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.
"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?"
Actually it would horrible since FDR confiscated all privately held gold in 1933. However, if proceeds from the confiscation had been invested in the Dow stocks in 1933, the returns would have been delightful.
Long term ownership of gold is not an investment any more than a money market account is an investment. It's just a way of preserving capital; it's a store of value just like money is supposed to be a store of value. The difference is that it's really easy to create money out of thin air and you can earn some interest on money. (Well, technically one can earn interest on gold, but it's impractical for individuals.)
"And the beauty of numismatics (rare silver/gold coins) is that YOU PAY NO TAXES when you cash in."
Just in case you ever get audited by the IRS, I advise that you keep that opinion to yourself. Capital gains on collectibles are indeed taxable at rates higher than long term capital gains on securities.
Even John Kerry knew that that capital gains tax applied to artwork. But he didn't know that the tax rate was higher than the ltcg rate on securities.
"Can you imagine being the last poor b@stard that bought gold during the Carter administration. You would still be behind the 8 ball."
I bought 10 Krugerrands for $100 each just before the 1976 election. I bought and sold gold coins throughout the Carter Administration and made a very tidy profit as he mismanaged our federal government. When Reagan was elected I sold almost all of my gold. (BTW, you do have to pay taxes on the capital gains!) But I kept the original 10 KR and I have no regrets for doubting the integrity of the US$ during the Carter years.
Only a miser would want to own gold - the cogent investor owns gold mining stocks!
The article is dead wrong about "increasing mine production", except within the period 1850-2000, which is handy info if you are planning on travelling backwards in time.
He's just another tout, but for his own brand of triple-x snake-oil, just like the clowns exploiting the run-up in gold and other metals.
Not to mention real estate, insurance, munis,...
The fact of the matter is that the world is demanding more metals but NOT mining more. Repeat - NOT mining more!
Maybe in 5 years, but not today.
Make your investment decisions accordingly.
Beelzebub, somehow, the point being made, i.e. that common stocks provide a return orders of magnitude better than gold, blew right over your head.
Have you looked at the stoichastics for September Unleaded Gasoline. A fortune is there to be made over the next 6 or 8 weeks. The longs issues have moved in, the shorts, out and up we go. Take a look. Time to go long.
Great! More excuses to buy ammo, camping gear, and tools! BTW, the "unibomber style forest enclave" is known as my deer hunting shack. Suppose I have to upgrade that to.
Please send me your graphs.
I am long now and have been long for several years.
I think that you are correct.
Beelzebub, somehow, the point being made, i.e. that common stocks provide a return orders of magnitude better than gold, blew right over your head.
Just to keep the discussion going - mining stocks are "depressed"(haha!*) relative to the metals because investors are sceptical of the current high spot prices of metals going forward at these levels.
I think they are wrong, but then, a bull market climbs a wall of worry!
*My mining stocks have, on average, more than doubled since November, and there are still many stocks at good entry levels.
That bet is, in part, going to have to be made on the assumption that for some odd reason, our politicians are better than those of Argentina, Zimbabwe, Weimar Germany, Rome, et. al.
In all those instances of history, gold and silver have held their own and people desired them. Not to mention the fact that the crooked leaders can't surreptitiously steal the sweat of the peoples brow through insipid low level inflation when they're on those standards.
Do you actually understand the concept of
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 US government is stating there essentially, "don't worry if we print the crap out of this stuff, keep taking it on faith, faith that we can wring the value, no matter how high, out of the suckers that keep electing us to office"...
They could get the same job done by keeping a set mass of metal in a vault to back it, they just wouldn't be able to "expand" the money supply to their liking. They have to be able to expand it at abusive levels to keep giving the ever expanding handouts that keep them in office.
The whole commodity run up is an obvious bubble. Record levels of actual materials (including oil and gasoline) being held in storage by speculators. The last guys holding the bag get to have the fire sale - what suckers. Well, not if but when it happens, I won't shed a tear and I'll take a nice long driving vacation.
In order for that comparison to retain the facade of legitimacy you'd have bought and held the exact components that made it up then and held it til now. More likely than not you'd be broke...
Therefore, productive land is the best investment (but you knew that already!)
Like I noted for the upcoming layoffs of pseudo reporters in many of the Dinosaur fish wraps, I'm a compassionate conservative. If someone is dumb enough to be the last one in on one of these pyramid bubble commodity schemes, I will help them get a used grocery cart, a used sleeping bag and show them a bridge to sleep under.
LOLOLOL!
If frogs had wings they wouldn't bump their ass every time they jumped either...
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