The Gold Bull Market

[cute fuzzy bunny]

Funny, I see absolutely no serious correlation between the price of gold and the value of the dollar.

And Steely Dan is not just one person!

 

[eridanus]

I would normally agree with you. That was the reason why I bought gold in the first place. However, one should expect a slow appreciation of gold as the US$ loses value.

It's different this time. (trademark pending)

I'm thinking of buying some gold puts.

 

[johnlw]

I'll go ahead and take a crack at the correlation between the price of gold and the value of the dollar question.

The U.S. dollar used to be backed by gold. That was not an arbitrary decision, the founders understood the inherent dangers of a fiat currency. They understood that a fiat currency created the potential for government to create an infinite amount of paper money, eventually destroying the value of that same currency. They also understood that gold had been accepted as real money for hundreds and hundreds of years. That is why dollars used to be redeemable as gold. However, in 1971, President Nixon severed the dollar from the last vestige of the gold standard (Bretton Woods), leaving us with a pure fiat currency.

It helps to remember that the transition of the dollar to a pure fiat currency was only 35 years ago. However, for some of us, that has been close to a lifetime, so the only thing we have been conditioned to understand is paper money. In contrast, gold has been accepted as money for hundreds of years. The tenure of the U.S. dollar as pure
fiat currency is a blip on the radar screen compared to the length of time gold has been accepted as a universal currency.

The U.S. government has been on a record debt creation and dollar creation spree ever since the Federal Reserve aggressively dropped interest rates near the beginning of the millennium in order to stave off a potentially severe recession. The entire world understands how bloated the U.S. debt is and what a massive credit expansion the U.S. government has created. Accordingly, the value of the U.S. dollar has dropped and in all likelihood, it will drop further.

As the value of the dollar drops, investors flee to gold as a safe haven and a hedge against the falling value of the dollar.

 

[Nords]

As the value of the dollar drops, investors flee to gold as a safe haven and a hedge against the falling value of the dollar.

Yeah, yeah, dollar down, gold up, we get it.

The problem is that the correlation is weak. There are many other factors at work here and the Treasury's printing-press output may not even be a major part of the issue.

Buffett remarked last weekend that although he made money shorting currencies, he didn't get any dividends. It was strictly a growth investment. Now that he's buying foreign companies, he's able to benefit from both a falling dollar and dividends. I think he's also discovered that there are plenty of overseas companies who are happy to be bought for cash.

 

[Maximillion]

Again, Gold is not going up, it is a Constant Store of value, all that changes are reflecting is the need for more Paper to buy that Constant.

In the Bundesbank era, at one point a stack of bills an inch high would buy a loaf of bread, then it became a wheelbarrow full of bills to buy that loaf.

Bread wasn't going up, Fiat was becoming worthless.

The Asians do not trust fiat Money, they have been through the periods of Hyper Inflation, they want their money in real things.

Most cities and small towns have a Chinese restaurant, no matter how small, there is always a Chinese restaurant.

The death of the restaurant owner invariably reveals a small fortune, held mainly in the Town's real estate.

The real concern is what will initiate the panic, how will the issue be handled, but I have no doubt we are in the early stages.

Bernacke has yet to prove himself, there could be a change in Government, massive changes are more easliy put in place when you can blame the other guys for creating the problem.

 

[unclemick]

Tuck circa 1966

Number three ranked in the state in ping pong, knew every Husky football statistic since the dawn of time, smoked Ron Tan cigars.

When he took Civics class in the 6th grade - they covered income tax - had to go with his Dad(Chinese restaurant) to the IRS and settle up. The entire family business was contained in a Chinese box kept under the parents bed - jade, gold, semiprecious stones, plain old American money. etc. Dad left China and ran a restaurant in Seattle - didn't speak English.

 

[doushioukanaa]

My partner and I decided to invest in silver once we determined that Iran was getting scary, the dollar was going down the toilet, and that a new silver ETF was being created that would result in a lot of silver buying.   We bought actual silver as well as a closed end fund called "Central Fund of Canada" with the ticker CEF.  It invests in gold and silver bullion and is up about 30% since we bought February.  The new ETF which we haven't bought is SLV.

For more on the bullish case for silver, check out: http://www.investmentrarities.com/tb-archives.html. The guy is a bit out there, and I take a lot of it with a grain of salt, but I haven't seen anybody refute his arguments.

Then remember that market euphoria can only last so long...

 

[bpp]

Hi dou,

Are you in Japan?

Bpp

 

[Craig]

Vanguard Precious Metals and Mining Fund (VGPMX) ... average annual returns of 8.79% since 1984.

Vanguard 500 Index Fund Investor Shares (VFINX) ... average annual returns of 12.18% since 1976.

I think it is possible to invest in precious metals as a small hedge in a portfolio, and still reap reasonable returns for the trouble. No need to be "out there", or trying to decide between bullets and American Eagles. Just another asset class, for a small portion of the portfolio.

Glad we have some, and we never expected, nor do expect precious metals to meet a large portion of our future needs. But nice to have that hedge. Bad stuff does happen, and history doesn't repeat ... but as Twain said, it does rhyme.

 

[doushioukanaa]

Hi dou,

Are you in Japan?

Bpp

No, I live in the US.  But I guess you speak some Japanese and figured out that I do as well from my login which translates as "What should I do"

 

[bpp]

By the way, you mentioned buying CEF. Just checking, but you do know that it is a PFIC for which you have to file Form 8621 on your income taxes, right? Wouldn't want to think of you moaning your name over and over again at some point in the future if you found out too late to take the QEF election...

(If you already knew about Form 8621, then don't mind me. I'm a little hung up on the subject after certain past experiences.)

Bpp

 

[mathjak107]

im no gold bug but im noticing gold may actually have tracked inflation better than we all think.looking back 200 years an ounce of gold bought a mans suit and a pair of shoes..well here we are 200 years later and guess what an ounce of gold buys ?
i think gold just got a bum rap.it had a flawed birth ..in the 70's gold came off the gold standard of 35.00 an ounce by president nixons decree and was released into an enviornement of hyper inflation...the likes of which we never had in modern times in america and there wasnt any other suitable means to bet against the markets or events growing worse,, like the dot.coms these were levels gold should have never seen ...yes when compared to those blown out of proportion levels of the 70's it looks like it hasnt done much...at 3% inflation prices double about every 20-23 years...well in 1986 gold was 350 an ounce ..well folks here we are in 2006 at guess what? double............its just gold is sneaky,it moves very slowly more ofton than not with little fanfare,and no attention from other than gold bugs...but when you turn around 20 years later there it is,right on track.like us aging...hey when did i get this gray ha ha ha

 

[doushioukanaa]

By the way, you mentioned buying CEF.  Just checking, but you do know that it is a PFIC for which you have to file Form 8621 on your income taxes, right?  Wouldn't want to think of you moaning your name over and over again at some point in the future if you found out too late to take the QEF election...

Yikes!  I had no idea of such a thing.  Are you sure it is a PFIC?  The fund has negligible income because it's all in bullion.  So you are saying I'm going to have to recognize the capital gains in 2006 even if I do not sell and even if they don't transact any of the bullion?  Or will I only be liable for taxes on undistributed income and undistributed but realized capital gains?  I guess I should talk to my tax advisor or the IRS...sounds messy. 

Then again, based on this document: http://www.centralfund.com/pfic/PFIC2005.pdf it looks like you can just declare the 0.01 dividend and the $0 capital gain and be fine.

The big deal for me is that I don't want to realize the income in 2005 so I can keep my taxable income low this year and recharacterize my IRA to a Roth.  But if I'm going to owe money for my CEF gains even if I don't sell and even if they don't sell any underlying assets, then I can kiss that opportunity goodbye.

Thanks for the heads up!!!!!!!!!

 

[bpp]

As you have found, CEF provides the information needed to make the QEF election. You still have to file Form 8621, but you don't need to recognize gains at the end of the year. Electing mark-to-market treatment is not required, it is merely the second best option for those PFICs (most of them) which don't provide the information needed for QEF treatment.

Bpp