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.
My reflexes and body are too slow when I'm SOBER to catch a falling knife. Thank God.
We do. That's our job.
It doesn't help the numbers any for the commodity in question to have been unconstitutionally declared illegal to own for approximately 40 of those years in there.
Also, the article mentione "periods of gold and silver mania". It's far more accurate to state that the world has historically viewed them as money with periods of "fiat" mania...
yep! If I were trapped on a island, then a pack of matches would be worth more than a crate of gold bars
Creating liquidity so the pros can get out at the top...
Look at the three month chart. Three months ago gold was at $540 an ounce. It rose steadily and about 1 1/2 months ago it rocketed in less that two weeks from $650 to a high of $716. The recent fall is merely a correction. Again, look at the trend. As of this morning, it sits at $631. A year ago gold was $419. Five years ago it was at $265.
First comes the pump, now comes the dump.
Don't call me Francis.
And if you touch my stuff I'll kill 'ya.
"Mister, we deal in lead." Steve McQueen
(Name that movie)
Tyco? The one with a $56 billion market cap?
Yes, which is why prudent invstors might have 3-7% of assets in gold, but certainly NOT 30-70%.
And they don't pay a dividend unlike many stocks like Altria, Bank of America, Pfizer, etc. Oh, yeah, Tyco did not completely lose value. Currently trading over $27 a share.
And the beauty of numismatics (rare silver/gold coins) is that YOU PAY NO TAXES when you cash in.
Goldbug and tax cheat.
"Tyco? The one with a $56 billion market cap?"
Ooops - not them.
That sounds just too familiar.
Fortunately, the close relative I sleep with loves her IRAS and 401k, which I manage with zero gold as per her wishes. She has one Krugerrand with a gold holder and a gold chain, which she wears. She had one Beanie Babie Doll and one Barbie doll which our grand daughter borrowed from her years ago. She also has a nice mink stole to go with her one St John's Knit Outfit with Gold Embroidery on the jacket.
Absolutely, that's why the cries of "fiat currency" ring false upon examination. The only reason anything holds value is because the reciever views it as something valuable.
If 10 cute baby bunnies were suddenly worth a brand new Lexus, there would be people complaining that that the cute baby bunnies are fiat cute baby bunnies because they are not back by gold.
"Goldbug and tax cheat."
Actually, for me it's silver and it's not a "tax cheat". No taxes due on collectibles. Educate yourself before insulting.
Definitely! One thing for certain, some of the best gear in the world was built for our military.
Just don't let the IRS know about it or how you got the money from selling it. Coins are specifically mentioned in the instructions for Schedule D for capital gains. They are even treated worse than stocks (28% vs. 15%).
"The Magnificent Seven" (But I had to google it to be certain)
How can a guaranteed store of wealth have a correction?
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.