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.
Well, then I suggest you put all your money into gold. I'll stick to stocks that can increase their earnings and dividends.
You don't have to be a multi millionaire to laugh at ignorance.
More silly anti-gold rhetoric. You don't need to put everything into gold to recognize that it has never gone bankrupt.
You don't need to put anything into gold to recognize it has never gone bankrupt. Philip Morris has never gone bankrupt and pays a 4.5% annual dividend. What do I win?
Philip Morris has never gone bankrupt and pays a 4.5% annual dividend. What do I win?
You feeling okay? You actually said something I can agree with.
There are scenarios where gold would be better than PM.
Sure, but Philip Morris pays you to wait. How much does gold pay you?
Philip Morris was never confiscated by FDR.
Yep, now it's more then obvious...what we have here -sparring with us- is an aspiring stock broker - scrambling to sway public opinion of those who might want to try to make a some dollars in gold or silver - while needlessly, publicly whimpering/fretting about a loss in his future commissions.
When did you admit that?
But Todd, it's O.K. - it's not a total loss for you, I do have a solid portfolio in stocks. (but only 15-20%)
(awaiting your replies after you leave Merrill [or whatever] later today, heh)
admitted that I owned a successful coin business
hmmm, not as astute as I thought Todd, you have neglected to find/hunt for the silver thread here-that's been ongoing for over four months - - -
Sorry, I don't watch every silly goldbug thread. My first experience with you was your panty-in-a-wad reaction to my goldbug taunts. Which you answered with your big profit (hehe) silver trading history.
Nope. I have my Series 7 and am also a Registered Options Principal (Series 4). I've been in the Securities Industry since 1984. I have never solicited customer business and have never received a dollar in compensation from commissions.
I'm currently a financial analyst on the buy side. It's kinda funny that a coin dealer who charges 1.8% commissions on bullion, I know your markups on coins are much higher, wants to criticize stock brokers who charge much lower commissions.
absolutely too funny/very astute, very, rofl
So, tell us, is this the same as being a: silly analyst?
Let me do some- analyzing and let me specifically analyze - how you missed the important numbers/facts - in an easy to comprehend scenario:
I just stated above that I purchased 50 krugerrands with gold bullion at $418 and I paid $423 for each of these krugerrands. Grab your calculator and analyze properly - - - what is the commission? (ahhh, not 1.8%)
(and of course, when I do sell them to my coin dealer friend, he'll most likely give me about $2 over spot)
[here we have an "analyst" who flunks out - on easy math???]
Back to the drawing board n00b.
Btw, it's indisputable, that historically - investing in rare coins has out performed every other long term investment - of any kind. Todd, do you know who Louis Eliasberg was?
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