hedge (i.e., gold prices went down as US$ went up for several years). But I was always impressed with the simple argument that an ounce of gold has always been able to buy a man's suit of clothes. True enough, right now you could probably buy a John Gotti cast off silk suit for an ounce of gold and back in 2000 it would have only bought a Brooks Brothers suit. All money has ups and downs with respect to each other and to what it will buy. Still, with the exception of gold, I'm not aware of any "money" which will essentially purchase the same market basket off goods (yeah, I really do know that IPODS didn't exist in Mesopotamia) over eons.

I'm not suggesting what to do with this information. Some may want some of the physical stuff buried in the back yard for WTSHTF and others think they can play the arbitrage game with it. To me, it makes some sense to own a little for the first reason and it make just about as much sense to own it for the second reason to balance a portfolio. YMMV as always.
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Old 12-08-2010, 10:59 PM   #44
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I have always struggled to understand why people invest in gold. It's value is dependent on enough people believing that gold is a good investment and acting on that belief. There really isn't enough demand for other uses to justify anything like the current price.

Most of the arguments I see for gold being a good investment are based on one of the following"

1.depreciation and debasement of paper or fiat currencies - to my mind these are arguments against holding assets which depreciate over time (like cash under the mattress). They do not actually justify investing in gold as an alternative, only investing in things which have at least some chance of matching or beating inflation;

2. historical record of matching inflation - this is a very patchy record and whether it performs this function often depends on which time periods you are looking at;

3. gold as a diversifier to reduce risk/volatility in a portfolio - even if true (and the evidence is patchy and timer period and portfolio dependent), I still fail to understand why an otherwise belief dependent investment should be included in a portfolio;

4. protection against extreme economic or political adversity - gold did to a go job for many people, especially in times of war or hyperinflation but (and this is a very important but), gold has also been subject to confiscation and other "emergency" measures. It's not guaranteed to be able to do the job.

As someone who is perhaps a little paranoid about the effects of inflation on my nest egg and retirement generally, I want to find assets which I believe can protect me against the printing presses of central bankers around the world. I just haven't seen anything which makes me believe that gold is a suitable investment to meet these concerns.

But I did buy silver in the belief that (i) the demand for end use is growing while supply is either not growing as quickly as demand and (ii) if gold does go for a run (which it has) then silver will follow.
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Old 12-08-2010, 11:39 PM   #45
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What if some prospector who bought a few hundred acres of cheap land a while ago decides to go out, and do some mining? To his disbelief, he discovers the worlds largest gold mine which subsequently creates a media frenzy, and gold investors see their market get flooded with supply within months?

A very likely scenerio that COULD happen maybe not today, tomorrow, next week...but sometime in the future

Talk about price tumbling, that would surely have to lower the price due to simple economics of supply and demand right?

Multiply that scenerio a few dozen times, and its a possibility...albeit a slight one that gold COULD sink to unpresidented lows...never to recover again due to its now massive supply.

Its got its risks just like everything else.
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Old 12-08-2010, 11:43 PM   #46
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The pervasive notion that gold is a reliable "store of value" is a strange one too. In 1980 gold peaked at ~$800 per ounce. Over the next couple of years it fell by 60% and spent the following two decades in a general downward trend. How is that a store of value? How is that an inflation hedge when CPI rose by 118% from 1980 to 2000, even as gold lost two thirds of its nominal value during the same time?

Even for the things that gold is supposed to be good at, it's actually pretty lousy.

I didn't say it was a stable store of value....


But, just to show some things... the Euro traded at the 90 cent range a decade or so ago... I think it got to the $1.40 range before coming back down (all from memory, so might not be that good).... to me, that is not a stable store of value either.....
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Old 12-09-2010, 01:02 AM   #47
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What if some prospector who bought a few hundred acres of cheap land a while ago decides to go out, and do some mining? To his disbelief, he discovers the worlds largest gold mine which subsequently creates a media frenzy, and gold investors see their market get flooded with supply within months?

A very likely scenerio that COULD happen maybe not today, tomorrow, next week...but sometime in the future

Talk about price tumbling, that would surely have to lower the price due to simple economics of supply and demand right?

Multiply that scenerio a few dozen times, and its a possibility...albeit a slight one that gold COULD sink to unpresidented lows...never to recover again due to its now massive supply.

Its got its risks just like everything else.
This could happen and it has happened in the past - the price of silver fell dramatically and permanantly (in real terms) after the Spanish started importing large supplies from South America and again when significant new sources were found and exploited in North America.

For gold, the biggest source of additional supply is all the gold that is already above ground sitting in deposit boxes and bank vaults. Just sitting there....

Of course the reverse is also true - a few countries decide that they want to have a (bigger) chunk of their reserves in gold and that could translate to some pretty significant additional demand.
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Old 12-09-2010, 05:06 AM   #48
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Of course the reverse is also true - a few countries decide that they want to have a (bigger) chunk of their reserves in gold and that could translate to some pretty significant additional demand.
ya think?

India gold imports keep climbing, hit 214 tons in Q3 | 29 November 2010 | www.commodityonline.com

China’s Gold Imports Soar Almost Fivefold on Inflation Concern - BusinessWeek (China already is the worlds largest gold producer)

And then perhaps a few sizable countries deciding they don't need to do business in dollars:
China, Russia quit dollar

FWIW, a scenerio by Shadow Stats:
Hyperinflation Special Report (Update 2010)

(OK, said my piece, time to pack and go do some ER boating/fishing/kiting in the Keys)
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Old 12-09-2010, 06:48 AM   #49
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Gold retains some of it's value because billions of women (and their jewelry) around the world say so.
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Old 12-09-2010, 09:06 AM   #50
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I didn't say it was a stable store of value....


But, just to show some things... the Euro traded at the 90 cent range a decade or so ago... I think it got to the $1.40 range before coming back down (all from memory, so might not be that good).... to me, that is not a stable store of value either.....
My comment wasn't directed at you, it was more a general observation. That gold is a good "store of value" is one of those things that everyone "knows" without ever thinking about it much. So you hear it repeated a lot, even if it isn't entirely true.

With respect to the second point, I don't own dollars so I can buy things in Euros. I own dollars to buy things in dollars, so the exchange rate doesn't really impact my standard of living, except to the extent that it translates into local currency inflation. And although inflation is almost always positive, my dollars pay a rate of interest that is designed to compensate for that inflation. Gold pays nothing, so when the price goes down, as it did for the better part of two decades in the recent past, it's real purchasing power goes down by even more.
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Old 12-09-2010, 09:15 AM   #51
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If on the other hand, you think that there is a real possibility that Mr. Bernanke and/or future Fed chairmen won't be able to reverse QE2 and other ease money policy within 15 minutes like he claims, that debasing of the currency isn't a good thing for the country, or that Chinese, and Arab, others may lose faith in the ability of Uncle Sam to pay back his loans, than Gold maybe a reasonable insurance policy.
Even in that case, wouldn't a diversified global bond fund, maybe held in a foreign account, still be a better alternative than gold?

It seems like the scenarios where gold makes sense are the ones where the entire world melts down, the electronic financial systems break, and the only "stores of value" are things that can be traded in physical exchange. Then a pile of gold would be really handy. Short of that, there are almost always better options . . .

Unless of course we're just hitching our wagons to a speculative ride up.
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Old 12-09-2010, 09:24 AM   #52
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It seems like the scenarios where gold makes sense are the ones where the entire world melts down, the electronic financial systems break, and the only "stores of value" are things that can be traded in physical exchange. Then a pile of gold would be really handy. Short of that, there are almost always better options . . .
In that case you best have actual physical possession of the gold, as in under the mattress, or the computer entries saying you own so much gold may disappear right alongside those that said you had so many paper $$$'s.

You could then sleep better even with that hard lumpy mattress.
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Old 12-09-2010, 09:34 AM   #53
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FWIW, a scenerio by Shadow Stats:
Hyperinflation Special Report (Update 2010)
I clicked through to this report dated December 2009, and the first thing I read is this . . .

Quote:
Please Note: Given less than one month before the New Year and the possible breaking of the hyperinflation crisis in the year ahead, I have entitled this “Update 2010.” The report is intended to replace the Hyperinflation Special Report of April, 8, 2008 . . . the April 2008 report updated and expanded upon the three-part Hyperinflation Series that began with the December 2006 SGS Newsletter.
You can't make this stuff up. It reminds me of the cult leader types walking around with signs saying "End of the World: TOMORROW." But the author of this report could learn something from the cult leader, and not date the prediction. If he instead says "next year" the prediction becomes evergreen and he doesn't have to go through the embarrassing ritual of pointing out that he's been wrong for four years, and counting.

But I'm curious, if these guys are serious, why don't they ever reflect on the causes of their previously erroneous predictions? Is it because they're not really serious and are just working some other angle . . . like selling subscriptions, maybe?
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Old 12-09-2010, 11:55 AM   #54
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Not directed at anyone here, but I sometimes get a whiff of sour grapes when I notice that most gold-bashers are quick to mention that they don't own any.

Meanwhile, I look at my 59% paper profit on the stuff, and think I'm not really so dumb after all.
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Old 12-09-2010, 11:57 AM   #55
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Not directed at anyone here, but I sometimes get a whiff of sour grapes when I notice that most gold-bashers are quick to mention that they don't own any.

Meanwhile, I look at my 59% paper profit on the stuff, and think I'm not really so dumb after all.
No sour grapes at all. Congrats on your good fortune.
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Old 12-09-2010, 11:57 AM   #56
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Meanwhile, I look at my 59% paper profit on the stuff, and think I'm not really so dumb after all.
You'd probably qualify for MENSA membership if you sold now.
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Old 12-09-2010, 12:03 PM   #57
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Mensa is way overrated. I'm a life member who enjoyed it for a number of years, but then saw the percentage of social misfits in my local group increase to the point that it drove me out.

As for selling, I stick with my observation that gold is nowhere near its high in real terms, so I'll continue to monitor it and not sell before its time.
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Old 12-09-2010, 12:21 PM   #58
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Mensa is way overrated. I'm a life member who enjoyed it for a number of years, but then saw the percentage of social misfits in my local group increase to the point that it drove me out.

As for selling, I stick with my observation that gold is nowhere near its high in real terms, so I'll continue to monitor it and not sell before its time.
I'm not a member of MENSA but I may reconsider if I can apply under the 'social misfit' category.

I suppose that also means I'm not smart enough to invest in gold, and I'm OK with that. I am smart enough to know it isn't a good idea for me to invest in something I don't understand and I'm really unintelligent when it comes to gold. Others obviously know much more about it and are in a position to make a lot of money - and I'm also OK with that.
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Old 12-09-2010, 12:40 PM   #59
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You'd probably qualify for MENSA membership if you sold now.
In true MENSA-like fashion, I'm trying to sell my bullion right now, but the local pawn shop wants to give me a 25% haircut from what it is selling at on Ebay.


May have to use my Mensa-like powers to find a better counterparty for this particular trade.
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Old 12-09-2010, 12:43 PM   #60
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I think that most people don't have a good handle on what Gold really is. It's the perfect currency. We may have all read the reason as to why gold has been so for thousands of years. Stable item, not much of it, not much being mined out of the ground, doesn't wear out, relatively easy to transport and identify.

Gold doesn't really change in value, the world around it does. Currently gold appears high because FIAT currencies are being devalued (printing money, currency wars, etc).

Consider that in the 70s, 20oz of gold could buy you a nice car. Today, 20oz of gold can buy you a nice car.

I have 30% of my investment in gold and by the looks of the US QE, the EU deadbeat countries (list seems to get longer), eventually the currencies of almost all developed countries will need the reset button pushed. I can't see gold going lower any time soon I'm considering buy more...
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