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.
That's the fact, Jack!
Damn, beat me by 10 seconds.
Hopefully by the time I sell them (YEARS from now), there will be no IRS!
"My reflexes and body are too slow when I'm SOBER to catch a falling knife. Thank God."
This gal is a real blonde with a great sense of humor. When she heard what the ER doc said, she called him up asked if it would help if she wore a wig with dark hair in the kitchen. He had to hang up due to a severe laugh attack. His wife is a real blonde who should never have anything heavy or sharp in her hands.
Maybe because it is traded in a free market made up of human beings - we are talking about the spot price.
“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”
Bad argument…the world population is also up many, many times as is the industrial demand for such metals.
It also does not credit world situations or individual perceptions as having any value. Gold is way down today, about $100 from a month ago, BUT, it is up $200 from a year ago.
I personally like the idea of gold dropping a bit…I hope to buy another few ounces over the next couple of months before I stop buying regularly.
Needless to say, I didn't marry her for her brains. Now I'm beginning to wonder about mine............
I stand corrected.
Gold Silverbug and tax cheat.
"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%)."
Another myth has been destroyed by KarlinOhio.
One thing that this article does not take into account is that the % of wealth accumulated by Asia's newly prosperous countries stored as gold will be much higher than it is here in the United States. The cultural tendency on the part of Indians, Chinese, etc to accumulate a familial gold holding is no less today than it was in the past...so I suspect that the demand for gold will increase disproportionately to what the world is accustomed to seeing.
The Magnificent Seven. My third favorite McQueen movie behind The Great Escape and The Getaway.
Or maybe because it really isn't a store of value?
Yep!! No doubt!
That's right...Gold is always worth something...Stock is sometimes worth nothing...
Yup!
But I'm inclined to think you may never see 500 dollar gold again.
Stopped at a garage sale yesterday, bought two large size serving spoons, I could tell by the tarnish.
Reed and Barton.
Total weight 145 grams, about 4 3/4 troy ounces.
.925 AG.
55 dollars or so of silver.
Total cost: ten cents
;-)
Absolutely, that's why the cries of "fiat currency" ring false upon examination.
Really, so if I have a printing press and you have a hole in the ground, you can extract metal and turn it out as money as fast or faster than I can roll it off the press in paper?
The issue is fiscal DISCIPLINE and that's what PM based monies confer.
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