Gold ready to crash?

Market Watch.com ^ | Jun 1, 2006 | Jesse Czelusta

[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.

[Harmless Teddy Bear]

Doubtful, a very wise man taught me along time ago that you can truly measure an item's worth by subjecting it to the "deserted island test" if it would be useful on a deserted island to survive then it has "real value" , otherwise any value associated with an item is subjective at best.

Very true. If there is a total collapse then the metals like steel, lead and copper are valuable.

Precious metals are precious only because we make them into pretty trinkets.

Should that time ever arrive you could offer me pounds of your pretty metal for my hoe and I would not trade.

[Toddsterpatriot]

Yeah, that's fascinating. I don't suppose you can answer my questions?

[Axenolith]

Yes, on the bi-metalic standard and they tended to be localized. The only instances (Pre FED) where you had inflations in backed money, it was local to significant easily worked placers and it generated temporary monetary expansion in excess of available goods and services in that area.

While we were still under the "standard" under Bretton Woods, they FED printed money to excess and people like the French saw that as an open invitation to get while the getting was good. That's why Nixon closed the gold window...

[Axenolith]

Give a person some time. Do you put that question in all of your debates to lend an air of "I'm winning" to them?

[Toddsterpatriot]

Yes, on the bi-metalic standard and they tended to be localized.

So you think we had less inflation? What about deflation?

That's why Nixon closed the gold window...

Yes. So do you think we should go back on a gold standard now?

[Axenolith]

You'll probably get my next replies after I get home, and have spent some time metal detecting, so don't go and get a hard-on that I've run off...

[Toddsterpatriot]

Give a person some time.

Sorry, thought you were answering post #199.

[Axenolith]

One more...

Cool, I'll slow up too. Catch you in a while...

[roostercogburn]

I just feel that in a world of competing currencies (dollar, euro, yen, yuan), the only thing countries WILL agree on is the certain value of gold.

The days of the dollar as the most sought currency are over. What exactly happens next is unknown. As such, I will be holding the gold I have, and purchasing little bits at a time as the prices fluctuate around the current ranges.
But I sense alot of hostility from people who do not own gold. Why?
There may have been alot of stocks that have done better over the last 30 years, but how many sons and daughters have opened their parents safe deposit boxes after they have passed and found worthless stock certificates?
But right beside that stock certificate was a few stacks of one ounce gold coins.
Gold may be many things, but worthless will never be among them.

[Toddsterpatriot]

The days of the dollar as the most sought currency are over.

What currency is more sought than the US dollar?

But I sense alot of hostility from people who do not own gold. Why?

I think it's because people who own gold, or claim they own gold, say silly things like, "Gold is a store of value".

Gold may be many things, but worthless will never be among them.

That's right, it makes pretty rings and the fillings work pretty good too.

But right beside that stock certificate was a few stacks of one ounce gold coins.

I'll take the Philip Morris certificate next to the gold coins.

[palmer]

That gold money declined about 13% in the last 3 weeks. Do you consider that a store of value?

Gold and silver are being speculated on, they went up unsustainably earlier in the year.

[palmer]

I think it's because people who own gold, or claim they own gold, say silly things like, "Gold is a store of value".

I keep an ounce at work to show to silly people who believe that paper can hold its value. Over the very long run, gold will always hold value and paper will always become worthless. There are no exceptions.

[ol painless]

"Not as much value as guns and gasoline."

True, which is why I am well supplied with a variety of firearms.

[ol painless]

"Doubtful, a very wise man taught me along time ago that you can truly measure an item's worth by subjecting it to the "deserted island test" if it would be useful on a deserted island to survive then it has "real value" , otherwise any value associated with an item is subjective at best."

Something to consider. I guess on a deserted island you could at least burn paper to start a fire.

[ol painless]

I like your idea! I will have to tell this to the wife whenever I buy another gun, or more ammo.

[Toddsterpatriot]

I keep an ounce at work to show to silly people who believe that paper can hold its value.

Who said paper held it's value?

Over the very long run, gold will always hold value and paper will always become worthless. There are no exceptions.

I hold my paper as shares of Altria. It pays a higher dividend than gold.

[roostercogburn]

Yeah, well how about Braniff stock? Or Eastern Airlines? Or Enron stock?
It is so easy for you guys to pick in hindsight stocks that have done well.
If someone had stock in the above mentioned companies, how much are ANY of them worth now? But the gold would still have value.
If you guys do not like gold as an investment, do not buy it. If you do, buy it.
This thread is not anything but a pissing contest between those who enjoy owning gold and those who do not. Unbelievable. Can a reasonable discussion be had here anymore?

[1rudeboy]

Sometimes, when someone writes something along the lines of "There are no exceptions," it is necessary to identify an exception.

[Toddsterpatriot]

Yeah, well how about Braniff stock? Or Eastern Airlines? Or Enron stock?

I'd suggest you not buy those stocks.

It is so easy for you guys to pick in hindsight stocks that have done well.

It's so easy for you goldbugs to talk about how you all bought it at $270, how come no one ever admits to buying it for $700 in 1980?

If you guys do not like gold as an investment, do not buy it.

I won't.

Can a reasonable discussion be had here anymore?

Apparently not.

[palmer]

It's so easy for you goldbugs to talk about how you all bought it at $270, how come no one ever admits to buying it for $700 in 1980?

I sold my gold in 1981 at a nice profit. But I needed the money for college. Sold some of my stamp collection too.