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.
Yes, however in the scenario stated the monetary system has collapsed. Money will be worthless as will gold. You may find someone to exchange food or necessities with you for your gold but I would say you would do much better investing in steel and lead from Sam Colt's outfit or from the manufactures like Ruger and Remington. Because you can have all the gold in the world but if the system has collapsed then there will be no law enforcement to protect you and your gold.
Any how if we collapse down to that level you may as well be on a deserted island in fact I would think your chances of survival in those first few months would be greatly increased by being isolated.
Nice dodging of the issue there loser. I don't trust the government.
Then again, your aggregate of Americans (most present company excepted) put people like Lyndon Johnson, Jimmy Carter, and Bill Clinton in office along with managing to keep folks like Kennedy, Feinswine and Boxer et. al. in for decades.
If you want to stick your head in the sand, feel free...
Each currency has it's own set of value and at this point in time, bucking World History, the non-gold or silver based U.S. dollar is the most sought form of currency on the planet.
For the time being it is. The average survival time post gold decoupling is 32 years for a currency and we are just coming on 33. You care to make a wager on it lasting out more than say, 7-10 more years?
Interesting stat. Do you have any back up? Or was it just something you saw on a goldbug website?
No offense. I just had the image of an extreme hard core survivalist in my mind. Some of those folks are way out there. The basic concept is fine. I'll change the wording from " unibomber style forest enclave" to "well-stocked sylvan retreat" :)
A shocking and underappreciated fact.
My grandfather left my father a $100 a month annuity around 1920. A few years ago when my dad passed away, he was still getting that $100, but the inflation adjusted value would have been in the thousands. Too bad that annuity wasn't denominated in gold instead of dollars.
That bit of government theft, multipled millions of times, financed the welfare state and many a reelection campaign.
I guess that depends on how you feel about the massive capital account surplus, government deficits that, as a percentage of GDP, are less than they were under Reagan and a household net worth (that's assets minus debt) that has more than doubled since 1995, and now stands at a record $52 trillion. It's hard to claim we're mired in debt with our net worth growing so rapidly.
suspect that foreigners will tire of keeping their trade balances in US Treasury securities
The fact that all this capital is flowing into the US is a crystal clear market signal that our economy is solid and is presently the best place to invest. Money flows to where it's treated best. What else are they going to do with their dollars? Where else will they invest? China? Japan? The EU? Those are not places I'd be investing but to each his own.
Did you hear about this?
http://www.progressiveu.org/172935-how-low-will-the-dollar-go
Just a 'bit'. That's sad.
IMHO gold will be close to $1000 oz by the end of this year and silver will be at $19 - $20 an oz.
Agree.
Hmmm, let me see now Todd. Over the past five months I have purchased/taken delivery of - 3,000 ounces of Englehard .999 silver bars at $8.50 and another 2,000 ounces of Englehard .999 silver bars at $11.45. Then another 300 ounces of Englehard silver bars at $12.50 and lastly, another 500 ounces Englehard @ $14.75.
Todd, I still have all of my above silver bars -do the math please; how am I doing/ how ingnorant am I?
That's a return on investment of anywhere from 4.4% to 12.8%, before inflation. That ranges from "not great" to "Pretty good."
Now, let's hypothetically take this to $20 an ounce. That $116,000, minus $11,600 in trading fees to $104,400, minus capital gains taxes to $75,168. Respectable return, there.
But if silver doesn't do what you expect it to do--the extremely high inventories on hand indicate that this is a speculative bubble--before you sell, then you wind up having spend $59,525 to get 5,800 ounces of a metal that needs frequent polishing...
Possible, in the case that the price of gold in Euros, Yen and Pounds remains about what it is today.
I'm sorry Pale Horse, but you'll have to redo all of your above figures.
Since I purchased all of my silver bars from a coin dealer, there were/are no trading fees. To clarify a bit more, let me use for this illustration -my first 3,000 ounce purchase (this past late January I believe it was).
That morning, I called my friendly coin dealer (who has been in business since 1978) and that particular day when I confirmed those three 1,000 ounce bars (.999 pure silver weighing approx. 65 lb each) -he said silver was at $8.35. He then said he would charge (fees, as you call them) fifteen (15 cents) over spot. So, $8.35 plus his .15 cents put the three 1,000 ounce silver bars at $8.50 even/per ounce. (no other fees and of course, no sales tax of any kind is required).
Now, I already knew the answer to my next question (roughly) -but since you don't know - I then asked him - how much under spot will you be quoting me when I want to sell these three bars. He said that typically he will quote .20 cents off/under spot.
And btw, I was in the numismatic business (coin dealer) for eleven years, so I am familiar with all of the above selling/buying of metals/coins.
[as we all now see Pale Horse, the fees -as you call them- are only about two percent (2%) - and not 20%]
Pale Horse, for the benefit of all readers, will you now kindly take the time to -redo your figures- and see what you come up with. Thanks.
"Silver shines but equities decline (Silver breaks $10/ounce! 22-year high!)"
http://www.freerepublic.com/focus/news/1588981/posts?q=1&&page=251
Not to 'beat a dead horse' so to speak, but I just noticed your above. This "return"...if I sold all of my silver tomorrow (Monday) - would be for a time period of five (5) months - not one year. :)
Yes, I see what you mean/bttt.
It's pleasant Sunday afternoon; awaiting your reply?
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