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.
http://www.pcha.gov/goldtrainfinaltoconvert.html
I don't know what has become of it; but as of 2004, the victims have received a settlement.
December 21, 2004 The federal government settled a lawsuit with 32 retired Miami Jews, regarding a legend about a trainload of gold, jewelry and other property, supposedly stolen by US Generals.
I am led to believe the new CEO from Goldman Sachs is worried about US exports and will let the Greenback slide.
Hope I'm right..:)
You're absolutely correct. I've noticed over the years that when the business channels fill up with BUY GOLD ads, the market is getting ready to peak and the smart money is trying to dump. When you can't find a BUY GOLD ad to save your life, the smart money is holding in anticipation of a run up in prices. If you have the nerves to play it, you can take advantage of millions of dollars of research and insider knowledge at the cost of a few magazines.
Pretty crappy, especially when FDR confiscated it (Unless my grandfather had been smart enough to hide it in the basement instead of obeying St. Franklin and turning it in).
That's where I get all my information. Users of that site are like the Marine Corps. The few, the proud.
bump
"When I hear these "BUY GOLD NOW!" commercials, I would Run, not walk but Run in the opposite direction."
Or when Time and Newsweak run a cover story on Gold re its great value.
A close relative of mine that I have been known to sleep with from time to time, has packed away several hundred dollars perhaps more than a thousand dollars worth (cost at time) of beanie babies that are just in pristine condition.............but don't put that money in a 401k plan, it's too risky............
Like you I have added some lead to the inventory os semi precious metals...including 9MM, 5.56MM, .45 Cal, etc.
Ammo boxes from the nearest Army/Navy Surplus place are the greatest containers ever, IMHO.
Granted, I am not a doom and gloom kinda guy...but...you really cant ever have enough ammunition, especially if you go to the range a lot...or feel the prices of ammo may go up, like it has to .45 and 5.56MM...
Mmmmmmm, rotten meat.
Amazing conclusion! Who made it?
Let's try again;
It can be a useful asset if governments inflate the fiat currency.
A guaranteed store of wealth that dropped 13% in a few weeks? That's funny!
I agree. Lead is always a good investment. The really important metals are measured by the grain, not the ounce.
Precious metals never completely lose value, unlike many stocks, like Enron, Global Crossings, Tyco, etc.
And the beauty of numismatics (rare silver/gold coins) is that YOU PAY NO TAXES when you cash in.
"I'll wait for it to crash and then show signs of life. Don't like to catch a falling knife.'
Over the holidays, a friend got one of the new really sharp Japanese Chef knives, it slipped out of her right hand. She grabbed it on the way down with her left hand for just under 50 stiches.
The local ER was doing some study on these knife hand injuries during holiday seasons, and they ran an alcohol/drug screen free of charge. When it came back negative, the Er doc told her family doc, our friend might want to have a glass of wine before using her new knife. That way if she dropped it, her reflexes would be too slow to catch the knife. Then she could wear steel toed boots in the kitchen.
Don't tell TP that..
Isn't that true of everything? What creates value? I'm trying to write an article on that topic and can use all the good input I can find.
Great suits.
I wonder if anyone has tracked the price of Armani Suits versus Gold in the past 3 decades.
Relax Francis. I'm tweaking the ignorant goldbugs. It's obvious you are neither. I know what inflation does to hard assets.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.