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Confessions of a Money Manager: Gold isn't a Glittering Investment
Madistan.com ^ | July 25, 2008 | Ray Unger

Posted on 07/25/2008 2:10:29 PM PDT by Diana in Wisconsin

Confessions of a Money Manager: Gold isn't a glittering investment

Ray Unger — 7/25/2008 12:13 pm

Have you heard those clever spiels on the radio coaxing us to buy gold in lieu of common stocks that can go to zero? Are they true? Yes, in a way. But sometimes the truth is mixed with a bit of chicanery.

Those gold ads remind me of a funny golf story. Ben Hogan is about to play an approach shot to a green fronted by a yawning pond. He asks his caddy what club he should use.

"I caddied for Sam Snead yesterday, and he hit an eight iron," quipped the caddy.

So Ben takes out his eight iron and smacks the ball right toward the pin as if it had eyes. But instead of coming down near the hole, it falls short and plops into the water. Ben turns, glares at his caddy and barks, "Are you sure Snead hit an eight iron?"

"Yup," quipped the caddy. "And he hit it in the water, too!"

Sometimes caddies, and as we'll soon discover, advertisers, leave out a few "minor" details when they tell us things.

First, let's talk about those common stocks that go to zero. Yes, some very high-profile companies have bitten the dust; Enron, WorldCom and a few others nose-dived when the tech bubble collapsed. But should we assume all common stocks have the potential to go to zero? That's like saying there are some dangerous people living in Madison -- we have had a few homicides recently -- so we'd better all pack our bags and get out of town.

Yes, common stock prices fluctuate, but those that go to zero are quite rare. In fact, investors who opt for owning an index like the Standard & Poor's 500 shouldn't be concerned with such possibilities. The way the S&P 500 is constructed mitigates these potential losses. The S&P 500 is composed of 500 large companies and is weighted by the market capitalization of each. The largest companies therefore represent the greatest share of the index. As such, when the failing companies fall in value they represent less of the index. When they hit that magic zero mark, their loss in the S&P 500 is quite minimal. Yes, the S&P 500 did lose when these companies went bankrupt, but the loss to the index holder was minor compared to those who owned the stocks outright.

Another claim in the ads is that the performance of gold far outpaced the stock market. Here again, that's quite true if we look only at the last eight years. The new millennial period began with the worst bear market since the Great Depression; from 2000 to 2002, the S&P 500 lost 38.6 percent of its value. It took from 2003 to 2006 for the S&P 500 to just recover from that steep loss. On the other hand, from January 2001 to the present, gold has been on a tear. It was under $300 an ounce back then and marched up to almost $1,000 earlier this month. As of Friday, it's about $927.

So should we jump into gold?

Before we do that, we need to understand a few basics about owning a metal. First, it doesn't pay any dividends. And unlike common stocks that currently don't pay dividends, gold will NEVER pay a dividend. That means investors in the shiny metal need to see prices rise to earn a positive return.

Second, the price of gold doesn't just go up. In fact, it can be quite volatile. Here is a link to a 30-year chart showing the price of gold supplied by Goldprice.org (goldprice.org/30-year-gold-price-history.html). As you can see, gold leaped in price from 1977 to 1980 only to fall back over the next 20 years.

In essence, gold is a speculation. It pays no dividends and its price gyrates wildly. If you compare the price of gold to the S&P 500 from 1980 onward, stocks won by a landslide. Even certificates of deposit beat gold. If you must own gold, at least buy a mutual fund like First Eagle Gold Fund (FEGOX $24.52). It pays dividends because it holds shares in gold mining companies that pay dividends.

Gold does have a glittering color, but as an investment, it's not that shiny.


TOPICS: Business/Economy; Culture/Society
KEYWORDS: ads; gold; goldbugs
Gee, thanks, Ray! I've done better with my gold and silver than even Hillary! did with her cattle futures. *SMIRK*

Wonder if Pelosi, et al will call me up to Capitol Hill to testify. I mean, I AM an Evil Speculator, LOL! Good thing cars don't run on gold.

Note: Ray is an investment broker. Of COURSE he doesn't want your money in gold when he can sell you stocks and bonds. ;)

1 posted on 07/25/2008 2:10:29 PM PDT by Diana in Wisconsin
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To: Diana in Wisconsin

The ones who tell you not to invest in gold are usually up to their necks in it in their own accounts....


2 posted on 07/25/2008 2:14:26 PM PDT by xcamel (Being on the wrong track means the unintended consequences express train doesnt kill you going by)
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To: Diana in Wisconsin
Gee, thanks, Ray! I've done better with my gold and silver than even Hillary! did with her cattle futures. *SMIRK*

Are you trading futures or gold stocks? With gold stocks, there might be some truth to this article. But with futures contracts, a smart investor with a knowledge of technicals can catch it at just the right time for a profit, as long as said investor has enough money on hand to make the occasional margin call.
3 posted on 07/25/2008 2:17:44 PM PDT by JamesP81 (George Orwell's 1984 was a warning, not a suggestion)
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To: Diana in Wisconsin
Gold is so-so as an investment (of course, long term vs. short term makes a big difference) depending on your time frame.

However, it is a great place to 'store value' as the dollar depreciates over the longer term.

4 posted on 07/25/2008 2:20:45 PM PDT by stockstrader (CHANGE--a euphemism for further dividing our country along racial, social and economic lines)
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To: Diana in Wisconsin
You need to realize that gold isn't really an investment per se. It's a store of value.

Here's something to think about.

In 1965 one ounce of gold could buy you a very well made custom tailored suit of clothes.

In 2008 an ounce of gold will buy you a very well made custom tailored suit of clothes.

Now, have you really 'made' any money on that ounce of gold you bought in 1965?

I'm not saying don't buy it. I'm just saying that you need to realize gold isn't really an investment vehicle like stocks or bonds are.

L

5 posted on 07/25/2008 2:21:01 PM PDT by Lurker (Islam is an insane death cult. Any other aspects are PR, to get them within throat-cutting range.)
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To: JamesP81

Coins and bars, Baby. :)

Dad & I have been playing the commodities market since I was a teen. He taught me on paper first, then would let me play with my allowance money each month.

It’s not for the faint of heart. And if you can’t afford to lose it, don’t play. :)


6 posted on 07/25/2008 2:24:59 PM PDT by Diana in Wisconsin (Save The Earth. It's The Only Planet With Chocolate.)
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To: Lurker

In 1965 one ounce of gold could buy you a very well made custom tailored suit of clothes.

In 2008 an ounce of gold will buy you a very well made custom tailored suit of clothes.

And somehow that is supposed to be good??! $500 worth of the S+P bought in 1965 would today buy you an entire clothing factory today.


7 posted on 07/25/2008 2:28:48 PM PDT by AmericaUnited
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To: AmericaUnited
And somehow that is supposed to be good??!

I'm afraid you missed my point quite completely.

Buying $500.00 is the S&P in 1965 would have been an investment. Buying $500.00 of gold in 1965 would have been buying a store of value.

They are two entirely different things.

L

8 posted on 07/25/2008 2:32:11 PM PDT by Lurker (Islam is an insane death cult. Any other aspects are PR, to get them within throat-cutting range.)
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To: JamesP81
But with futures contracts,

And any other futures traded item that has gone on a multiyear rip... long oil, short doller, long Euro, ...

9 posted on 07/25/2008 2:33:13 PM PDT by AmericaUnited
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To: Lurker

“It’s a store of value.”

You are correct, Sir. We have a goal in mind and a plan (we’ll sell at a certain point in the future) and we’ve planned the work and are now working the plan. We’re 8 years in, so we’ve been quite patient while others panicked and sold too early. IMHO. :)


10 posted on 07/25/2008 2:34:14 PM PDT by Diana in Wisconsin (Save The Earth. It's The Only Planet With Chocolate.)
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To: Diana in Wisconsin
Really an idiotic article from an “investment professional”.
The key to long term investment results is diversification and proper allocation percentages in the various types of investments. Precious metals is appropriate for an allocation in virtually any portfolio, but generally much less than stocks, bonds and money markets/CDs. So his discussion, which implies jumping in with a sizable portion of one's assets, useless.
11 posted on 07/25/2008 2:35:16 PM PDT by Aldebert
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To: Diana in Wisconsin
we’ve planned the work and are now working the plan

That my dear is the best course of action.

I bid you prosperity now and in the future.

Best,

L

12 posted on 07/25/2008 2:36:44 PM PDT by Lurker (Islam is an insane death cult. Any other aspects are PR, to get them within throat-cutting range.)
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To: Lurker

Did gold beat inflation from 1965 - 2008? If not, then “value” was not stored but lost.


13 posted on 07/25/2008 2:37:06 PM PDT by AmericaUnited
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To: Lurker

People buy gold anticipating the collapse of paper currency.

The current mega-inflation in Zimbabwe is their ultimate horror.

In 1923 one US dollar was worth a million German marks.

It shows a lack of faith in our economy, IMHO. Right up there with stocking up on bottled water and canned tuna.

(Stocking up on ammo, now that’s a different story)

;^)


14 posted on 07/25/2008 2:39:58 PM PDT by elcid1970 (My cartridges are dipped in pig grease)
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To: Diana in Wisconsin
Dad & I have been playing the commodities market since I was a teen. He taught me on paper first, then would let me play with my allowance money each month.

I'm a software developer, but the company I work for is an agricultural commodities risk management firm. And yes, it is *NOT* for the faint of heart. You've got to have nerves of tempered steel.
15 posted on 07/25/2008 2:52:15 PM PDT by JamesP81 (George Orwell's 1984 was a warning, not a suggestion)
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To: stockstrader
Gold is a good hedge against inflation and a crumbling dollar. It is also a good investment to play during certain periods of time. I started investing in gold and gold companies in 2002 and I continued to hold them until late last year. I currently have 20% of my investments in gold or gold stocks.
16 posted on 07/25/2008 3:19:11 PM PDT by peeps36 ( Al Gore Is A Big Fat Lying Hypocrite. He Pollutes The Air By Opening His Big Mouth)
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To: Lurker

Thanks! Daddy didn’t raise no fool, LOL! :)


17 posted on 07/25/2008 7:18:57 PM PDT by Diana in Wisconsin (Save The Earth. It's The Only Planet With Chocolate.)
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To: elcid1970

“It shows a lack of faith in our economy, IMHO. Right up there with stocking up on bottled water and canned tuna.

(Stocking up on ammo, now that’s a different story)”

I’m glad you clarified that because we have plenty of ALL of those “commodities.” (The canned tuna is for the cats. Never touch the stuff myself.) :)


18 posted on 07/25/2008 7:21:07 PM PDT by Diana in Wisconsin (Save The Earth. It's The Only Planet With Chocolate.)
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To: JamesP81

It was a wild ride back then. Cocoa Futures were my specialty when I was a teen. (See my tag line; not much has changed, LOL!)


19 posted on 07/25/2008 7:22:53 PM PDT by Diana in Wisconsin (Save The Earth. It's The Only Planet With Chocolate.)
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To: elcid1970

I always laugh when people say that they have gold in case the economy collapses.I always wonder, if the economy collapses and there is a general downfall of the country WHO can take their gold as payment of anything?

I mean, can you go to the market and tell the 18-year-old clerk at the cash register that your little speck of gold is worth $100? And if he takes it, how does HE exchange it? And how do you get change back if you don’t trust the money in society?

I think if society collapses gold won’t do you much good. A GUN on the other hand, is FAR more useful in that case!


20 posted on 07/25/2008 7:29:29 PM PDT by Mobile Vulgus
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To: Mobile Vulgus

>>>I always wonder, if the economy collapses and there is a general downfall of the country WHO can take their gold as payment of anything?

If you read their stories, the escaping Vietnamese boat people used gold to buy their passage out of a Communist dictatorship. It might not work for small purchases like buying bread and clean water on a daily basis, and it may not be very portable. It also requires the owner to know too much about the purity of the metals involved.

It would be interesting if one calculated the difference from 1968 until 2008 of the change in gold prices with no taxes (assume nothing was sold), less stated CPI... to the receipt of interest on the same amount of money at the quarterly prevailing 1 Year Treasury rates, less annual tax payments on the interest, less stated CPI for those years.

Also, if you want to eliminate the risk of holding gold (good idea), then you can simply buy one of the funds or ETFs that invest in gold indexes or diversified gold stocks and futures contracts. This would be the preferred way to go if you only predict high inflation and not total breakdown. If you are forecasting a lower dollar, perhaps certain US manufacturing companies that sell overseas would be a better bet. They’re having a half-off sale right now! (after factoring in our lower USD).


21 posted on 07/25/2008 8:38:27 PM PDT by Hop A Long Cassidy
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To: AmericaUnited
$500 worth of the S+P bought in 1965 would today buy you an entire clothing factory today.

How much would $35 of the S&P buy you? [Value of 1 oz. of gold in 1965].

Could you buy S&P ETFs in 1965?

What were the brokerage fees for buying $35 in stocks in 1965?

22 posted on 07/25/2008 8:42:50 PM PDT by DeaconBenjamin
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To: elcid1970
Is it even possible to have too much ammo? I don't think so....
23 posted on 07/25/2008 8:45:24 PM PDT by ASOC
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To: AmericaUnited

According to BLS [http://www.bls.gov/bls/inflation.htm], $35.00 in 1965 “has the same buying power as $243.13 in 2008.”


24 posted on 07/25/2008 8:46:13 PM PDT by DeaconBenjamin
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To: Hop A Long Cassidy

See #24


25 posted on 07/25/2008 8:50:57 PM PDT by DeaconBenjamin
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To: Mobile Vulgus

Just a thought, but instead of watching the price of gold, I track the price per bullet of 7.62mm NATO ball ammo.

And boy has it gone up in the last four years!

As an old Cold Warrior, I remember fallout shelters and Conelrad. At the time, one author suggested using .22 long rifle as a form of currency. Another wrote,

“The day may come, in the aftermath of nuclear war, when a pound of tobacco is worth more than a pound of gold.”


26 posted on 07/26/2008 12:44:35 AM PDT by elcid1970 (My cartridges are dipped in pig grease)
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To: elcid1970

Exactly. When people need STUFF in a time of collapse, money is useless... no matter if it’s gold of paper. If I need bullets and milk and bread and so does the next guy, which of us needs gold or dollars?


27 posted on 07/26/2008 2:24:36 AM PDT by Mobile Vulgus
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To: DeaconBenjamin
What were the brokerage fees for buying $35 in stocks in 1965?

Totally irrelevant, since what ever they were, you would still be way ahead today.

28 posted on 07/26/2008 3:21:08 AM PDT by AmericaUnited
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To: All
WARNING! ... The price of gold is gonna CRASH ... soon ...

Remember who told ya.

Gotta go now. Good luck.

29 posted on 07/26/2008 3:47:34 AM PDT by bankwalker (In the land of the blind, the one-eyed man is king.)
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To: Lurker

Perfect! Econ 101 right there.


30 posted on 07/26/2008 3:52:11 AM PDT by don-o (Have you donated to FR? If not, why not?)
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To: Diana in Wisconsin

Bought all the gold I own, mostly coins, back when it was selling around $400.00 an ounce. Buying it today at current levels is probably not a good investment. One thing I didn’t see mentioned ... the demand for gold in China. That will go a long way toward sustaining gold at it’s present level.


31 posted on 07/26/2008 4:01:39 AM PDT by BluH2o
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