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.
Beautifully done! It's darn rare to find sterling cheap any more.
"When I talk like this, my wife will walk out of the room shaking her head. LOL."
Poor thing, I get a head ache reading your remarks here, thousands of miles from you.:)
I heard that! I believe it about as much as when they say, "I'm from the federal government, and I'm here to help you."
"When I hear these "BUY GOLD NOW!" commercials, I would Run, not walk but Run in the opposite direction."
I agree completely. Also, when I hear the grocery baggers talking about the Dow, it's tell to sell.
My wife figured out that I like to use the latest headlines as an excuse to buy more reloading stuff. And she found that I already have 500 rounds for each firearm at any given time (I reload alot in the winter), so I can't use that excuse anymore :(
I enjoyed reading survivalist writers in the seventies. As unlikely as the worst case scenarios were, the practical recommendations were interesting.
Some of them said to be sure you have lots of ammo, spare parts, and an owners manual for the gun you will be using to protect the food you've stored in your unibomber-style forest enclave.
They also love to pick their datapoints. Talk about gold, and the paper merchants always start blowin steam about 1980. Now we hear talk about the Dow AFTER THE 1929 CRASH...
Can you imagine being the last poor b@stard that bought gold during the Carter administration. You would still be behind the 8 ball.
As soon as the small guy starts to buy, the big guy sells.
Could be that he was reading Barron's last week, too.
There is a credible argument for higher prices, but it's predicated on the continued deterioration of the US$.
If you have faith in the US$ despite massive trade deficits, government deficits, and ballooning household debt levels, it's only natural that you think that gold prices will collapse.
However, if you think that, eventually, deficits matter, suspect that foreigners will tire of keeping their trade balances in US Treasury securities, and observe prices in other commodity markets, recent trends in gold prices don't look all that strange.
Investment wise, not if you have to buy it. Electrical, plumbing, and a/c are taking major hits. Quotes are for 24 hours only.
Helps when people don't have a clew what they have... I heard a story about some gal who bought a lampshade at a garage sale for like 2 bux.
One of the earliest (and most rare) Tiffany works, worth something like 30K.
I bought a book at yard sale last year, it had very unusual pages.
Fifty cents. First edition "Salome" by Oscar Wilde. Not that I'm a big fan of his (even though Salome is a great work) but somebody out there would give an arm and a leg for it...
Can you imagine being the last poor b@stard that bought gold during the Carter administration. You would still be behind the 8 ball.
Gold is a gamble not for the faint of heart. I would NEVER invest in Gold, NEVER.
Yes, I tweak goldbugs.
But one who bought $x of gold each year, even starting at the worst peak, would have yielded 5% return on the money.
I'd have to run the numbers, but you may be correct.
If you think the economy of the next 30 years is going to be like the economy of the past 30 years, you would probably put more into other things. If not, gold and other commodities can be attractive.
We can agree on this.
The same can be said about gold.
The dollar has lost about 7% of its value of the past month.
Measured against gold, the dollar has increased in value in the last month.
When gas was 29 cents you could buy a gallon of it for three dimes. Those same (silver) dimes today still buy a gallon of gas.
Just as useless a story as the one about the suit you could buy for an ounce of gold.
FWIW, the gold stocks ($XAU for example) tend to track gold itself by about 2x, e.g. 1% move in gold corresponds to roughly a 2% move in $XAU.
But today $XAU is down barely a percent although gold is wallowing at $632, down 4.7% from its high of $660 at the surpringly non-random time of exactly one minute before the end of May (GMT).
What was the high for gold in the late 70s?
If Gold drops another 20%, I will buy some ETF funds in Gold with strick stop loss ordera. It will not exceed 5% of our total investments.
If the rats regain power in congress, I will buy as much gold as we can get to match our CD's and money funds. I will own zero $'s of any American stock and very few foriegn stocks or ETFs.
Interesting how a few minutes can make the difference between losses or gains.
What was the high for gold in the late 70s?
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