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.
You? Your mother?
Come on, tell us the truth. You bought a million ounces of gold at $100 an ounce. And they liked you so much that they let you buy below spot.
Yeah, that's the ticket. LOL!
I bought stock and never got charged freight. If they stick you with a high enough mark up, they'll ship for free and laugh at you all the way to the bank.
But regardless, you avoided the math analaysis on the 50 krugerrands??
Sorry, I don't respond to every new claim made by silly goldbugs (that'd be you).
IF fatty boy in North Korea, fires that missile...watch gold go up...
you avoided the math analaysis on the 50 krugerrands?? Where's your 'redo' analysis??
But instead, we have our not so bright/astute analyst - - not wanting to discuss key elements in this investment thread. Very good oh so astute analyst Todd:
"I don't respond to every new claim made by silly goldbugs"
Then we have Todd here, scampering back with more of his oh so bright analytical mindset - not replying that he does not know who Louis Eliasberg was?
"You? Your mother?"
Todd, would you like to know who Louis Eliasberg was (so you can take his investment strategy into account - in this investment thread?)
Surely a good - and oh so astute self-proclaimed analyst would want the readers to see all of the information available - instead of childish replies "You/Your mother"?
I'm I correct oh so astute analyst?
Wow, over 1% markup is supposed to impress me?
not replying that he does not know who Louis Eliasberg was?
Don't know....don't care. Did he buy silver at $14.75 an ounce?
Surely a good - and oh so astute self-proclaimed analyst would want the readers to see all of the information available
If you want readers to see information about Louis Eliasberg, why don't you post some? How much more silver did you buy today? What did you pay?
And our oh so astute analyst, wanting/making sure - to cover every conceivable important fact in a discussion, comes back to all readers - with this:
"Don't know....don't care."
:*(
It appears you've become unstable momentarily and I'll not bother you again - until you are able to calm down. Sorry friend.
You keep talking to yourself. It's kinda cute.
Oh, you're back. Are you feeling better now? Did you find out who Louis Eliasberg was?
Handing out homework now? I didn't know you were a school teacher.
We'll, I see you are perhaps, not one of the truly bright analyst as you continue to avoid/evade pertinent queries and issues here.
Now good luck in your future and if you'd ever like to know more about Mr Eliasberg, drop me a ping. Take care.
Yeah, I'll be sure to let you know. Keep buying that gold and silver. Your dealer is loving your +1% commissions. LOL!
"Yeah, I'll be sure to let you know."
Oh so astute analyst Todd, wanting to make sure he has taken into account all pertinent information/variables - still hasn't bothered to do a quick google for Louis Eliasberg.
"Keep buying that gold and silver."
Oh so astutle analyst Todd misses again -the fact that for this year- I've stated that I'm already at my 15-20% for silver purchases.
Your dealer is loving your +1% commissions.
And now the 3rd strike for the Oh so astute analyst Todd -he didn't take into account and include in his equations - that when I do happen to sell my krugerrands from a year ago, the fact that I'll get about $2 above spot. Not much change in the equation, but should be included in any aspiring analysts' factual review.
Yep, that's our Oh so astute analyst Todd.
Yawn.
Gold back to $601 / Silver close to $11
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