Posted on 07/17/2010 7:01:25 AM PDT by SeekAndFind
I've been bullish on gold in varying degrees since 2001. Since then, the price has quintupled -- from about $250 an ounce to as much as $1,250. Over the same period, stocks show a net loss.
And yet we still hear from some commentators that gold is a bad investment. Not just because it's gone up so much that maybe it's not positioned to go up more. That, at least, I could understand as an argument, though I disagree. I hear over and over that gold is always a bad investment, no matter what, when or why. In a nutshell the argument is: It's just a lump of metal, so why should you invest in it?
Self-evidently this isn't true. It's been one of the best investments you could have made over the last decade, as I just explained. It's also been one of the best investments you could have made this year. Stocks are off for the year, gold is up. In fact gold made all-time highs this year.
Yet plenty of people who are otherwise moderately accomplished investors just don’t get it.
Take James Altucher. He's one of these guys -- like me, I suppose -- who pops up online and on CNBC with some frequency offering his latest views on markets and the economy. James is a decently bright guy, at least when it comes to inventing interesting little short-term trading strategies. I once very favorably reviewed his book about that in this column, several years ago. I consider him an acquaintance, if not a friend. But his latest pronouncement on gold, issued from the lofty pedestal of The Wall Street Journal's "financial adviser" blog no less, is so mind-bogglingly wrong I scarcely know where to begin.
For James, gold is "basically a worthless rock that has a net negative return as an investment." His proof? He cherry-picks a couple of time periods in which gold underperformed stocks -- starting with the most unflattering period of all, the one starting from gold's previous all-time highs in January 1980. No mention of how gold's returns have simply obliterated those of stocks over the last decade. Silence on that.
James claims that since 1800, when gold was valued at $20 an ounce, its return has worked out to only 2% a year. He doesn't offer a competing return for stocks on anything else over the same period (perhaps because he doesn’t know). And he doesn't mention that over the vast majority of the 210 years since 1800 gold was effectively money, and so should have had a low money-like return. But he does transform that 2% return into the claimed "net negative return" by saying you have to "[s]ubtract out the costs of mining."
I've heard talking heads say some dumb things about investing, but are you kidding me? Surely James knows that in order to invest in gold you don't have to mine it. You simply buy it. Today it costs about $1,200 an ounce. Did I mention that's quintuple the price of 10 years ago?
James goes on to comment on gold's use as an industrial metal. He claims that "silver has the same uses" and yet is cheaper, which is "why the world gold supply keeps going up." He doesn't finish the thought, so presumably it's self-evident to him that it would be wrong to expect rising gold prices in the face of rising supply.
To put the cost in perspective. They need .3 Grams to buy a loaf of bread. At Today’s price of Gold (March 12, 2009 $923.73 / Troy Ounce) .3 Grams of Gold = $8.91. They are paying $8.91 for a loaf of bread plus a days labor to pan for the gold.
That's less ambiguous than mine, indeed. I was trying to describe places like Blanchard and Goldline as well as individual coin shops, rather than a guy selling a coin to a pawn shop. That opposite side of the transaction is included in the perfectly contradictory "cash4gold doing good business".
I hope that one of these days I see both of those objections in the same article or thread comment.
That’s an absolutely excellent economic observation / calculation. Their net expenditure for the day is “only” the labor to get the gold.
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