Gold Loses Its Shine 28 comments
-
Font Size:
-
Print
- TweetThis
Differences of opinion make markets. When I look to buy, someone with the opposite viewpoint must be willing to sell. Knowing this, we often expect diverse opinions to exist about the value of any asset. Nowhere is such disagreement more evident than with respect to gold.
We know the value of an asset should be the sum of its expected future cash flow adjusted by a discount factor that accounts for risks taken. As a commodity, gold does not offer a series of cash flows. Where other commodities satisfy set needs (i.e.-oil for fuel, corn for food), gold has little industrial use and its main benefit is its role as a store of value. Over centuries, gold has been seen as true money that represents tangible wealth. Having lived through a world of market manipulation, groups of investors long for the time when gold as true money will replace fiat money which is backed by nothing other than a government's promise to honor the value of the paper currency.
I agree that the current fiat system is flawed and opens itself to disruptive forces. However, I am not convinced gold is much better. What the gold bugs fail to answer is why does gold represent true wealth? Their answer tends to be that it always has. My counter would be that placing faith in gold as true wealth is no different than placing faith in fiat currency as a store of wealth. If we reach a point of chaos where paper money fails, people will value gold as a means to attain that which is needed to survive (i.e. - food and energy). If you need to invest in a commodity, why not skip this middle step and buy oil and corn as opposed to gold?
I am certain my attack upon the value of gold will spur many points of agreement and disagreement. That is the essence of how markets work.
In light of the economic events of the past year, the current environment is one in which gold should shine. The financial markets have imploded and interest rates have been cut to zero. As an inflation hedge and store of value, gold should skyrocket. Instead, we see a spike above $1,000 in March 2008 as Bear Stearns failed. From that point, the news grew worse, but gold set a series of lower highs ($977 in July, $913 in October and $882 in December) while maintaining a persistent downtrend. Lower highs within an existing downtrend are clearly bearish. Combine the bearish view with an uptrend from the October low and we see a triangle that should offer a dramatic move for the price of gold.
Traditionally, one would wait for a triangle to result in the price spiking higher or lower before taking a position. I believe gold will break lower. Therefore in my weekly newsletter EPIC Insights I recommend a short position as this week's technical trade. If the triangle does break lower, we can expect to see gold trade toward $700 in the coming weeks.
For individual investors, ETFs offer the easiest way to short gold. I have always used the iShares COMEX Gold Trust (IAU) as a proxy for gold. With the expectation that gold will retest $700, I recommend a short position in IAU as this week's technical trade. By using the 10 day moving average (currently $865) as our stop loss, we have a trade with very limited downside (1%) and tremendous upside (18%).
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 28 comments:
You speak of the fact that gold has no practical use. Well, technically it does have a few uses and it's popular for jewelry applications. That's why it has value --- there is demand. In this sense, it's no different than any other good out there --- if you offer me a cow for $10, that cow may have a useful value of $0 to me as I'm not a farmer and wouldn't even begin to know what to do with it. However, someone out there does want the cow --- hence even if it has zero worth to me, it has worth to someone else, hence creating an objective value. If that cow is worth $100 to most farmers, I might jump at the opportunity to buy it at $10 even if I have no real use for it personally since I can make a $90 profit selling it to someone else.
Now that we've established why gold would have objective value, the next question is why is gold better suited to serve as currency than other commodities. The answer, ironically enough, is its limited applications. If we used palladium as a currency, for example, our currency's value would radically fluctuate based on demand from a variety of sources --- particularly right now, it's value would be crushed by the auto manufacturing industry's woes. So in essence, a currency based on a good that has volatile pricing could be problematic. Since gold's applications are more limited, it is more stable as currency. Jewelry demand may go up or down, but it's somewhat stable.
Now, the reason why gold has value is two-fold: (a) demand and (b) production costs. Gold has a real cost of extraction. This cost varies from miner to miner and is somewhat debatable (since you have to determine what costs are included in obtaining the final product), but the same is true for all commodities. However, the one thing that you can say about gold versus paper money is that these real economic costs are meaningful. Paper money has a real economic cost, as well, but I imagine it's fairly trivial (a few cents per bill?). Hence, the argument for gold is that it has a significant real economic value attached to it, whereas, paper's value is rooted in something less absolute.
Honestly, I don't think literally using gold as a currency would be very convenient, but there are a lot of reasons it serves very well backing paper money. There are also reasons why when paper money becomes devalued, gold --- with its real economic costs --- gains value versus paper money.
Sure. there's plenty of room in my closet to store a few hundred bushels of corn and a hundred or so barrels of oil in my bedroom closet.
I'm not a gold "bug", but I don't have time to shoot holes in these weak arguments.
If he'd have bothered to even read a wikipedia article on gold he'd understand more about what makes it different than fiat money.
And it's uninformed at best to think that gold will rise in value ONLY if there is a chaotic breakdown and chaos. Has he checked the price since 2001? Has he compared it to any other asset class? Has he looked at the money supply figures? Has he heard the numbers tossed around in various bailouts?
It would be one thing if a person could even match real inflation with CD's or bonds, but it's not even close. It hasn't been for years. Gold is simply a store of value that periodically one can do even better on as it comes in and out of favor.
But you go ahead and pay 50 times earnings for some tech or retail stock and let us know how that works out for you.
Patently false. The cost of producing fiat money is zero and so it lends itself to massive debasement with the click of a mouse. The Bank of England is about to receive from Parliament the authority to expand the supply of Sterling WITHOUT THE NEED TO REPORT THE NUMBERS. Only a fool would not ask "Why?" This is presented in the press as a "Reform Plan":
www.telegraph.co.uk/fi...
If money is to serve as a store of value, its most basic function, trust is essential. How can anyone trust a fiat currency when the issuer's 150 year-long reporting requirement is suddenly suspended? Such an action is more representative of Zimbabwe than of a developed nation with a 'respectable' fiat currency.
Gold cannot be debased in such a manner, and as such it represents an external monetary discipline which corrupt government officials repeatedly demonstrate they need. Currency debasement such as BoE is about to undertake, and such as the Fed is currently undertaking via QE, is outright theft under color of authority and must be resisted. Locke is instructive.
The purest way of selling GC is selling GC futures, long dated ones are better as it saves you on roll over fees that for unexperienced trader can run even up to 1000-2000$ a year.
Sell December 2009 or 2010 GC futures and wait how Gold bugs will melt like sugar on the pan.
The Gold bugs are squeezed in the corner now and are punched from all sides by piling GC production from cash squeezed mining giants, from Central Banks dumping their endless ureported physical GC.
GC bugs thought that if they are going to buy 1 Gold Eagle or Sovereign coin it will be enough to shift the balance and create the shortage of physical metal, the speculators bought stocks of mining stocks that are now between 50-95% below year ago price, the bugs see that all their demand for Gold bars,coins,watches,jew... options,GLD,SLV,IAU is being filled with big satisfaction from sellers.
So it turns out today, that all the news about the shortage of GC and Gold Eagles was delivered by sell side of the industry and every buyer out there was given all the GC he wanted and more on top.
Where we go from here?
I think we will see soon GC at 500-600$ but even 200-300$ is not out of the picture, just imagine what the GC bugs will do with their GC Eagles when they will realize finally that they were....
The purest way of selling GC is selling GC futures, long dated ones are better as it saves you on roll over fees that for unexperienced trader can run even up to 1000-2000$ a year.
Sell December 2009 or 2010 GC futures and wait how Gold bugs will melt like sugar on the pan.
The Gold bugs are squeezed in the corner now and are punched from all sides by piling GC production from cash squeezed mining giants, from Central Banks dumping their endless ureported physical GC.
GC bugs thought that if they are going to buy 1 Gold Eagle or Sovereign coin it will be enough to shift the balance and create the shortage of physical metal, the speculators bought stocks of mining stocks that are now between 50-95% below year ago price, the bugs see that all their demand for Gold bars,coins,watches,jew... options,GLD,SLV,IAU is being filled with big satisfaction from sellers.
So it turns out today, that all the news about the shortage of GC and Gold Eagles was delivered by sell side of the industry and every buyer out there was given all the GC he wanted and more on top.
Where we go from here?
I think we will see soon GC at 500-600$ but even 200-300$ is not out of the picture, just imagine what the GC bugs will do with their GC Eagles when they will realize finally that they were....
As for why gold instead of corn or oil? Research on the desired characteristics of money. Some of the more important ones are:
(1) durability,
(2) portability,
(3) homogeneity,
(4) divisibility
(5) scarcity
As prior posters have noted, precious metals were found over hundreds of years of trying various materials as 'money' to meet these characteristics best. Gold best of all because it is the most durable of the precious metals which is still easily divisible.
1) Gold is nearly chemically inert. It doesn't rust like silver or react with anything but aqua regia (and even then it can be recovered). Mice and rats don't eat it like they do corn, and it's not flammable like oil. It's difficult to 'destroy' gold. It's a good quality for a store of value to have.
2) Gold's relative scarcity gives it a high value per unit weight. Therefore it is easier to move a great deal of wealth in the form of gold than it is to move the same amount of wealth in corn, or oil, or pretty much anything else.
3) Gold is the same in the US as it is in China. It is the same everywhere as it is a chemical element. Corn can differ from field to field, oil from well to well (West Texas Intermediate vs. Northern Brent). Unless you are an expert, you can't tell one kind of oil from another.
4) Gold is easily divisible with simple tools. This is where it outshines most other scarce precious metals. You can litteraly beat gold to a very thin sheet with only a hammer. Platinum is much too hard for this despite being much scarcer.
5) Gold is not widely found in nature, and where it is found, it is not easy to extract. The scarcity leads to a higher value (low supply = higher price). Gold also cannot be 'duplicated' or created as alchemists tried to do for hundreds of years. It is a chemical element. It would cost far more to 'create' it than it could be sold for (via high energy physics and particle accelerators, etc.). It takes a lot of investment and work to add to the total supply of gold.
Over the history of man, trading of goods led to the use of a standard item for 'storing' the value of a trade until you could get something else you wanted. Trial an error over many years eventually led to the use of gold as best suited for this purpose in general. Historical research led to the realization of the "best" characteristics for the material used to store value, and of all those tried, gold has best suited those characteristics.
One other important item, also noted in prior posts, is that gold's scarcity insures that the value of gold won't change greatly if used as money. It can't be counterfeited.
This is one reason why governments do not like a gold backed money. They can't print gold and spend it. They actually have to take it from their citizenry via taxation, which is generally not well received at the high rates of taxation necessary to sustain a spendthrift political class as we have here in the US.
Gold money (with guaranteed convertability) requires the government to be fiscally prudent, which makes buying votes and influence peddling much more difficult. Gold is "honest" money.
Although the thought of carrying thousands of dollars of gold in my pocket may well create a bulge in my trousers of another kind.
On Jan 12 08:06 AM H.J. Huneycutt wrote:
> Gold is a commodity and just like all other commodities, it's price
> is subject to broader supply and demand trends. Using gold as a
> currency is, in a sense, similar to using any other commodity. There's
> no reason you couldn't use pork-bellies or corn as a currency. Of
> course, there would be some big problems with using either of those
> in modern American society and there are actually reasons why gold
> is the best commodity to use as currency.
>
> You speak of the fact that gold has no practical use. Well, technically
> it does have a few uses and it's popular for jewelry applications.
> That's why it has value --- there is demand. In this sense, it's
> no different than any other good out there --- if you offer me a
> cow for $10, that cow may have a useful value of $0 to me as I'm
> not a farmer and wouldn't even begin to know what to do with it.
> However, someone out there does want the cow --- hence even if it
> has zero worth to me, it has worth to someone else, hence creating
> an objective value. If that cow is worth $100 to most farmers, I
> might jump at the opportunity to buy it at $10 even if I have no
> real use for it personally since I can make a $90 profit selling
> it to someone else.
>
> Now that we've established why gold would have objective value, the
> next question is why is gold better suited to serve as currency than
> other commodities. The answer, ironically enough, is its limited
> applications. If we used palladium as a currency, for example, our
> currency's value would radically fluctuate based on demand from a
> variety of sources --- particularly right now, it's value would be
> crushed by the auto manufacturing industry's woes. So in essence,
> a currency based on a good that has volatile pricing could be problematic.
> Since gold's applications are more limited, it is more stable as
> currency. Jewelry demand may go up or down, but it's somewhat stable.
>
>
> Now, the reason why gold has value is two-fold: (a) demand and (b)
> production costs. Gold has a real cost of extraction. This cost
> varies from miner to miner and is somewhat debatable (since you have
> to determine what costs are included in obtaining the final product),
> but the same is true for all commodities. However, the one thing
> that you can say about gold versus paper money is that these real
> economic costs are meaningful. Paper money has a real economic cost,
> as well, but I imagine it's fairly trivial (a few cents per bill?).
> Hence, the argument for gold is that it has a significant real economic
> value attached to it, whereas, paper's value is rooted in something
> less absolute.
>
> Honestly, I don't think literally using gold as a currency would
> be very convenient, but there are a lot of reasons it serves very
> well backing paper money. There are also reasons why when paper
> money becomes devalued, gold --- with its real economic costs ---
> gains value versus paper money.
It looks like the free market is responding to a demand for gold-backed paper 'money.'
Or maybe they've just answered it and you've never listened. It's rare, it's shiny, it's divisible, it served as money for thousands of years, it can't be counterfeited.
"If you need to invest in a commodity, why not skip this middle step and buy oil and corn as opposed to gold?"
Not bad advice. On the flip side, those are paper promises as well. If you want the real stuff, you would be hard pressed to store enough of it in your house. Maybe you should research what the function and purposes of money are.
Fiat money systems eventually always crash (ours is on it's last leg). When this system finally collapses, it will also take down any paper promises along with it (counterparty failure and broken promises across the board). Therefore, if you want to preserve your 'earned value' through this tranformation period (greatest transfer of wealth ever known to mankind), then you need to store your earned value in some type of non-depreciating hard asset that doesn't have an expiration date. This includes:
1. PM's
2. Real Property
3. Oil, Base Metals, & other non-perishable commodities
In adition, of course, one should store as much food and other consumable items as necessary and feasible.
Out of items 1-3, PM's are the best suited to carry your wealth through the old Fiat system into the new one (For the most part they will be of little or no use during the transition period).
If you own real property you have carrying costs and TAXES (Believe me when the government is also in need of money, they will tax you out of your property if that's what it takes to keep them afloat). Other commodities either have a shelf live or are too bulky to serve the purpose.
That leaves PM's as the best option.
Back in the 1960's, my uncle-in-law (he lived at 2764 N. Weil St in Milwaukee, WI, second house south of what was then a corner bar) was metal-detecting in his back yard with a White's metal detector when it went off near a stone bench. He started digging and hit a cloth or leather bag. When he opened it up it contained numerous gold double eagles from the 1930's. He again searched the yard with the detector and got a hit on some more metal. When he dug, up came another bag of gold coins! These were probably buried by someone during the Depression who didn't trust banks. I don't think he ever spent those coins because he was afraid the IRS would confiscate them or heavily tax him if they found out.
(Our government's greed knows no bounds. Right now the Democrats and the Republicans have divied up $700 billion of the taxpayer's money under the guise of a "bailout"; $350 billion for the Republican's term and $350 billion for the Democrat's term. Who says there's no bipartisanship? They scared us into giving it to them under the threat that we'd have a depression if we didn't. At least that was their reasoning. Of course our reasoning was they flat out stole it from us without our vote. Taxation without representation. So I don't really wonder why the former owner of those gold coins buried them in the first place. We get the picture 80-some years later.)
Anyways, getting back to the story, he held on to those coins until the 1990's in his safe at home until he was diagnosed with Altzheimers. He then went to King VA Hospital and died a year or so ago. I don't know what ever happened to those coins nor if there still might be more gold coins still buried in that back yard down in Milwaukee. I can imagine that if there were any still there, the owner would be a rich man.
Either way, even though he had all this gold, it never did him any good in the end, or anyone else, for that matter. The moral of the story is that even if you have the actual physical gold, you can lose that as easily as if you had it in the stock market.
On Jan 12 12:49 PM bowman711 wrote:
> isn't owning in GLD or IAU akin to owning a gold-backed currency?
> The shares of the two ETFs are readily tradable, as would be a gold-backed
> currency. True, it isn't a universally tradable as dollars, but those
> who own GLD or IAU really have paper that says it is backed by gold
> just as a gold-backed currency is paper backed by gold.
>
> It looks like the free market is responding to a demand for gold-backed
> paper 'money.'
You wrote: "...So in essence, a currency based on a good that has volatile pricing could be problematic." (Platinum)
I don't see how gold would be a better choice over Platinum to base a currency on as both are very volatile. I think it would be better to base a currency on something more plentiful but still has value. This would limit the volatility of the underlying currency.
On Jan 12 08:06 AM H.J. Huneycutt wrote:
> Gold is a commodity and just like all other commodities, it's price
> is subject to broader supply and demand trends. Using gold as a
> currency is, in a sense, similar to using any other commodity. There's
> no reason you couldn't use pork-bellies or corn as a currency. Of
> course, there would be some big problems with using either of those
> in modern American society and there are actually reasons why gold
> is the best commodity to use as currency.
>
> You speak of the fact that gold has no practical use. Well, technically
> it does have a few uses and it's popular for jewelry applications.
> That's why it has value --- there is demand. In this sense, it's
> no different than any other good out there --- if you offer me a
> cow for $10, that cow may have a useful value of $0 to me as I'm
> not a farmer and wouldn't even begin to know what to do with it.
> However, someone out there does want the cow --- hence even if it
> has zero worth to me, it has worth to someone else, hence creating
> an objective value. If that cow is worth $100 to most farmers, I
> might jump at the opportunity to buy it at $10 even if I have no
> real use for it personally since I can make a $90 profit selling
> it to someone else.
>
> Now that we've established why gold would have objective value, the
> next question is why is gold better suited to serve as currency than
> other commodities. The answer, ironically enough, is its limited
> applications. If we used palladium as a currency, for example, our
> currency's value would radically fluctuate based on demand from a
> variety of sources --- particularly right now, it's value would be
> crushed by the auto manufacturing industry's woes. So in essence,
> a currency based on a good that has volatile pricing could be problematic.
> Since gold's applications are more limited, it is more stable as
> currency. Jewelry demand may go up or down, but it's somewhat stable.
>
>
> Now, the reason why gold has value is two-fold: (a) demand and (b)
> production costs. Gold has a real cost of extraction. This cost
> varies from miner to miner and is somewhat debatable (since you have
> to determine what costs are included in obtaining the final product),
> but the same is true for all commodities. However, the one thing
> that you can say about gold versus paper money is that these real
> economic costs are meaningful. Paper money has a real economic cost,
> as well, but I imagine it's fairly trivial (a few cents per bill?).
> Hence, the argument for gold is that it has a significant real economic
> value attached to it, whereas, paper's value is rooted in something
> less absolute.
>
> Honestly, I don't think literally using gold as a currency would
> be very convenient, but there are a lot of reasons it serves very
> well backing paper money. There are also reasons why when paper
> money becomes devalued, gold --- with its real economic costs ---
> gains value versus paper money.