Posted on 09/10/2009 8:31:10 AM PDT by SeekAndFind
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head. - Warren Buffett
The reasons why one should sell the cat, pawn the mother-in-law, and use the proceeds to buy gold are well known: the Fed is printing money faster than you can read this, which will result in inflation; the government is borrowing like a drunken monkey, so the dollar will be devalued; this will debase all currencies, so the only thing that will save you is the shiny metal.
However, here are some arguments why one should think twice before jumping in bed with gold bugs, or at least remain sober while determining gold’s weight in the portfolio .
1. For investors (not speculators) it is very hard to own gold, because you cannot attach a logical value to it. Unlike stocks or bonds, gold has no cash flow and has a negative cost of carry – it costs you money to hold it. It is only worth what people perceive it to be worth right now. The argument I commonly hear is, “What about all those Enrons, Lehmans, Citigroups, etc. that either went bankrupt or got near it? What was the value of those?” If the lesson learned is not to own stocks but to own gold, it is the wrong lesson. The lesson should be: own companies you can analyze (the aforementioned companies were unanalyzable) and diversify – don’t put your all net worth into one stock.
2. The gold ETF SPDR Gold Shares (GLD) is the seventh largest holder of physical gold in the world. If its holders decide to sell (or are forced to sell; think of hedge-fund liquidations), who will they sell it to? This is extremely important, as the presence of GLD changes the dynamics of the gold price, both to the upside and downside. If gold keeps climbing, the ease of buying will drive gold prices higher than in GLD’s absence. In the event of a significant sell-off, there are not enough natural buyers of physical gold. It is a bit like a roach motel – easy to get in, hard to get out.
3. In the past, gold had a monopoly on the inflation and fear trade. Not anymore. Now you have competition from Treasury Inflation-Protected Securities (TIPS), currency ETFs, short US Treasury ETFs, government guaranteed/insured FDIC checking accounts, etc. TIPS suffer from the flaw of the CPI being measured and reported by the US government, which has an inherent bias to understate inflation; returns of commodity ETFs are skewed by price differentials between financial derivatives and spot prices of underlying commodities; returns of leveraged ETFs diverge significantly over the intermediate and long run from the underlying index; FDIC reserves are being depleted with the every-Friday-night bank bailout (but believe you me, the US government will not let FDIC go bankrupt, even if it means it has to raise taxes and impose draconian fees on the banking sector).
The bottom line here is this: none of these investment vehicles are perfect, in fact many have significant flaws; but despite their flaws they attract money away from gold, thus undermining gold’s monopoly on the fear/inflation/currency debasement trade. (I’ve discussed it in greater detail in my book).
4. If, because of points 2 or 3 above, gold fails to perform as expected, the perception of what gold is worth may change dramatically.
5. Over the last 200 years, gold was really not a good investment. It may have a day in the sun, but it may not. And the cost of being wrong is fairly high.
Though gold bugs make it sound as such, gold is not the only and not the best alternative if the worst fears come to pass. The best way to deal with the risks of dollar devaluation and high inflation – with a much lower cost to being wrong – is, instead, to own stocks of companies that have pricing power of their product. When inflation hits, they will be able to raise prices and thus maintain their profitability. Also, companies that generate a large portion of their sales from outside the US will benefit from the declining dollar.
Gold bugs look at gold as a currency, but it is not one and unlikely to be one in our lifetime. Here is why: there is not enough of it around, so even if world government were to adopt a fractional system (currency in circulation as a multiple of gold reserves), they will never go for it, because central banks and governments will never give up their monetary tools – inflation is a very addictive tool to fight growing monetary obligations.
There is a wild card in the price of gold, though: China (John Burbank made that argument at the Value Investor Congress in Pasadena). If it decides to switch partially from owning US Treasuries to owning gold, the price of gold will skyrocket.
-- Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007).
Couple of nukes is all it would take.
Let’s see now, many of us bought Gold at less than $400 and silver below $10. Silver at $16 and Gold at $980. Not bad, even considering the loss in spot versus paid price.
Same tired arguments I’ve been reading since gold was below $300. They pull these out every time the gold shorts get nervous.
Very true. The metals gold and silver have industrial uses which the anti-gold, pro-stock market salesmen fail lie and say it has no value because it has no use.
“Couple of nukes is all it would take.
“
Having a background in nuclear warfare, I’d say your wrong about that one. What has been learned will not magically be forgotten once a nuke blows. There is no “blow us to the stone age” result.
"Not this $*&t again." ;-)
Free investment advice is worth what you pay for it aways keep your back to the wall and never bend over.
lol! perfect!
the value of currencies is nominally determined by the interaction of electrons, ultimately by the tax-generating power of the nations. In the first instance a power-outage is enough to reduce all accounts to zero, in the second, an honest reckoning of net worth will due it.
Yes, "nothing is done" with gold, making it the perfect store of value -- for a consummable commodity wouldn't do for that purpose.
It is the ultimate destination of any "flight to quality."
Until a loaf of bread becomes more valuable, that is.
From one twilight zone fanatic to another ... yes I do realize it ... and the concept is just as valid in reality as it was in the zone scenario. That quart of water is worth more than it’s weight in gold
A handful of gold coins and a case of spam works for me.
“(All with receipts and withdraw receipts, too, in case some idiot ATFer in the current day decides to presume it’s drug money.)”
Documentation on my legal ownership of a firearm won’t stop confiscation without representation. Best case is completely stashing cash/gold/silver/guns/ammo out of the prying eyes of government intruders.
The rule of law is only as good as who has the best aim in a given moment. Hesitate on the draw and you have been robbed.
Thanks for your post. It has generated a good discussion.
I believe it is better to view purchasing of gold (and silver) as a form of savings rather than an investment. It is no more than a store of value. The US dollar has fallen substantially over the last eight or so years and to a remarkable extent (90%+) ever since the establishment of the Federal Reserve. Precious metals offer an individual protection from the debasement of a fiat currency.
Where I'm going, the streets will be paved with it.
How many rifles do you need?
By the way, how big does a gun safe have to be to hold 10,000 rifles?
Reminds me of my daughter when she was about ten. We drove up to an ATM to get some cash and she asked, "Daddy, why do they have those little bumps on the ATM buttons?"
I explained to her that they were Braille so blind people could use the ATM.
She just looked at me with a puzzled expression and said, "Daddy... I know that, but this is a drive-thru ATM!"
We need more ten year old logic in this country.
I had a suprise this morning.
I went to Wal-Mart today and I usually get their brand of bean & bacon soup for $0.68 a small can. Today it was priced at $1.08 a can. I looked up the manager an asked him if there was a mistake...he said no, prices are going up. I said $0.40 at a time. He shrugged his shoulders and walked off.
My point is, beans and bacon soup have been a better investment (I have lots of the $0.68 soup in storage) than my gold or silver...so far.
Then she asked, “If the $ is no good, why do the people selling their gold want dollars that are not good for their gold?”
But at least this childish view of economics is coming from a child for a change.
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.