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I guess I was wrong about gold
Old 12-07-2010, 07:46 PM   #1
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I guess I was wrong about gold

I've always been a gold skeptic. Partly cause my one and only precious metal investment a 100 oz bar of silver ended up getting lost in move. But mostly cause I figured that owning something that paid no dividends or interest, or provided no capital that let others invent the next iPad, or Hollister clothing line etc. was a lousy investment.

Last night with gold hitting a record level I watched a very good interview by Charlie Rose with 3 gold experts "All about gold with John Hathaway of Tocqueville Asset Management, Peter Munk, chairman and founder of Barrick Gold & James Grant, editor of Grant's Interest Rate Observer"

Peter is the CEO of the largest gold mining company of the world, Hathaway is the founder of the first Gold ETF, and James Grant is somebody who I know many on the forum have followed. After watching this 30 minute interview, I realized there was a lot about gold I didn't really understand.

First, Grant said that gold isn't an alternative asset class, like I thought. Rather gold is money pure and simple and it has been money for thousands of years . This despite the best efforts of central bankers and governments to convince us that this paper/electronic stuff is money and gold is just another commodity, there are billions who believe differently. For those of us in the US, Canada and some European who's currency has always been pretty stable using dollars, or maple leafs is convenient way of handling transactions. However, Latin America businessman, oil sheiks, and government kleptocrats in places like Africa and Afghanistan have always been skeptical about paper money for good reason. They have been buying gold for a very long time. This certainly isn't going to change.

John Hathaway talked about how the availability of gold ETFs has made much easier to buy physical gold and that accounts for a lot of the increased demand.

Finally, Peter Munk explained that real demand is not jewelry, a few commercial uses, and the tin foil set stocking up their bomb shelters as I thought, rather it is fear. Now most of this fear is a result of the economic crisis, but some of it is due to concerns about terrorism, the rise of Islamic extremist, China etc. Peter points out in the late 1980s and 90s when communism had collapsed capitalism had one, America was the lone superpower, and peace was breaking out, gold prices didn't move.

The panel discussion includes lots of comments about Bernanke and QE2, not surprisingly they aren't fans.

I worry that I have arrived to late at the gold party to make any money, and certainly will go down in price if "Happy Days are Here Again". Still I won't be pooh-poohing those who have made a large gold purchases in the future. Anybody else looking at buying gold for the first time?
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Old 12-07-2010, 07:51 PM   #2
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I did, at ~$900.....

And I have a lot of gold jewelry, some of it purchased several decades ago.....
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Old 12-07-2010, 07:54 PM   #3
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I'm pretty happy with the recent performance of my silver holdings (I own almost no gold but a few dozen pounds of Ag). Silver topped $30/oz earlier today.
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Old 12-07-2010, 08:35 PM   #4
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They have been buying gold for a very long time. This certainly isn't going to change.
But why does it have a certain value? A stock has a value because you are buying a portion of a company and the earning power (and growth in earning power) that comes with it. A "useful" commodity has value because of its utility. Gold has value because of this ongoing self-perpetuating, centuries old mystique. But people do change their minds about the worth and utility of things, and gold could be the next "old" thing. Whether gold is going up or down, it seems that the reason it has value at all is just a variation on the "greater fool" theory, and that's not something I'd want to bet a lot of money on.
I can understand stashing away a dozen or two 1/10th ounce pieces along with the canned food and ammo, but I'd have trouble putting a large portion of our savings into it. I don't invest in things I don't understand, and "everyone agrees it's valuable" just doesn't cut it for me.
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Old 12-07-2010, 08:48 PM   #5
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As a variation on what samclem said, I won't buy gold until someone can explain a thoughtful way to put a price on it. The only thoughtful way I've heard to estimate fair value for a commodity is by its marginal cost of production (MCP). Last I read, the marginal mining cost for gold is about $800 per ounce. Theoretically, supply and demand should balance in the "long-run" at the MCP. So I guess I think gold is probably fairly valued around $800. But I have a small problem with even buying it at that price. For the price to be driven by the MCP, there must be demand for new production, in view of the fact that already produced gold stays in the market nearly forever. And my problem is, I don't really understand why anyone is demanding it at all.
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Old 12-07-2010, 08:52 PM   #6
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I remember back around 2001, when I was buying & selling silver on ebay, and making a little money, but not getting rich. Just having a little fun really, but I did make a decent profit overall. Gold was $275 an ounce, and I just didn't think I wanted to pay that much LOL!!!!!!! My God, what was I thinking?

Let me say this...if gold EVER hits $275 per ounce again...I'm in!!! lol
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Old 12-07-2010, 09:21 PM   #7
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I've always been a gold skeptic.
I think many in the USA will be late to the party. I think it will really take off at the end of this decade.
Gold has always been a store of value and protection against political unrest and inflation in China, India, South East Asia (remember the Vietnamese boat people that bought their way on a boat with gold), it is in their history. Those same countries now have a lot of money (courtesy of the USA) and will be buying gold.

I do not own any gold currently but will probably take a small position next year. But as the decade is young there is time.
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Old 12-08-2010, 02:19 AM   #8
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I think equities for the past 2 years since gold bug hit have done just as well.
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Old 12-08-2010, 02:29 AM   #9
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As a variation on what samclem said, I won't buy gold until someone can explain a thoughtful way to put a price on it.
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Old 12-08-2010, 04:24 AM   #10
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I won't buy gold until someone can explain a thoughtful way to put a price on it.
Good question and one even the most ardent gold advocates struggle with though they generally feel it is still well undervalued based on latest (and expected future) QE's adding that much more to the world fiat currency supplies in relation to the total above/below ground supply of gold/silver, as well as their prognosis of untenable debt levels. Either way I respect not investing in something you don't feel comfortable with.

Even though he has an obvious bias, I like the analysis of Ben Davies (Hinde Capital - Reports). Also read the latter part of the 2009 Investment letter by Paul Tudor Jones (Tudor Third-Quarter Letter). He is a very successful hedge fund manager who went bullish on gold. Disclosure: I am not invested in either of these funds.


Some parting historical quotes for thought/entertainment:

"The most important thing about money is to maintain its stability…You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold." George Bernard Shaw, 1928


“THERE IS NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT EXPANSION. THE ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS THE RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION OR LATER AS A FINAL AND TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED.”Ludwig von Mises – Austrian Economist (1881- 1973)


and my personal favorite;

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other… This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.Gold and Economic Freedom, Alan Greenspan, 1967

(wonder if the Mistro was buying gold while he was wrapping things up with that nice little credit bubble)
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Old 12-08-2010, 04:58 AM   #11
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IMO - If one owns gold right now... the only way to be wrong about it is to not lock-in the gain. I would only use it as a tactical hedge on inflation. If the gain is not taken, then the hedge did not occur. The question now is when? When will the party end!


BTW - I did not buy in. I thought about it a year or so back. But since I am preparing to FIRE... I got conservative because I did not want to jeopardize FIRE. I needed to figure out my money management plan. Now that I have a pretty good idea of how I will manage the money. I intend to do some tactical hedging... I will allocate some money to energy stocks to hedge against energy inflation with a defined limit where I will take the gain. No big gain, no energy inflation, no household spending impact... I will just take the dividend... I can wait several year (because I have a strategic income plan that is low risk)!
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Old 12-08-2010, 07:39 AM   #12
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I have about 3% of my portfolio in gold, at an average cost of about $850 per ounce. I've always looked at it as a hedge, since traditionally (although not recently) the price of gold has moved inversely to the price of equities. The more recent performance has been very pleasant.

I certainly have no interest in selling right now, but I would not discourage anyone from starting a position on any big dips, and I would even consider buying more if it dropped below $1,300.
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Old 12-08-2010, 08:44 AM   #13
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Good question and one even the most ardent gold advocates struggle with though they generally feel it is still well undervalued based on latest (and expected future) QE's adding that much more to the world fiat currency supplies in relation to the total above/below ground supply of gold/silver
I'm aware of how people feel. And I do agree that the psychology of the moment makes gold a good candidate for a speculative investment, which is what the hedge fund business is all about.

But on the fundamental merits, the case isn't that strong (IMHO). That is because what people "generally feel" about money growth isn't based on any actual data. Instead they see a Fed Funds rate at zero, they hear about QE2, they listen to their favorite "news" personality blather on about currency debasement, and from this, they "feel" the government is printing unprecedented amounts of money. But what I don't think many understand is that Fed action and money creation are two different things. Just because the Fed is acting, doesn't mean it has been successful in "printing money".

Your link to Tudor's 3rd quarter letter has a graph that illustrates that fact. He shows the market cap for gold / US M2 (which is the relevant metric when looking at gold priced in dollars) is at its highest level since December 1984. I think his intended point of the graph is that the ratio is well below levels hit in 1979, but are we really comfortable saying gold is "undervalued" because it is still priced lower than the last bubble peak?

Here's a graph of M2 growth over the past 50 years. I don't see an explosion of growth recently. I see a spike that looks pretty typical for the tail end of a recession, followed by a very sharp drop to one of the lowest levels in a half a century. I see money growth well below the rates of the 1970's when inflation was a problem, and when gold last traded at current levels. What I don't see, is anything that looks at all "unprecedented" or even out of line for what has been typical since Volker took over the Fed.

What I see, in a nutshell, is that what many people "feel" about money creation, is mostly wrong. So I'd be a tad uncomfortable basing an investment decision on what these folks "feel", unless I was a hedge fund trying time the psychology of this . . . which is a perfectly valid way to make a buck, as long as you understand that is what you're doing.

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Old 12-08-2010, 10:45 AM   #14
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My take... gold is a store of value... dollars (or euros etc.) is a store of value... (lead is also... just look at the end of this post to see why it not used that much)...

The value of either is what someone else is willing to part to get that gold or dollar... we all deal with this every day... we go to the store and see some fruit priced at $5 and say 'that is to high'... why? Because we are not willing to give up our store of value for that fruit... and the store is not willing to give up their fruit for less... But if it is $1 we might buy more than normal because it is 'cheap'...

The other thing about gold is that since it is more expensive, it is easier to carry around a lot of value with little weight... we can also store that value in lead... but carrying around $1,000 worth of lead is not practicle... so gold got picked a long time ago and we still use it... also note... having that $1,000 in dollars is kind of light also... in fact, we can just have one check or CC and have $1,000...
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Old 12-08-2010, 11:09 AM   #15
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My take... gold is a store of value... dollars (or euros etc.) is a store of value... (lead is also... just look at the end of this post to see why it not used that much)...
Right. But the fruit, lead, etc all have an ultimate utility--you can eat the fruit for nutrition, we need that, so it has value. You can melt the lead to make useful objects, we need them, so it has value. Gold is useful stuff for industrial purposes, but we've got enough mined already to last for a loooong time if used only for this, its price would be very low (supply/demand) if industrial uses were the only thing driving demand. It just seems to me that the price of gold is supported almost entirely by speculation and a difficult-to-define consensus that it is valuable. And this consensus is also the only thing that gives paper currency any value. In this sense, gold is just as much a "fiat currency" as govt-printed folding money.
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Old 12-08-2010, 11:11 AM   #16
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If only I'd bought gold when I got out of tulip bulb futures...
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Old 12-08-2010, 11:35 AM   #17
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In this sense, gold is just as much a "fiat currency" as govt-printed folding money.
Then you have your answer as to its value.
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Old 12-08-2010, 11:48 AM   #18
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But why does it have a certain value? A stock has a value because you are buying a portion of a company and the earning power (and growth in earning power) that comes with it. A "useful" commodity has value because of its utility. Gold has value because of this ongoing self-perpetuating, centuries old mystique. But people do change their minds about the worth and utility of things, and gold could be the next "old" thing. Whether gold is going up or down, it seems that the reason it has value at all is just a variation on the "greater fool" theory, and that's not something I'd want to bet a lot of money on.
I can understand stashing away a dozen or two 1/10th ounce pieces along with the canned food and ammo, but I'd have trouble putting a large portion of our savings into it. I don't invest in things I don't understand, and "everyone agrees it's valuable" just doesn't cut it for me.

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Old 12-08-2010, 11:52 AM   #19
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If only I'd bought gold when I got out of tulip bulb futures...
Tulip mania occurred only once in human history, peaked in February 1637, crashed, and has never recovered. Gold, on the other hand, ....

Of course, this is assuming there was even such a tulip bubble. "Peter Garber argues that the bubble 'was no more than a meaningless winter drinking game, played by a plague-ridden population that made use of the vibrant tulip market.'" See here.
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Old 12-08-2010, 11:56 AM   #20
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Tulip mania occurred only once in human history, peaked in February 1637, crashed, and has never recovered. Gold, on the other hand, ....
...hasn't reached that point...at least not yet.
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