I guess I was wrong about gold

[Gone4Good]

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.

 

[BTravlin]

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.

 

[Gone4Good]

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 . . .

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?

 

[braumeister]

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.

 

[Gone4Good]

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.

 

[REWahoo]

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.

 

[braumeister]

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.

 

[REWahoo]

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.

 

[FUEGO]

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.

 

[e86s54]

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...

 

[dex]

I think your post illustrates what we often see in such discussions (see how to lower health insurance cost and should marijuana be legalized) i.e. hurtles for success (gold) are higher than other investments and the criteria for evaluation does not acknowledge basic aspects of the issue.

e.g. - "how to lower health insurance cost" most people only focused on the cost of procedures and not the decline revenue due to the decline in membership due to companies not providing it any more and workers loosing their jobs. Also, add to that in some states unrecoverable hospital costs for the uninsured are paid by health insurance companies.

e.g. "should marijuana be legalized" people that were in favor of legalization only focused on what was eliminated with legalization but not what was increased with it.

This is not to pick on you post but for illustrative purchases.

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.

The uses - utility - is what it fulfills for the buyer - some of which you mention, others are below. Supply/demand determines the price; just like any other asset. Why should gold have a higher hurtle or different criteria than any other product?

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;

This is a developed nations westerner view and possibly a US$ based view. Gold is a global market and the individuals in less developed countries do not have access to the investment alternatives, do not have enough capital to meet minimum requirement, high transaction costs, lack the knowledge of those investments, etc. As mentioned before those in less developed countries have a family history (high inflation, political & economic turmoil) that includes gold for safety.

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;

This is an example of a higher hurtle. Excluding gold, what investment meets that criteria? (Or "does not meet" correct?)

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;

Belief is a subjective aspect. Price is objective.

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.

This is a higher hurtle. Excluding gold, what investment meets that criteria? (Or "does not meet" correct?) Taxation and inflation can be considered forms of confiscation.

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.

There are good times to have gold and bad times to have gold, just like any other asset.

Historical Charts of Interest

 

[Nords]

I've always been a gold skeptic.
Anybody else looking at buying gold for the first time?

When I see goldbugs on Charlie Rose, I'm thankful that the growth of gold ETFs has made it so easy to short the stuff.

Perhaps "goldbugs" is a bit harsh, because Charlie Rose generally attracts a credible crowd. But the mere fact that it's come to the attention of a forum like that means it's getting way overpublicized.

I used to be pretty skeptical of the future of the U.S. [-]renminbi[/-] dollar until 2008. I was genuinely surprised at the number of millions of people around the world who cashed in their savings & local currencies to buy dollars. If those same people had exhibited the same faith in gold then the price would've zoomed over $2000/ounce.

 

[dex]

When I see goldbugs on Charlie Rose, I'm thankful that the growth of gold ETFs has made it so easy to short the stuff.

Perhaps "goldbugs" is a bit harsh, because Charlie Rose generally attracts a credible crowd. But the mere fact that it's come to the attention of a forum like that means it's getting way overpublicized.

I used to be pretty skeptical of the future of the U.S. [-]renminbi[/-] dollar until 2008. I was genuinely surprised at the number of millions of people around the world who cashed in their savings & local currencies to buy dollars. If those same people had exhibited the same faith in gold then the price would've zoomed over $2000/ounce.

The 2008 move happened fast. My guess is that it was institutions moving into the dollar at that time. I think this gold move over the next decade will be driven by individuals.

Russia & China just made an agreement to stop using the US$ for cross border trade. If commodities - gold, oil - stop being denominated in US$ but in a basket of currencies there will be problems for the US$.

 

[Gone4Good]

The uses - utility - is what it fulfills for the buyer - some of which you mention, others are below. Supply/demand determines the price; just like any other asset. Why should gold have a higher hurtle or different criteria than any other product?

Most investment assets are evaluated on a discounted cash flow basis. Requiring that gold have a suitable, and reasonably estimable, expected IRR isn't a higher standard. It is the same standard.

Gold is a global market and the individuals in less developed countries do not have access to the investment alternatives . .

.

Not particularly relevant in markets where gold has to compete with those investment alternatives.

This is an example of a higher hurtle. Excluding gold, what investment meets that criteria? (Or "does not meet" correct?)

If an investment sells itself primarily as an inflation hedge, it isn't a higher hurdle to ask how well it does, or doesn't, serve that purpose.

- Bonds I buy for short-term stability and predictable nominal cash flow - they've historically served that purpose well
- Stocks I buy for long-term growth potential - they've historically served that purpose well
- TIPS I buy for inflation indexed cash flow - In their short history, they've served that purpose well

Gold as an inflation hedge? Pretty terrible ever since we've gone off the gold standard.

 

[clifp]

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.

Perhaps, although Government cranking up the printing presses is something that plenty of other government do. An interesting chart would be to see how well gold has held up vs a basket of currencies. I haven't been able to find one that goes back 20+ years.

I don't think the whole world financial system needs to melt down in order for gold to make sense, just the currency of the country you live in.

Honestly for me a reasonable alternative to gold is oil, cause there is obviously a high utility function to oil and most of the production is outside the US.

 

[samclem]

Honestly for me a reasonable alternative to gold is oil, cause there is obviously a high utility function to oil and most of the production is outside the US.

Yes, I think oil makes sense for this purpose. You could, however, get burned if we have high inflation coupled with low economic/industrial activity, which would reduce demand for oil. Except for that, I think it has better potential for long-term growth and doesn't depend on a system of mutually reinforcing beliefs in unexplainable forces.

 

[Texas Proud]

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...

This is similar to a discussion I have with my boss at times... he thinks the dollar is going to tank big time with all that is going on... and I ask... against what currency.... I don't see the Euro being any better... he metions India and China along with Brazil and NZ... well, Brazil and NZ are so small it does not matter what they do....

But, take India and China... are they going to sit around and let the country that buys most of what they produce let the dollar go belly up I don't think so...


Then I say... we might have a lot of inflation, but I don't see the dollar tanking.... so now, let not look at a hedge with other currencies, but against inflation... that leads to either TIPS or some other store of value... commodities.. gold is just one... it could be land etc. etc... but since we are talking 'the company' instead of us individually.... it leads to we should not do anything... if you are thinking long term.... and worried about inflation... I think TIPS are a better hedge than gold...

Now, I own a few gold or mining funds to try and get a little bump in my earnings (my mad money account).... as they say... don't fight the market.... I just have to sell when it falls and hope it does not go down to fast...

 

[dex]

This is similar to a discussion I have with my boss at times... he thinks the dollar is going to tank big time with all that is going on... and I ask... against what currency.... I don't see the Euro being any better... he metions India and China along with Brazil and NZ... well, Brazil and NZ are so small it does not matter what they do....

Think Asset Allocation. Now the US$ is the reserve currency and for international transactions - trade, commodities - gold, oil, minerals etc. If you were going to move away from the $, a basket of currencies would work; something that is discussed for oil when the dollar declines. Create an accepted allocation of the Euro, US$, China, and India for the basket and you can create a unit used for what the US$ is currently used for.

 

[figner]

Gold/metals are not part of my asset allocation so I don't own them currently. That said, I might be tempted to buy some as part of my small "play money" allocation, were it not that too many people seem way too excited about gold lately. Of course this is mostly personal experience and anecdotal data: the number of "we buy gold!" flyers in my mailbox has been increasing over the last few years, gold shops seem to be advertising a lot, and a non-investment-savvy friend just bought a gold krugerrand because "it's the only thing that's been a great investment for the last decade."

I have no idea if gold is about to crash, but the greed vibe I get from the general public reminds me of the tech bubble when everybody and their dentist was hyping internet stocks.

 

[powerplay]

I bought a few gold maple leafs a few years ago at around $300/oz. With the current prices it looks more like an investment and of course wish I had bought more at the $300 range. They sure are pretty and the purchase was really more about having a few gold coins than the potential for profit.

I also have some silver that was purchased at $4/oz. Ordered from the mine and went and picked it up along with a cashiers check. They carried it to my car for me. Now that's customer service. Since it's from a well known mine I expect that will be helpful when I decide to sell.

Go gold and silver!!