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.
If Iran does indeed follow though on their latest threats to use 'oil as a weapon' (as they have done previously) not only gold shall be rising further.
Dad & I currently own 16,000 oz. in silver. It's about $13/oz. right now, after a high of $15, but Dad is certain it will rebound and hit $30 eventually. It dipped due to people selling off at $15/oz. It's just considered cash; there are no trading fees, and we probably deal with the same guy you do, or another honest one like him.
Dad and I have been playing with commodities for decades and having a blast at it. I will say that silver has been much more fun (and lucrative) than pork bellies, LOL!
In fact, we've even got "She Who Shall Not Be Named" beat with her bogus (and most likely illegal, but she is above the law as we all know) Cattle Futures scamming. :)
I've been telling people for months to get in on this, but no one listens to me. (Boo-Hoo. We're cryin' all the way to the bank, LOL!)
I agree with his opinion making $30. And $20 by the end of this year.
The few folks in this thread who are referring to gold and silver investors as "ignorant"...are most likely your 'run of the mill' stock broker (frantic/pushy car salesman types - - so to speak ) - and these guys hate it when clients and potential clients invest in metals. Investing in the metals for short or long term means -a lot less money folks will have to put into the stock market ie. less commissions (less trading fees) for them.
People can feel free to call me "ignorant" if it makes them feel superior.
But what makes us feel superior is that educating ourselves about commodities has paid off in spades and is resulting in a secure future for Dad in his Golden Years that won't bleed me dry financially as I care for him. DH & I plan to retire before we're 55 so we can travel the globe with him.
Someone has to carry the suitcases, right? LOL!
Yes, right -with .999 pure gold and silver handles huh/ lol. Bttt
See especially, at the first link, "the ultimate standard of value" by Bohm-Bawerk.
In relevant part, first he shows that bare utility is not the source of value, considers the rival theory that cost is, then explains the marginal utility theory -
"Since of all the possible useful employments to which the good may be put, it is not the most important, but the least important, that a rational being would dispense with first, the determining utility is the smallest or least important utility among all the useful employments to which a good may be put. This determine its value and is called the marginal utility."
He then shows that marginal utilities themselves depend on costs which are not themselves fixed, but depend in turn on values set elsewhere. Costs are set by balancing real productive possibilities, in turn constrained by the whole productive apparatus of a society (its supply of labor, its existing capital, its willingness to save, etc).
Tracing how the demand for particular items drives the adjustment of the whole productive capacity, the conclusion follows that the utility of the last item of a good, to the least interested person who still wants it, balances against the alternative uses of the productive capacity needed to procur it, to any other person in any other role.
It is not remotely a simple question and all flip answers to it are incorrect, in material ways.
fyi
Thanks for a serious response and for the links. My own research has already shown it to be a very difficult question. I always consider the source and one of the flip "answers" came from an individual who is a legend only in his own overheated mind.
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?
Seriously, why are you so hostile to gold and those who think it makes sense to accumulate?
Your pleasure in annoying ("tweaking") others is not the answer I am looking for.
I think if you step back and look at those who frequent these threads you will see that those who advocate heavy investment in gold are dramatic in their insults of everyone who dares questions the value of gold as the primary form of investmnet.
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To: Beelzebubba
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!
186 posted on 06/01/2006 5:12:37 PM CDT by Axenolith (Got Au? Ag?)
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I would consider that a dramatic insult.
Here is another, same poster by the way.
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To: Toddsterpatriot
The dollar has lost about 98.5% since the FEDs inception and it's accelerating.
200 posted on 06/01/2006 6:00:52 PM CDT by Axenolith (Got Au? Ag?)
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He posits that the dollar has lost 98.5% due to the way he views gold vs. the dollar. I think that is dramatic.
Was that enough proof?
The Iran bourse is officially active, I think. It is, in and of itself, not that big a deal; it doesn't seem that the immediate business will have any serious impact only dollar hegemony. The importance of this bourse lies in the role it can play in the "death by a thousand cuts" scenario for the dollar. Various countries report diversification out of dollar-denominated assets; various entities are moving towards oil for euros instead of dollars. It appears to be a slow inevitable slide to a very different world for those holding dollar assets.
FYI, there was a new gold exchange opened in Dubai in the last year. Again, not exactly a challenge to the movers and shakers in London and NYC; but it's a step in a different direction, none the less.
Was that enough proof?
LOL
What are the Russians starting tomorrow?
"...will have any serious impact ON dollar hegemony."
Also, I don't see your reply / your redo of your figures yet PaleHorse -to my #256. The readers are waiting. Thanks.
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