Gold as Safety

[greg]

Hello:

Last nite I thought of a rather esoteric (?) argument for owning gold. Owning gold, either thru a fund such as GLD, IUA (?), GTU-UN.TO, or CEF allows you to (almost) completely withdraw from "the marketplace--unlike any other financial instrument. If you stuff money in your mattress, someday that money may be worth less. What buys a car ($20,000?) today may only buy half a car ten or twenty years from now. One oz of gold pretty much buys a suit of nice clothes, has for a long time, probably will for a long time. A thousand oz of gold buys a pretty nice house just about anywhere in the US. This will probably stay true.

If one is worried about the coming economic times and is unsure of how things shake out, one could go to T-bills to ride things out. The market place entices you in this direction with a current 4%, umm 4.25%, interest rate. This is considered the shrewd move by bears or others worried about market changes. And it's a very reasonable choice. The market place offers many possibilities which are usually priced for sale according to some sort of "yield" inducement attached and is often priced this way in relation to perceived marketplace risk. This is needed to draw out buyers. (Plus, nowadays, much of the perceived risk is fed to us from advertizers of various products. But the salesman's job has always existed since the beginning of human civilization.

Commodities, physical assets, play a similar role, but tend to be more dependent upon market place conditions (RE--location, location, location for one condition).

Gold stands alone as a detached financial vehicle that withstands the vagaries of time and market condition. One should at least consider this feature before one has created his or her perfect retirement porfolio. At this time I don't find a 10% detachment unreasonable.

--Greg

 

[Mountain_Mike]

Gold has had a long, long history in retaing value as "money," but as an "investment" over the past 20 or so years, gold has not been stellar.   This said, I really wish I had bought more about 4 years ago when it was $250/oz. as opposed to over $500 today.  Gold Eagles and other coins are beautiful to look at, and touch.

You make a good point that, in essence, no matter what happens gold will retain value, whereas our fiat money is dependent upon a government and the trust of the people.  Therefore, if you happen to be a pessemist beliving that a doomsday scenario is a possibility, it would seem prudent to hold some precious metals as a hedge against catastrophe.

My bottom line is, gold (and silver) are fun to collect and own, but I don't count on them as my primary investments...more like a hobby.

 

[brewer12345]

I guess it all depends on how you define safety.  I am a lot happier with diversified commodity exposure rather than trying to pick one, regardless of what that commodity is (oil, gold, live cattle, corn, etc.).  Why?  First, a single commodity is a LOT more volatile than a basket.  Check out the whipsaw correction gold is going through vs. the more restrained moves of something like PCRIX.  Second, how much gold do you consume in a year, Greg?  I use a lot more heating oil, gasoline, corn, soy, aluminum, etc.  I suspect that a basket of commodities is likely to track inflation more closely than gold, although over very long periods of time the difference probably starts to wash out.

You want safety, look at TIPS or I bonds.

 

[Robert the Red]

Advocatus Diabolus: Gold has maintained its value over a long time, but not over a short time.  Nor is past performance necessarily a guide to the future.  For centuries, the price of silver was nearly a constant fraction (5%) of the price of gold, and most people thought of this as a 'law' of precious metals.  But not for the last 120 years or so -- silver is much cheaper now.

The price of anything is culturally/socially determined -- gold may well skyrocket as the Indian and Chinese middle classes grow, if they maintain their social desire for a gold hoard backup.  Or it may plummet, as more people who could afford to buy gold realize that gold is pretty much useless except for looking good.  And for 5-10 lousy ounces of gold, I can look good with my plasma TV instead!

Finally (although you didnt' say or imply this, many gold advocates do), it is not true that gold has always been a valuable medium of exchange in all cultures.  The Inca did not use gold as money -- all gold was the property of the few nobles, and was used for decoration.  If a peasant found some gold nuggets, they were just seized by the Inca rulers to be incorporated into jewelry or gold leaf to adorn the temples.

And finally finally, I do in fact have a little physical gold, but can't really justify it.  But, I am large, I contain multitudes (of contradictions).

 

[Marketneutral]

Gold is not keeping up with inflation anymore.

There I said it.

 

[justin]

Greg, what happens with your 1000 oz example when (if) gold drops back to $250/oz? Can you still buy a nice house pretty much anywhere with that kind of money? What if real estate prices (in non-bubble areas) keep up a 6% increase (inflation plus 3%) for the next 10-20 years? You gonna move into the studio condos down the street from me?

Gold will always be worth something, but I wouldn't call it an investment. If the apocalypse does happen, and we have a catastrophic collapse of all major markets and currencies, you won't be able to buy your house anyway. All of our infrastructure and systems will shut down (IMHO). Goods can't get to market. I don't see gold helping much there. You might be able to buy food with your gold, but if you are so worried about a scenario where you starve, just buy a couple 50 lb sacks of rice and a few cases of beans. After the apocalypse the looters are going to pillage and destroy all major retail outlets anyway. What are you going to buy?

 

[Marketneutral]

Only good thing about gold is it probably will never go to $0.

However as an investment through time it has been a major dog.

Think of it this way.  As an investement it has been around thousands of years.

Perfect example:  Silver.

Silver is currently 8.48 an ounce.  Your great great great great great great great great great great great great grandfather gives you an ounce of silver.  He says hold this, protect it, pay insurance for it, safe guard it, worry about it and 3000 from years from now you can buy a 12 inch Subway sandwich and a medium drink.  What would you would of said?  I would of said, just keep the damn thing.

 

[brewer12345]

Only good thing about gold is it probably will never go to $0.

However as an investment through time it has been a major dog.

Think of it this way.  As an investement it has been around thousands of years.

Perfect example:  Silver.

Silver is currently 8.48 an ounce.  Your great great great great great great great great great great great great grandfather gives you an ounce of silver.  He says hold this, protect it, pay insurance for it, safe guard it, worry about it and 3000 from years from now you can buy a 12 inch Subway sandwich and a medium drink.  What would you would of said?  I would of said, just keep the damn thing.

I would have said: thanks, gramps. Then put it on the shelf and forgotten about it.

 

[justin]

I forgot that I've made a lot on gold and silver. I bought a bunch of gold eagles and silver eagles a few years ago when prices were much lower (because they were pretty). I'm guessing the market value of the bullion in those coins is at least 30-50% more than what I paid. We gave away a bunch of the silver eagles as stocking stuffers one year (2002 maybe?). I can buy a lot of subway sandwiches now.

 

[Marketneutral]

I would have said: thanks, gramps.  Then put it on the shelf and forgotten about it.

You should of sold immediately. That is my point.

http://goldinfo.net/silver600.html

You took a massive loss by holding.

 

[brewer12345]

You should of sold immediately.  That is my point.

http://goldinfo.net/silver600.html

You took a massive loss by holding.

Eh, for something that is rounding error in the grand scheme and in 50 years will have immense sentimental value ("gramps gave me this")? Put it on the shelf.

 

[Marketneutral]

Eh, for something that is rounding error in the grand scheme and in 50 years will have immense sentimental value ("gramps gave me this")?  Put it on the shelf.

That does not fit into my retirement lifestyle.

Less worries the better.  I want my assets to produce for me - not look good and depreciate. 

 

[wildcat]

Second, how much gold do you consume in a year, Greg? I use a lot more heating oil, gasoline, corn, soy, aluminum, etc.

That is the key from my perspective.

 

[Marketneutral]

Has anyone noticed that these precious metal bugs look like tech dot bomb bugs to me.

All glazed over - GOLD IS GOING TO $1,000.  

Amazon is going to $1,000.
EToys is going to $1,000.
Yahoo is going to $1,000.

Gold was over $800 for all of two days.

$550 is at 400 years of resistance - and it is getting sold off.  Got to go back to 50 year moving average, I guess.   8)

 

[Marketneutral]

That is the key from my perspective. 

and no currency is backed by gold anymore.

It is basically a worthless element.

It is like a shiny object to a bird. Has looks value but no true value.

 

[brewer12345]

Has anyone noticed that these precious metal bugs look like tech dot bomb bugs to me.

All glazed over - GOLD IS GOING TO $1,000.  

Amazon is going to $1,000.
EToys is going to $1,000.
Yahoo is going to $1,000.

Gold was over $800 for all of two days.

$550 is at 400 years of resistance - and it is getting sold off.  Got to go back to 50 year moving average, I guess.   8)

Yeah, all the moonbeam looks from the goldbugs doesn't give me any warm fuzzies about the gold market being rational. I actually listen to a radio show on Friday afternoons called "Gold Linne". which is a thinly-veiled advertisement for a precious metals brokerage. I enjoy listening to the very professional appeal to both fear and greed (they pull off both at the same time). At least they recommend I-bonds and have enough litigation worries to recommend gold for 5 to 10% of one's total portfolio.

 

[Marketneutral]

Yeah, all the moonbeam looks from the goldbugs doesn't give me any warm fuzzies about the gold market being rational.  I actually listen to a radio show on Friday afternoons called "Gold Linne". which is a thinly-veiled advertisement for a precious metals brokerage.  I enjoy listening to the very professional appeal to both fear and greed (they pull off both at the same time).  At least they recommend I-bonds and have enough litigation worries to recommend gold for 5 to 10% of one's total portfolio.

I agree my friend. I listen to that show also. Red lights were starting to go off when he said that hold times to order were the longest he had every seen. His comment were some folks were on hold for up to two hours to place a order for one ounce.

In my head I said - run, run, run.

I sold all my PM holdings Monday morning. I know I have no credibility here on the other hand I never lie.

 

[Marketneutral]

by the way, you can MP3 it here:

http://www.goldlinecoins.com/market-news/archive-radio-show.html

 

[greg]

Gold has had a long, long history in retaing value as "money," but as an "investment" over the past 20 or so years, gold has not been stellar. This said, I really wish I had bought more about 4 years ago when it was $250/oz. as opposed to over $500 today. Gold Eagles and other coins are beautiful to look at, and touch.

You make a good point that, in essence, no matter what happens gold will retain value, whereas our fiat money is dependent upon a government and the trust of the people. Therefore, if you happen to be a pessemist beliving that a doomsday scenario is a possibility, it would seem prudent to hold some precious metals as a hedge against catastrophe.

My bottom line is, gold (and silver) are fun to collect and own, but I don't count on them as my primary investments...more like a hobby.

Mountain Mike: Gold in one sense is a serious contrarian play. My suspicion is that over the past, oh say, twenty or thirty years financial-type stocks have out-
performed the markets in general. Investment money has tended to flow out of real assets such as commodities and the like and into the action--credit creation instruments such as banks, loan companies, and such other related stocks. I think we both agree that commodities in general are finally reverting to the mean.

I like the detachment gold ETFs provide. When I think the markets will give me something worthwhile, I'll at minimum rebalance out of them.

--Greg

 

[brewer12345]

I like the detachment gold ETFs provide.  When I think the markets will give me something worthwhile, I'll at minimum rebalance out of them.   

--Greg

Just a suggestion: you might want to regard gold as a trading vehicle, not a default choice/parking place.

 

[Marketneutral]

Just a suggestion: you might want to regard gold as a trading vehicle, not a default choice/parking place.

Concur.  It trades like a stock now.  Heck it is an ETF.

Silver ETF starts March 2006 (I believe).

It is basically a piece of paper now.   

 

[haha]

IMO gold is likely no more speculative right now than 95% of US stocks.

For sure gold is a better speculation than it is an invesment. It has to be bought an sold. Whereas, bought right, a basket of high ROI companies can probably fairly safely be held for a long time.

That said, it is hard for me anyway to imagine the circumstances that would send gold back to $250. I don't think any of us who are alive today will ever see that price again.

Gold trades on emotion. IMO, we aren't at a long term top yet, but that is always hard to be sure about.

Ha

 

[greg]

I guess it all depends on how you define safety. I am a lot happier with diversified commodity exposure rather than trying to pick one, regardless of what that commodity is (oil, gold, live cattle, corn, etc.). Why? First, a single commodity is a LOT more volatile than a basket. Check out the whipsaw correction gold is going through vs. the more restrained moves of something like PCRIX. Second, how much gold do you consume in a year, Greg? I use a lot more heating oil, gasoline, corn, soy, aluminum, etc. I suspect that a basket of commodities is likely to track inflation more closely than gold, although over very long periods of time the difference probably starts to wash out.

You want safety, look at TIPS or I bonds.

Brewer: I see deeper problems. I see a devaluing US$--if not soon then later. TIPs and I-bonds--at best--offer whatever the gov't says they are at that point (remember some of the arguments about whether the CPI is a correct reflection of "true" consumer inflation?). Gold transcends national borders and gov't manipulation more than other commodities. Some, in fact many, commodities are manipulated by their governments, not necessarily in a bad way (we subsidize our own agricultural industry, as do other countries). Right now Bush is shipping large quantities of gasoline from Europe in order to keep prices reasonable for consumers. I think interference may get worse over time. But whose paranoid?

 

[greg]

Gold is not keeping up with inflation anymore.

There I said it.

Not today!

 

[greg]

Only good thing about gold is it probably will never go to $0.

However as an investment through time it has been a major dog.

Think of it this way. As an investement it has been around thousands of years.

Perfect example: Silver.

Silver is currently 8.48 an ounce. Your great great great great great great great great great great great great grandfather gives you an ounce of silver. He says hold this, protect it, pay insurance for it, safe guard it, worry about it and 3000 from years from now you can buy a 12 inch Subway sandwich and a medium drink. What would you would of said? I would of said, just keep the damn thing.

When gasoline was first refined its cost was about one oz of silver/four gallons. So which is more important to you Subways or gas?