Gold?

[Texas Proud]

I know there are a lot of people who are claiming that gold is not a store of value.... but it is...

Your cash is a store of value... but if you look at the actual paper, there is not much value there... there is a promise to pay, but is there anything else there

Cash does not pay dividends... and as we have seen, the purchasing power is eroded over time....



Now, I am not one to buy real gold... but I can see where some like it as a hedge.... (me, I am a bit in silver a an ETF).... but I would not invest a lot in this class myself....

 

[samclem]

I know there are a lot of people who are claiming that gold is not a store of value.... but it is...

But to have any faith in this, don't we need to understand why? US paper currency has value today because it is almost universally accepted in trade for other things that have intrinsic worth (e.g. to buy cars, homes, food, etc that have utility). This cash has very little intrinsic value if people lose faith that others will believe it is valuable. In my book, gold is exactly the same. It has very low intrinsic value (just for industrial uses, perhaps for jewelry, but the demand for both of these things will be depressed in an economic turmoil which further depresses the intrinsic value of the shiny metal. The industrial/artistic uses of gold would support a price far lower than gold's trading price). "Because people have historically wanted to have it" seems no different than the reason cash has value.

And the limited supply of gold is a necessary but insufficient reason to explain why it might be a dependable "store of value." There's a far more limited supply of other metals (e.g. osmium), but folks aren't seeking it out as a "store of value."

I think it all boils down to tradition, history and myth. Maybe that will continue to be enough to keep the whole thing going just by force of inertia.

 

[haha]

When you buy gold, you go short faith in government institutions, long government failure and social panic. I am sure that institutional investors have better targeted ways to do this, we members of hoi polloi perhaps not.

I tend to analyze similarly to what others here have said, gold's worth is a social construct. However, this may be more true than we frequently admit of many things once we get beyond food and fuel and basic shelter.

With these types of emotional investment assets, I tend to be bold when it is so cheap that it is highly likely that we will get at least a bump. I bought gold back in the early 21st c, between $280 and $335. I figured it would be hard to lose, under the jumping out of a basement window thesis. Gold is highly marketed, which may introduce more volatility and risk than is less marketed assets.

But this level of commitment doesn't give me much staying power- so while it is still stupid cheap, I can stay, but once it is more or less middling, I am out. So I will never make a lot of money this way. But, I will very rarely lose any money at all this way.

I feel differently about oil. I might try to trade around, but faith in oil is a lot easier for me to have than faith in gold. Still, for one who can stay with what is clearly a speculation, faith in gold would have paid off better so far.

Ha

 

[imoldernu]

I know there are a lot of people who are claiming that gold is not a store of value.... but it is...

Your cash is a store of value... but if you look at the actual paper, there is not much value there... there is a promise to pay, but is there anything else there

Cash does not pay dividends... and as we have seen, the purchasing power is eroded over time....

I think this is getting closer to what I see as the "relative equivalency of the dollar" compared to the international currencies, AND the long term stability of the nation. As I read it, gold is the hub of valuation.

Value comes from the potential value of things like natural resources, the educational level of the populace, the completeness (dollar value perhaps, of the nation's infrastructure), potential for growth, the balance or imbalance of the distribution of wealth, the level of debt relative the GDP, and the value of the energy potential (today, oil).

The common denominator is not paper money, but gold.

Back to the OP... and the whispered discussions that indicate a change on the outlook for gold prices. Much of this is coming from the recent, growing awareness of the value of Natural Gas, and the realization that this is a United States exclusive. In effect this means a huge increase in natural resource value that is not available to any other leading nation. The exclusivity comes from the almost complete build out of Natural Gas Supply systems. This includes the major pipelines, the storage (cave) facilities, and the "final mile", that leads to the electric power supply and the individual houses. While other countries may gear up the technology (currently 10 years behind) there is no reasonable way to build the extended pipeline/storage capability to distribute the Natural Gas. (no cost effective way to transfer natural gas, other than pipelines.) This "WEALTH" belongs to the nation.

To get to gold, as a long term value, this most recent perception of long term energy sustenance, would bolster the value of the dollar relative international equivalency... eventually affecting the value of gold.

A bit confusing to be sure, but a line of thinking that is appearing in the financial sector.

(BTW, I have no relationship to T. Boone Pickens.)

 

[gcgang]

One shouldn't be scared of a particular asset because it is "speculative". You need to consider how that asset fits with the rest of your investments.
I am reading Swedroes book on Alternative investments. He explains that Commodities (not gold, but similar) have had similar returns to the S&P with higher "risk", as measured by standard deviation. He then goes on to explain the correlation between the asset classes is actually negative, meaning that when stocks, and bonds for that matter, go down, commodities tend to go up. So, if you add a risky commodity investment to a balanced 50/50 portfolio, your overall portfolio becomes less risky, and may yield higher returns.
He also says that you need a long term perspective, patience, and understanding before you employ this strategy, as most people will buy and sell at the wrong times.
But it IS hard to buy gold after it has gone up so much in the last decade.

 

[samclem]

As I read it, gold is the hub of valuation.
. . .
The common denominator is not paper money, but gold.

I'm not quite following you on this one. We could pick any of thousands of commodities and note that they can be converted to hundreds of national currencies over the decades. We could even plot their relative values out. But none of this would mean that hog bellies, osmium, natural gas, or anything else was the common denominator.

Put another way--there have been decades where gold has "lost value" relative to the dollar. And, there have been times when gold has appreciated relative to the dollar. Gold hasn't officially under-girded US currencies since 1971, and there is no country today that is on a gold standard. I don't think it's the hub of anything today.

If a person bought gold in 1981 (price: about $600 in 1981 dollars) by 2001 he probably wouldn't have thought that gold had been a "good store of value" for him (gold price: about $250 in 2001 dollars and a true loss in buying power of about 75%).

I agree completely that we should look to ways to diversify against the possibility (likelihood) of inflation and also of US currency "troubles". Maybe gold will be a good way to do that, but I haven't heard a convincing argument that explains why this should be so.

I'm not trying to be confrontational, I'm just trying to understand the underlying principles at work here.

 

[Texas Proud]

But to have any faith in this, don't we need to understand why? US paper currency has value today because it is almost universally accepted in trade for other things that have intrinsic worth (e.g. to buy cars, homes, food, etc that have utility). This cash has very little intrinsic value if people lose faith that others will believe it is valuable. In my book, gold is exactly the same. It has very low intrinsic value (just for industrial uses, perhaps for jewelry, but the demand for both of these things will be depressed in an economic turmoil which further depresses the intrinsic value of the shiny metal. The industrial/artistic uses of gold would support a price far lower than gold's trading price). "Because people have historically wanted to have it" seems no different than the reason cash has value.

And the limited supply of gold is a necessary but insufficient reason to explain why it might be a dependable "store of value." There's a far more limited supply of other metals (e.g. osmium), but folks aren't seeking it out as a "store of value."

I think it all boils down to tradition, history and myth. Maybe that will continue to be enough to keep the whole thing going just by force of inertia.

Yes, you got it.... it has value because other people think it has value... just like the dollar... if people think the dollar is going to lose value, they are going to flock for another store of value... right now, the default global (universal) store is gold.... not Euros, Yen, oil, etc. etc.... but gold...

But if you go to your basic argument, all items only have value as long as other people think it has value...

For a long time, gold had value because the gvmt said it did... we were on the gold standard and our paper money was 'backed' by all that gold in Fort Knox... since there wasn't enough gold for them to spend what they wanted, they broke this connection (which wasn't real in the first place)...

The psychology of the value of gold is not going to change in my lifetime... heck, it might not change for many decades or centuries... since I know that, I could invest in gold and play the game... I choose not to, but it does not mean that it is not real....

 

[Texas Proud]

/snip/ "good store of value" /snip/

I just said it was a store of value... maybe the OP said it was a good store of value...


Also, central banks of almost all countries use gold for trading currencies between themselves... I have not heard how much there is, but I read that there is a LOT of gold held at the NY Fed in the account of other countries....

So, if central banks think that it is a store of money, who am I to say otherwise



Edit...looked... the OP said he heard it was a good hedge... not even a good store of value...

 

[LeavingOhio]

Well, I'm not gonna buy gold... Don't have enough $$$ to begin thinking of speculation.
....but my memory brings me back to 1979, and the story of a co-worker who was earning about the same as I was at the time.... about $30k... working in Chicago.

Remember the Hunt brothers?... My friend got pretty excited about silver. He was pretty well settled at the time, in a nice suburban community and a nice house... nice car, and basically doing quite well by most standards of the time.

In the matter of a few weeks, he took all of his savings, his pension, then sold his car, sold his house and went to live in a tiny apartment with his wife.

He took all of this cash, and day traded in silver for a few months...leveraging, buying, selling, buying and selling again and then again.

Don't know how much he had for starters... maybe $300 or $400K. Sometime in 1980, he showed us a statement from a Swiss bank, with balance of more than $3 million.

Like it was yesterday, can remember him asking us to get in on the best deal ever... We saw him as the local idiot, and expected a train wreck for him and his wife. He got out of the market at the peak, in early 1980.

Can still remember him coming in to work every day... quoting the closing price on silver...$11.26, $14.13, $25.87, $36.24, etc, etc...

Oh well...

That's an example of all your eggs in one basket, and he got VERY LUCKY that it turned out for him as it did.

 

[ChiliPepr]

Also, central banks of almost all countries use gold for trading currencies between themselves... I have not heard how much there is, but I read that there is a LOT of gold held at the NY Fed in the account of other countries....

So, if central banks think that it is a store of money, who am I to say otherwise

Countries used to use the gold when trading currencies, that was when the currencies were based on the "gold standard", I do not believe there are any currencies today that are based on a "gold standard". They are all based on the full faith and credit of the country that backs the currency. Gold is no longer in the picture.

For a good read on the gold vault at the NY Fed, check out http://www.newyorkfed.org/education/addpub/goldvault.pdf

As of early 2008, the Fed’s vault contained roughly 216 million troy ounces of gold (1 troy oz. is 1.1 times as heavy as the avoirdupois ounce, with which we are more familiar), representing about 22 percent of the world’s official monetary gold reserves.

 

[Texas Proud]

Countries used to use the gold when trading currencies, that was when the currencies were based on the "gold standard", I do not believe there are any currencies today that are based on a "gold standard". They are all based on the full faith and credit of the country that backs the currency. Gold is no longer in the picture.

For a good read on the gold vault at the NY Fed, check out http://www.newyorkfed.org/education/addpub/goldvault.pdf

Thanks, I will read that link...


But I did not say they were on the gold standard, just that they used the gold for trading...

IOW, if you were country X and wanted to buy the currency of country Y.... you can call the fed and tell them to move some of your gold to country Y's account and get their currency.... easy peasy....

So gold is still in the picture....

 

[ChiliPepr]

IOW, if you were country X and wanted to buy the currency of country Y.... you can call the fed and tell them to move some of your gold to country Y's account and get their currency.... easy peasy....

It does not work that way. A country X that wanted to to buy country Y's currency would just call up the currency desk at your friendly neighborhood investment bank and say buy currency Y at the current exchange rate using my currency X. All done. Now, if the government was Zimbabwe thay may have to use gold to do a transaction since there is not a market for the Zimbabwe dollar. But any country with a "stable" currency would just use the currency exchange.

The Fed does not charge foreign countries for holding gold, but it does levy a handling fee when gold enters, is moved within, or is shipped out of the vault.

So, It would be much more expensive to buy currency thru the Fed than it would be on the exchange. Gold is stored in a specific location and requires more work than just moving numbers on an account sheet.

The gold bullion in the Federal Reserve Bank of New York’s vault is part of the monetary reserves of foreign governments, central banks and official international organizations around the world. It is largely a relic of an era when the gold standard and gold exchange standard were used to establish the relative values of national currencies, and gold itself was used to meet international payments.

 

[T-bird]

Investing in gold is too speculative for my blood

Besides that try this exercise. Take all you portfolio value and divide it by the current price of gold and see what you come up with. For me I don't expect to have to ask too many no make that any folks for their assistance in moving it around. Matter of fact it is somewhat of a depressing task once you see what your stash is actually worth in those terms. Maybe I need to convert that to tea bags or hog bellies to feel better. I guess my AA will just have to go without.

T-bird
Class of 2013
DW Class of 2012 (May, a done deal)

 

[haha]

For a long time, gold had value because the gvmt said it did.......

That is not really true. Governments have always tried to avoid the discipline of gold when they were stressed. Gold had value because for many centuries people honored it. It is in fact astonishingly beautiful, and under non industrial conditions it was not all easy to mine and smelt and cast. Many a king stayed king because he could find the gold to pay soldiers, his own and mercenaries. When the Romans under Emperor Trajan discovered and developed prolific gold mines in Europe and Asia Minor it ushered in the golden 2nd century AD. The emperors could pay their troops, buy grain to give to the mob, tax their provinces less onerously, and in general make everyone happy. Similarly the 19th century under the British Empire used gold to keep the peace, and citizens had what to us would seem like impossible geographic and monetary freedom, largely due to the freeing and stabilizing effects of gold being freely used to settle accounts within borders and without.

If Queen Victoria had said we can't use gold, much more likely it would have been goodbye Queenie, rather than goodbye gold.

Ha

 

[imoldernu]

I'm not smart enough to explain the "hedge" statement in a step by step discussion. In effect, the overall hope to retain value is based on holding gold. Not gold mine stocks, and not "paper gold"... but the metal itself.

So many different things get into this... just to mention a few:

The paper gold may be as much as 16 times the actual amount of bullion in trade on a given day.
The FED is the eventual arbiter of the price, and that means the member banks.
Gold is traded mostly on the European exchange.
The price of gold is directly related to the amount of physical gold in circulation.
Those who control the physical gold can drive the prices up by simply not offering their metal in trade.
The eventual price of paper gold, is directly related to the perceived stability of the entity guaranteeing the eventual payment. (This is where some volatility comes in, as gold derivatives are involved in the trades.)

Now, as to the relationship of gold relative to the stability of the dollar, and its' relationship to the international market. It is a term based perception, which is usually, but not always balanced in the value of the US Dollar ie. US dollar vs. Japanese yen. The amount you see in the daily trading is just that. The daily trades. Beyond that, of course are many variables that the market may guess at, but does not know...

Since the top three GDP countries are the The US, Japan and China, they obviously will have the most influence. What the governments of the international monetary system do to keep confidence, also goes directly to the safety of the guarantees in the bank. Thus, if a bank is perceived to be unstable, the pay off on the gold will not be based on physical gold, and could result in losses to the stakeholders.

Now, as I see it, the growing perception is that the US is basically stronger vis a vis the long term recovery. The two major reasons that are becoming more important, looking to the future, are:

The underlying stability and build out of the infrastructure... roads, bridges, buildings, food supply, etc. ,

and...

The potential of the US to become energy independent within the next 20 to 25 years via the newer natural gas extraction processes. Again.. we are ahead in the technology, but more important we have the infrastructure to transport the fuel... which will difficult for other producing countries like China or Russia, to build out.

Of course, the endgame in this would come in an international imbalance in the monetary system. As countries lose credibility, and the banks destabilize, the losses would become real, then the return to holders of paper gold would be a percentage of the stated value.

At the same time, holders of the metal would take it off the market, enhancing the value of gold.
...................................................................................
Yes, I realize this is not a matter for the investor to be concerned with... and yes a lot of assumptions, but with the total international debt at incredible levels.... US current debt 16T, world debt at more than $100T, and a look ahead 20 years total of 100T in the US alone... The thought that the world economy will "grow" out of this debt is pollyanna-ish.

And thus the original post.

My opinion only... just an excursion into "what if's". All of the points made by other members in the thread are well founded. I could not argue them away... It's just the way I've put the pieces together... time will tell! In the meantime, I surely won't be putting my money where my mouth is.

 

[brewer12345]

I prefer shotgun shells.

 

[Donzo]

When I got my career job I was trained by a 62 yo WW2 veteran that had been selling pharma for 20+ years. He was such a character and some of his stories were unreal....both positive and negative concerning his time in the Pacific region as a Marine.
Anyway....he was so positive on gold. He bugged me to buy gold, all else is gambling, period. But as a young buck I did not follow his suggestion - if I remember correctly gold was $310 per oz at that time. I went for company stock and other stocks. I have always been a buy and hold person - so the gold would have done well for me as well(if I held this long B-) ). As for all investments......when you buy is important, when you sell is also very important. Some folks have the gold in their homes....that would be a worry for me big time for both theft and re-sale.

 

[Donzo]

Also want to add. With all the advertisements you see on TV to buy gold recently....that to me is a sell sign. Sorry if this has been previously said in the thread.

 

[steelyman]

I am not brave enough to buy only gold, but I do have money in Permanent Portfolio (PRPFX), which allegedly has 25% in gold. Some prefer a roll your own approach, and you can find threads that discuss this. There are good arguments, but I'm one lazy dude .

 

[rescueme]

A snip from an article on gold, published today on Morningstar:

"Warren Buffett famously mused on gold: “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

While I/DW do not have any gold holdings for investment purposes, I sort of go with what Mr. Buffett said.

Here's the entire article:
What Is Gold's Role?

 

[samclem]

When I got my career job I was trained by a 62 yo WW2 veteran that had been selling pharma for 20+ years. He was such a character and some of his stories were unreal....both positive and negative concerning his time in the Pacific region as a Marine.
Anyway....he was so positive on gold. He bugged me to buy gold, all else is gambling, period. But as a young buck I did not follow his suggestion - if I remember correctly gold was $310 per oz at that time. I went for company stock and other stocks. I have always been a buy and hold person - so the gold would have done well for me as well(if I held this long B-) ). As for all investments......when you buy is important, when you sell is also very important. Some folks have the gold in their homes....that would be a worry for me big time for both theft and re-sale.

You were probably wise to pass regarding his gold advice. Based on his age and service in WWII, this must have happened no later than 1989, and that matches what you remember about the price of gold (see the blue line below).


If gold went from $310/oz at that time to today's approx $1700, that's a gain of 550%

Most other typical conservative and less volatile investments would have done much better for you (and for him). Examples: (from Jan or Feb 1989 to today, dividends reinvested)

Vanguard Wellington Fund: 871%
Vanguard Wellesley Income Fund: 831%
Vanguard STAR Fund: 737%

And if you'd just put the dough in the VGD 500 Index fund: 778%

I wonder if he reinvested all the dividends the gold coins paid out?

 

[Koolau]

All the bad things mentioned here (and elsewhere) about gold are true. Having said that, gold is the only "money" that was recognized 4000 years ago which is still recognized as money today (silver is not quite as universal). FWIW, my guess is that gold will still be "money" long after the yen, dollar, and pound sterling are ancient memories. Whether gold as once-and-future money is a psychological phenomenon, I do not know. I suspect that it is simply a universal tradition, backed up by the fact that gold can't be created by governments and it is almost universally recognized. I can tell the difference between 10, 14, and 18 carat gold jewelry just by its appearance (color).

I don't know that this argues for holding gold (physically or paper or stock) but it suggests (to me) that having some of the stuff might be a good idea over the long run. Whether one wants to own it or not, gold is virtually universally recognized as a store of value (volatile, perhaps, but so are dollars and yen, etc.).

A statement I heard years ago (attributed to someone from even farther back) says that an ounce of gold will always buy a man's suit of clothes. Of course, sometimes that suit is wool and sometimes it is silk.

As far as investing in gold, now gold seems less attractive than it did when it was $300. The few ounces I have are not burning a hole in my pocket and have easily kept my total portfolio's value positive through all the ups and downs of this century. Naturally, YMMV.

 

[imoldernu]

bumping because of the fiscal cliff discussions.

Also, because of this... Savings accounts in US banks... (note the scale in trillions)

Now, if the growth of the accounts was a direct reflection of the dollars held on the sidelines, (which the media constantly reminds us of) by itself, these dollars might not be worrisome. (Money going to safe havens in times of stress). That alone would speak to an economy that was waiting a recovery.

Here's a point that might be worth keeping in mind, as we begin 2013. Understanding bank repurchase agreements, and re-hypothecation in the face of the Bear Stearns and Lehman situations is a grey area that doesn't get much attention. This ties in with the status of the housing market, and the fact that there has been little legislation to provide meaningful regulation to the banks. I would guess that this risk factor is the reason for Bernancke's decision to continue the borrowing into next year... and not to extend any stimulus.

The question that arises, is where does the bank recovery come from, since an increase in fees and penalties alone cannot account for the return to solvency?

That this is in the background leads me to believe that there will be some settlement of the fiscal cliff, before there is any cause for bank withdrawals.
Posted in the Gold thread, as gold is the alternative.

Just something to keep in mind.

 

[Sparkie67]

I have a kilo of physical gold. I see it as a store of value. I feel comfortable with the view that an ounce of gold has the same buying power it did centuries ago ( the often quoted roman tunic vs Italian suit ).

I consider that the value of gold doesn't change. It is the value of the fiat currency that it is denominated in ( currentlyUS$ ) that changes. As the dollar gets weaker via inflation, it takes more to buy an ounce.

Even before the more recent QE, the US$ has devalued by approx 90% over the last century. That will only get worse as the dollars from QE filter into the wider economy. So gold hasn't 'gone up'. The dollar is becoming ever more worthless. Once non Americans lose faith in it, it won't be used globally. It will be just paper.

In my view, I am taking some of my 'money', and converting it from paper into something that has held its value for centuries. And so are some of the worlds central banks, especially China. If they consider gold worth something, so do I.

Historically, gold is money. Paper used to be a promise to hand over the gold if required in the future. Then it became just an IOU. An IOU is only good if you believe the other person can make good. Most non Americans realise that America can't make good. The numbers are too big, and dollar is becoming worthless. Just my two (non US) 2 cents

 

[brewer12345]

Historically, gold is money. Paper used to be a promise to hand over the gold if required in the future. Then it became just an IOU. An IOU is only good if you believe the other person can make good. Most non Americans realise that America can't make good. The numbers are too big, and dollar is becoming worthless. Just my two (non US) 2 cents

Cowrie shells used to be used as money, too. Got some lying around just in case?