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.
Still stretching to prove gold is a better investment than stocks?
More likely than not you'd be broke...
That's right because 70+ years of dividends on gold is more than 70 + years of dividends on the Dow or S&P. And GE has done pretty well since 1935.
Of course if and when the bottom falls out of the Gold/Silver bubble, it will be GW's, Rove's, Republican's, yours and my fault.
From the article:
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.
Gold and silver are money, not an investment. Anyone pretending that they are an investment is a shill or a speculator. Anyone pretending they aren't money is ignoring history.
Exactly. The question isn't whether gold will have value. How much will it buy you in guns and compatible ammo?
That gold money declined about 13% in the last 3 weeks. Do you consider that a store of value?
We are enjoying a period of low inflation!
Excluding food, fuel, health care, school, taxes, rent, housing supplies etc...
Air and public drinking water are really holding that core rate down, thank God, the adjustible won't rise to fast!
I'm not a gold advocate, but it has outperformed the Dow the past five years, and done so handily.
Wow ... how enlightening. Modern mining technology aces anything that panning for gold produced during the gold rush era in northern California over 150 years ago. This should be evident to any one with even the most cursory interest in precious metals. This author comes across as a rank amateur.
No problem ... I purchased gold in the $340.00 range. Further I have done exceedingly well with Vanguards precious metal fund, up 27.3% YTD and 45.5% in the last three years. I've owned it since early 2001.
Yes, I tweak goldbugs.
Don't quit your day job...
Yes, it is possible to make money by buying gold and other precious metals. Do you consider it a "store of value"? Or is it a commodity that can go up and down?
Please sir, how much gold would you take for that fine shotgun?
Now really, there's no need to load it, I'll take your word for it that it works.
Uh, sir, you really don't need to point it in my direction.
Now really, let's be reasonable, I have all this gold and ....
I don't buy gold because I think it's pessimistic.
Don't like owning precious metals, either.
Still stretching to prove gold is a better investment than stocks?
I cleared out of both too soon but then better to sell too soon and take a profit than to hang on too long and get whacked.
Comparing the DOW and gold since XXXX is stupid, if you want real gains, you have to move in and out of stuff.
BTW, every instance you get to cite for golds poor performance is inevitably caused by government intervention to save their paper. Volker did most of the damage in the last breakdown in the 80's by jacking interest rates through the roof...
Contrary to what some have concluded, I favor real estate over gold or stocks or other things. It's real. It's not going anywhere. There is no more of it. Transfer of title takes a certain path, and one can rely on deed records to determine clear title.
Investment is like life. When you're 30, canoeing down the rapids sounds like fun. When you're 55, it sounds like trouble.
You feeling okay? You're making sense :^)
Some believe that gold will IN THE FUTURE preserve wealth better than stocks.
Yes, many confused people believe a lot of silly things.
You can disparage them as "gold bugs."
And I do. I'm going to buy some gold. As soon as they raise the dividend it pays.
Yes, a gold based currency makes it difficult for politicians to inflate the money supply. You don't think we should go back on a gold standard, do you?
Did we have less inflation/deflation while we were on the gold standard?
The dollar has lost about 98.5% since the FEDs inception and it's accelerating.
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