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).
Its not time to buy gold when the radio is full of ‘buy gold’
pitchmen!
Not exactly. Post-civilization, it would be near worthless.
Food and weapons would be much more valuable.
I do have some physical gold in a lock box.
Mostly Krugerrands and Maple Leafs bought back when Carter was president.
I’m still waiting for my rate of return on those to go positive.......
If you had bought an equal dollar amount every year since then, you’d be impressively ahead.
Thank you. That, of course, is the point.
Additionally, the post mentioned something about gold not being a currency and unlikely ever to be one. Pure nonsense. Anything people want to hold and use as a medium of exchange is currency, and gold has traditionally been THE currency of choice. People want to hold gold precisely because they know that paper is worthless.
There was some further nonsense about buying stocks of companies that are "price makers." This comes from mainstream (i.e., neo-classical) monopoly theory: there are, according to this view, "price makers" and "price takers." But economist Yale Brozen studied these companies and found that, in the long run (even after a period of a few years) "price makers" moved toward average profitability and became ordinary "price takers" (while less profitable, less efficient companies moved up toward the middle and became more profitable, more efficient "price takers")...that is, they all wind up as "price takers" as competition moves in and starts eroding their profit margins. What the article really means, I suppose, is that you should look for the hot new stock of the latest entrepreneurial wiz-kid company like Microsoft in the 1980s. Great advice. The problem is in recognizing these companies before they become well known and being able to guess correctly what consumers want. No easy task, and I don't think professional investors have any better track record at it than non-professionals.
Not really. Barter works, but the whole point of currency and coinage is to make transactions more liquid by not having to negotiate a wide array of divergent wants. Unless you believe that a post-collapse society is more or less stuck in a primitive late-nineteenth century lifestyle forever. If not, then you’ll have to have some sort of value holder for complex transactions but none of the other barter goods you mention have any serious monetary qualities.
You do understand the concept of multiplication right? That if y=a*b, and if "a" goes down while "b" goes up by the same factor that y is the same?
Where I’m going we’ll be the ones doing the melting for ya.
I thought gold peaked at $850 during the Carter years, and at today's $1000, you should be positive.
Considering the Constitution gives the States the right to coin money in gold or silver, they should.
The Constitution was written in parts and pieces then pieced together, hence we see the federal government also given the right to coin money but not just in gold or silver. Our founding fathers never intended anything but gold and silver backing as they knew the pearls of fiat currencies.
There's been a lotta compound interest missed since 1980
“but none of the other barter goods you mention have any serious monetary qualities”
If you think fuel doesn’t have “serious monetary qualities” you must not have lived any where near Houston post-hurricane.
Guys with bottle trucks who drove to Houston made $20/gallon.
“But economist Yale Brozen...”
No offense to him or anyone else trying to make sense of the markets, but the markets are completely manipulated. The only thing that makes sense of the market is to study is robbery, fraud, deceit.
We do not have free markets, we gave government sponsored organized crime.
You didn’t answer her question.
If our $’s are worthless or will be, why do gold merchants sell gold for $’s.
She understands merchants and wants to own her own business.
We own some Gold via our IRAs and otherwise.
I think her question re that ad is a valid question.
Accounting for inflation I believe that $850 is somewhere around $3,000 in today’s dollar.
“why do gold merchants sell gold for $’s.”
To buy more gold. They buy low and sell high. While the FRN is still valid they can continue to build their wealth that way. It’s not so hard to follow.
Re the Braille Dots at the drive thru ATM.
About ten years ago, I drove my OJ Simpson Bronco to a truck ATM in Brookings, Or.
I noticed the Braille Dots and buzzed the people in the bank and asked why.
A nice lady asked me to come in and ask my question.
My wife and I went in and the lady asked me to repeat my question. I did. I won a nice little cash pool ponied up by the employees for the first person to ask that question.
My next two questions were how long had the Braille Dots been there and why.
1. They had been there over 3 months, and no one had ever questioned why.
2. The state of Oregon in its wisdom had made that law for all ATMs / walk up and drive through.
In constant dollars?
You are of course 100 percent right. And for the same reason, buying a bunch of gold right now may not be such a great idea.
First off fuel is a consumable, once it’s used, it can’t be used again...earlier in the thread someone posted basic requirements for a hard currency unit. I won’t repeat them here but I’ll leave it as exercise for the reader to find the post and figure out how fuel fails as a serious currency unit. Especially given that post describes why oil doesn’t work as a serious currency unit.
Exactly the point. In your equation, 'y' is the amount of stuff you can buy with your dollars, 'a' is the amount of dollars you have, and 'b' is their worth. As 'b' goes down, 'a' must increase to keep 'y' constant. Let's say that you buy $1000 dollar worth of gold today, instead of a $1000 worth of appliances. At some time in the future, you sell that gold for $2000 dollars. On paper, you just doubled your money. But, when you go to buy those same appliances, the price has doubled because your new dollars are worth half as much. The price of the gold wasn't what changed; gold is a constant. It was the price of your dollars, measured in gold, that changed.
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