Posted on 06/01/2006 8:10:31 AM PDT by Grampa Dave
Gold ready to crash? Commentary: The problem with precious metals By Jesse Czelusta, Index Rx Last Update: 8:01 AM ET Jun 1, 2006
Jesse Czelusta serves as a technical advisor to the Index Rx investment letter, which is edited by his father, Lawrence Czelusta, and is a PhD candidate in economics at Stanford University. (indexrx.com) SAN ANTONIO, Texas (MarketWatch) --
Despite the recent pullback, gold and silver are very much in fashion. The fact that history has witnessed recurring periods of Au and Ag mania is evidence that Mr. Barnum's estimate of the birth rate is merely a lower bound.
Just listen to the din coming from the circus touts, ringleaders, and big top patrons themselves:
"Silver at $40 an ounce! Invest now, don't miss out!" screams the latest get-rich-quick pamphlet to litter my desk.
"Gold at $2,000?" queries the headline on one of my favorite on-line investing sites.
"Gold is the best investment that a housewife can make," I was recently informed by a member of said caste.
Indeed, the past few years have generated a frenzy of speculation in precious metals investments. But a broad-based fall in precious metals prices, if not imminent, is at least inevitable. Any interest in precious metals (as distinct from mining companies' stocks, which are better long-term investments but subject to their own set of limitations) as anything other than a disaster hedge, a short-term gamble, or jewelry is grossly misdirected.
Contrary to popular belief, long-run demand is not growing more quickly than supply.
Imagine that in the year 1900 your great-great grandfather had listened to the advice of someone touting precious metals. How would his investment have looked one hundred years later?
Not so great. At the start of the year 2000, prices for gold and silver in real terms were about the same as they were one hundred years before (see charts). Demand (largely from industry) has increased, but supply has on average kept up.
World mine production today is almost 25 times as high as it was in 1850 (again, see figures). New discoveries and technologies have allowed gold and silver production to continue to expand.
But won't these new sources of supply dry up sooner rather than later? Doubtful.
Supplies are coming not only from countries that are relative newcomers to precious metals production, but also from countries and regions that have long been mining gold and silver.
The U.S. mines more gold today than it did at the height of the Gold Rush in 1853. Gold and silver production in Australia, Peru, Mexico, Brazil, and so on -- countries with long histories of mine production -- are stronger than ever.
The proximate lesson of history for investors is clear: gold bullion is second only to hiding your money under a mattress as one of the worst possible long-term investments. If you are intent upon hopping aboard the gold fever bandwagon, then stick with stocks. Better yet, stick with stock index funds. Funds like DWS Commodity Securities SKSRX or GDX an exchange-traded fund offer investors a way to purchase a diversified basket of commodity company stocks at relatively low cost.
On the other hand, history also tells us with respect to commodities that what goes up will almost certainly come down. If you think the gold fever has run its course, you could instead make a contrary play by shorting streetTRACKS Gold Shares which both track the price of gold bullion. Or you could make a highly aggressive move by purchasing puts on the optionable GDX.
If you do make a foray into commodities, be prepared for the inevitable boom and bust cycles. Commodities (like stocks) are worth only as much as the investment masses think they are. Just because your personal opinion is proven right in the long-run does not preclude the possibility that you will miss out on substantial, sentiment-driven profit opportunities in the meantime.
This is why Index Rx employs a mid-term relative strength model, rather than editorial prescience, to pick funds. Neither of the editors of Index Rx would have recommended precious metals twelve months ago. In fact, we purposefully exclude commodity funds from our portfolios because of their volatility and lack of potential for long-term appreciation.
Yet we've benefited from the run-up in commodities prices (and arguably from the dollar's decline) by investing in international and emerging market funds over this period. Our more aggressive portfolios have accrued large returns over the past year via ETFs like iShares MSCI Emerging Markets (EEMiShares:MSCI Emerg Mkt VPL ) . Although May's drop was precipitous, this short term decline is vastly outweighed by these ETFs' 12-month gains.
While the final numbers were not yet in as this article went to press, recent market action looks likely to move us away from emerging markets and into developed economies. Funds like iShares MSCI EAFE Index (EFAiShares:MSCI EAFE Idx.
Whatever strategy you choose, remember: All that glitters is not gold, even gold itself.
The guvmint will try to reduce that debt, through inflation.
That's why gold is 'as good as gold' for decades to come, until we have rediscovered the merits of hard work and saving.
BUMP
It is sort of interesting to watch it...
But I view it as entertainment value...:-)
Are you comparing the U.S. Dollar to the Zimbabwean Dollar in terms of legitimacy?
The "value" of the U.S. Dollar is due to faith that the U.S. government will back up and support the note when used as currency. The "value" of an ounce of gold is due to faith that someone will accept the gold as currency.
Both the U.S. Dollar and an ounce of gold retain value due to the "faith" that people put in it. They are both valuable because people have determined they are valuable.
Screaming "fiat currency" does not change the fact that value in gold is just as "faith based" as value in the U.S. Dollar.
My future financial stability is firmly planted on my star wars trading card collection. You just can't do any better than that!!! Trust in the force.
Yes, gold has a great track record, if you ignore the last 3 weeks. I can provide charts of stocks that have outperformed gold and also pay a dividend.
To the latter point, it is still worth $631 an ounce as I type.
It certainly is. Only 13% lower than 3 short weeks ago.
Shhhhh. Some goldbugs can have an allergic reaction to the truth.
Stock in good companies can also be a hedge against inflation. Don't forget dividends!
If the monetary system collapses, your gold had better be buried deep enough to avoid metal detectors. The Red Guard dug up everyone's yard several feet deep.
Also good to have 10% of it on hand to give to the authorities when they come knocking, so they think they've gotten it all.
Not a bad idea to have diamonds, too, as they will pass through a metal detector as you're fleeing the country!
If the monetary system isn't collapsing just buy GLD through a discount stock broker or YG through a discount commodities broker, and be sure you have a systematic plan for selling before you buy.
The value of things in relation to what you have and are willing to trade.
The Captain (Jackie Gleason) was wealthy beyond imagination because he had an air conditioner on that hot southern army base.
His underlinings were left to fight bitterly over a fan.
"His underlinings"
Jackie Gleason's underlinings? Not exactly a pleasant mental image.
Now it sounds vaguely familiar. I may have seen it, but I don't recall. I will make an effort to find it and watch it.
The graphs help me with the decisions...but not the only thing.
As you know, buying and/or selling often depends on the time frame.
Compressions or "tensions on the tape" can be opportunities for the day trader to sell ( go short )...while the market is also in a long term bull, up trend .
When I talk like this, my wife will walk out of the room shaking her head.
LOL.
Heck, if you invested $1,000 in Wal-Mart on June 1, 1976, you would only be holding $938,959.24 in stock today. I mean, it's not as good as a lot of 30 year investments, but still...
ROTF!
One of the leading commodity bulls, Jim Rodgers, has been recommending tin, lead, etc for a few years.
Don't look at the price of copper wire for electricity if you don't want a heart attack. I saw 200ft. priced at $102 at Home Depot last weekend. GAG!! I paid $28 less than 2 years ago. INSANE!
http://www.tfc-charts.w2d.com/chart/US/66 (91 >> 84)
and about 30% of its value since 2001.
http://www.tfc-charts.w2d.com/chart/US/M
Clearly, any arbitrary timeframe can be selected to show the relative outperformance of gold to the dollar. And it also depends on what you're buying: a $399 PC today devastates the performance of a multi-million dollar UNIVAC or GENIAC.
I like the analogy supplied by a FReeper (whose name I don't know) which I will steal:
When gas was 29 cents you could buy a gallon of it for three dimes. Those same (silver) dimes today still buy a gallon of gas.
In 1935, selling an ounce of gold and buying the equivalent of the DOW or S+P and holding till today would buy you THE ENTIRE SUIT FACTORY!
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