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.
My house has tripled in value since I bought it. It is not an investment either.
But it is worth more today than it was in 1990.
Gold is the same thing. It is not a stock, yet the value goes up.
A rose by any other name, and all of that....
Most Stock doesnt always go up in value but the bucks spent to buy those stocks ALWAYS goes DOWN in value.. and if your stock goes down in value you lose TWO WAYS...
The matter of gold as an investment is not all that complicated, but sometimes it takes a bit of detailed knowledge in order to see through to what is actually a simple truth.
By the way, a 2% interest rate, if it is a real rate adjusted for inflation, is not that bad, if it is sustained over a long period of time. If someone could give you a portfolio of stocks which did that, it would be OK.
The Fed policy of holding down interest rates by pumping more currency into the economy makes gold look good. Then the people who like that policy turn around and make fun of gold! Well, there is some humor there.
The Keynesians believe that the economy improves by inflation, and that if some people have paper money enough, they will spend it, and other people will be stimulated to work hard to collect those bits of paper. It is a scheme that assumes that you can fool most of the people most of the time, and that that is all that is necessary to make an economy run.
Obviously, it does not work. People work because they have real needs and desires, which (in an orderly society of laws) they get by themselves producing desired goods (including “services,” which are really just service goods). Production of wanted things is what makes an economy prosperous. The money does nothing but help people makes trades, and keep track of accounts, and act as a store of value, assuming that it is honest money.
Gold has limited quantity, and cannot be produced from nothing. You can’t inflate a gold-backed currency easily: it is practically impossible. Gold is durable and lasting, and is even attractive. It is portable and compact. It does not need to be fed, and has only modest storage costs. None of these things have changed for centuries, so it is no wonder that people resort to gold for savings when they feel nervous about other values.
And what makes these people nervous? When Keynesian inflationism, dictatorship, war, terrorism, anti-capitalism, and other threats are abroad in the world, people become almost desperately interested in a secure store of value. Old codgers (like me) especially have reason to worry, because they are at the end of their working days.
Of course, gold will not save anyone in a complete social collapse. Who will buy your gold then, and with what for payment? Long before that, the government will find a way to go after your holdings, anyway, as under Stalin, Mao, Roosevelt, and other great leaders of the 20th Century, and pillaging hoards throughout history.
The only way to survive a total collapse is to prevent it in the first place. That is why things are so critical now, and why we need to reform our leadership immediately. It is almost a life-and-death situation, and for some people it will be actually just that critical.
In the meantime, don’t be deterred from buying gold by the scorn of the know-it-alls. They haven’t stopped me! Bear in mind, it is the policies of those same critics which have made gold look good. If we had honest money, balanced budgets, and governments who would mind their own limited business and leave us to ours, gold would be a bore.
There is another benefit to owning gold: it is a way of annoying those “experts.” That is a small thing, but I enjoy small, simple pleasures. I enjoy owning a gun, partly because I know that it drives some liberals crazy. That’s enough reason for me.
Only problem is, after the newly passed financial “reform” bill, you will now be required to report all gold purchases on a 1099 to the IRS.
Get ready for paying market dividends for any gains in value to the tune of 30% at the end of every year. Not to mention audits on a regular basis.
I guess Donald of Smart money missed that headline. These tyrannts will slip this kind of BS into every bill they pass. I’m surprised they haven’t put a 1000% tax on ammunition yet.
Are there enough lamp posts in Washington D.C.?
Those who do not like gold are the ones who do not own it.
Beauty is in the eye of the beholder.
Do you know where in the mammoth "Dodd-Frank Wall Street Reform and Consumer Protection Act" (H.R. 4173) that provision is?
I searched for "1099", "gold", and "bullion" in it, and I didn't find any of those words in a relevant context. I also did a quick search around the Internet, and while I saw references to new 1099s resulting from the Obamacare bill, those are only business-to-business.
I also checked a gold seller's website which had a page labeled "Reporting Requirements" at http://www.usagold.com/cpm/privacy.html, and I didn't see revisions dealing with new 1099 requirements for consumer purchases of gold.
Could be possible you are short sighted..
Yep, definition of investment. Gold isn’t.
It also isn’t any good long-term.
When I started my career as a worker, Gold stood at $800 an oz, and the stock market was somewhere under $1000.
about 29 years later, I’m worth 500 times what I was worth when I started working, the stock market is about 10 times more valuable, and gold is about 1.5 times as valuable as it was when I started working.
But if we just go back far enough, gold used to be $40. Back in 1933. I dare say a basket of stocks from 1933 has increased in value more than an oz of gold in that time.
GOld isn’t about investment, it’s about preservation of capital. And that only because of an historical supersticion about magical properties.
GOld ownership is a choice. So obviously those who don’t think gold is a good investment won’t own it.
The question is, who is using better logic, those who decide not to buy gold, or those who decide to buy gold?
Those who own gold need gold to go up in value to make money. So of course they will tell others how great gold is.
What is interesting is how many companies there are that spend millions of dollars convincing other people to buy their gold.
If gold is such a great investment, why are these people spending so much money to get other people to buy it from them?
The trouble with gold is that it is all perception. Gold has no intrinsic value, and if one day people figure that out, it will be worthless. Sure, people may never figure it out.
Meanwhile, when a person arguing that gold is a great investment argues in support of that position that we have only mined 10% of the gold available in a mine, you have to wonder — if there is enough gold still available to increase the supply by 10 times, doesn’t that suggest there will be a supply glut which will destroy demand?
Gold has run up greatly this decade. Of course, the $250 value was a depressed value from higher earlier values. And of course, there has been a lot of work done to convince people that gold is running out, and the better buy it before it is gone.
Nobody knows where gold is going next. It could go up, it could go down. But the point is, whatever it does, will be because of factors that have nothing to do with gold itself (it’s supply, the chance of finding more, current mining levels, current uses, etc.). That’s why it’s not really an “investment”, it’s a hedge against other things.
Technically, nothing has any "intrinsic" value. The value of any commodity is exactly that price at which the extrinsic consumer values it, nothing intrinsic and nothing less or more.
That being said, though -- like any commodity, gold has certain intrinsic qualities, and many of these are particularly monetary qualities:
There are five of these characteristics: recognizability, divisibility, portability, high value in relation to weight and volume, and continuity of value over time. Any physical commodity that possesses these five characteristics is a candidate to become the monetary commodity of a particular social order.
Historically, gold and silver have possessed these five characteristics to a greater degree than any other commodity." -- Gary North
Given that gold has particular qualities which make it an attractive candidate for usage as money, do you not think it sensible that consumers assign a money-value to gold reflecting this usefulness?
Maybe under a strict definition of "intrinsic". But apples have an intrinsic value, because every person needs food, and apples can be eaten. Food, water, basic supplies, shelter, clothing are necessities that have intrinsic value. Money doesn't have intrinsic value because you can't use it for anything.
Other products also have intrinsic value based on our desire to use them, like cars, TV sets, decks of playing cards, books, a swingset, a cell phone, a computer.
Some of those could lose their value, if you lose your job and get thrown out on the street cards might be MORE valuable, while your computer would be useless.
But gold has no USE. The only "value" gold has is the value of DESIRE of others. So long as others DESIRE gold, for the sake of having it, you can trade gold for things you really need.
To show what I mean by "intrinsic", just look at all the posts about gold on this site, and in this thread. People who want gold, who like gold, all say the same thing -- they like that it goes up in value. What value? The value relative to dollars. What do we do with dollars? buy what we need.
So gold has "value" because it will make MONEY for us that we can do to buy things we NEED. Thus, gold has no intrinsic value. We don't buy it to USE it, we buy it so later we can sell it or trade if for something we need.
Someday an apocalypse will come, and those who stocked up on canned good, water, and ammunition will be living in their shacks, and those who stocked up on the high-value gold will be knocking on their gates, begging to trade gold for some food and water and shelter.
That's what I mean by "no intrinsic value".
If you think the economy will recover, now is a bad time to buy gold because it is at a peak, and last time it ran up in value like this was right before the crash of the early 80s, after which it sat between 400 and 250 for about 20 years.
If you think the economy will get a lot worse, gold might not be a good buy because you might better be buying the stuff you'd spend money on later, like food and water and shelter and maybe fuel and a power generator. You'll never see me in a thread dissing those who decide to buy a cabin in the woods and stock if for the "coming apocalypse", because even if they are wrong they have a nice cabin to go vacation in, and can eat the food and water and enjoy the A/C and cold beers.
I just bought my first "emergency prep kit" for the house (well, really, my son is putting it together for Emergency Preparedness Merit Badge). This is just a 3-day kit, to get you through the first moments of disaaster until government can come to save you.
I plan to build this into a long-term storage system because if we really need government, I think 3 days is way too optimistic. I'm thinking a 6-month rotating supply that we use with our real food, that would provide 3 months if we used ONLY the supply.
Yet whenever this has happened in the past, all those who own gold and silver have been able to trade that gold and silver for food, water, and shelter -- precisely because Gold IS known for having usefulness as a Form of Money, and Money Economies are more efficient than Barter Economies.
I repeat:
We do buy gold to "use" it -- specifically, to use as Money, if (and, historically speaking, when) paper currencies do collapse. So you can say THAT is the "intrinsic value" of gold -- the fact that gold has qualities which make it a useful candidate to serve as Money, and the margin of productivity by which Money Economies function more efficiently than Barter Economies.
When I started my career as a worker, Gold stood at $800 an oz.
How about a worker who started investing 10 years ago? How do you think they would fare in gold versus the S&P?
Those who own gold need gold to go up in value to make money. So of course they will tell others how great gold is.
What’s the deal?
You think i chose the date of my career based on the price of gold?
It’s when I started work. I can’t help it if it was a peak.
We’re at a peak now as well, so anybody saying that gold has gone up X% in the past Y years is “cherry-picking” the current peak.
Historically, if you go back and look at say the 36-year price of gold valued in different currencies, you will see that it was flat for a long time, peaked up to 1981, crashed but to a higher value, flatlined for a long time, and is now peaking again.
But in inflation-adjusted values, there was no difference in value between the peaks. Gold is pretty much an inflation hedge that has occasional bubbles, if you just go by historical data.
It is certainly true if you buy a flatlined “investment”, and sell it at a peak, you’d do well. Of course, there are dozens of individual stocks that would have done better over a similar period of time. And in fact, there are hundreds of stock which, if you bought them over time, but sold them at their peak, would have made you tons more money much quicker.
I remember when gold broke $1000, and then it went down over 10%, and then it went up, and then it went down, and now it’s up, except it’s also now down.
But sure, dollar-cost averaging always looks good if you happen to be at an historical non-inflation-adjusted high.
If we had this conversation when gold first collapsed a couple years ago, that might not have been the case.
And we have yet to see whether gold will make another huge run-up from this point, or if it will act as it has every previous time it had a big run-up.
In any case, you can’t figure out where it is going based on the knowledge of gold; it’s not an investment, it’s a gamble.
When has this happened in the past where these people who owned gold were able to convert it to food and water?
Historically, gold was owned by pharoahs and kings and if “the people” managed to get some the rulers would just take it from them, along with all the food and water.
Was there some great trade in the depression where poor starving farmers took gold in exchange for their crops?
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