As an Investment, Gold's Just a Brick 43 comments
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Gold is an important but very different asset class that competes with stocks and bonds. Unlike stocks and bonds, its main attractions are scarcity, durability and resistance to oxidation - it simply never stops shining.
In fact, most of the gold ever mined is around today. It is exhibited in museums, worn as jewelry and buried deep in the vaults of the central banks. Peter Bernstein, in The Power of Gold, wrote:
Despite the complex obsession it created, gold is wonderfully simple in essence. Its chemical symbol AU derives from aurora, which means “shining dawn,” but despite the glamorous suggestion of AU, gold is chemically inert. That explains why the radiance is forever. In Cairo, you’ll find a tooth bridge made of gold for an Egyptian 4,500 years ago; its condition is good enough to go into your mouth today. . . . Stubborn resistance to oxidation, unusual density, and ready malleability-these simple natural attributes explain all there is to the romance of gold.
Despite its unique properties, gold has not been a good investment. Over the past 200 years, its returns have barely kept up with inflation. Its value has a low correlation with stocks (prices of gold and stocks move independently of each other most of the time), which is a big positive from the portfolio construction perspective; diversifying with gold can reduce a portfolio’s fluctuations (volatility). But the diversification benefit comes at a large cost: Once added to the portfolio, gold substantially reduces that portfolio’s risk-adjusted returns. Its dismal returns negate any benefit the portfolio receives from reduced volatility.
One thing about gold, however - it is real! You can hold it and touch it and see its shine. This tangibility makes it seem impervious to the whims of politics, nature and time, as opposed to paper assets such as stocks and bonds. Gold’s physical attributes attract investors during times of economic uncertainty, and so it serves a purpose in the markets and society - it is a stabilizing influence. It feels safe.
Doomsday currency
The thinking of the so-called gold bug (a believer in gold’s supremacy, a gold aficionado) often takes on a variation of this form: While in the bunker (or any other variance of the “world-falling-apart” scenario), you cannot pay for food with paper money or a stock or bond certificate. You may do so with real tangible assets, such as gold. If this scenario played out (God forbid), it is conceivable that gold could become the de facto currency. In that event, you need to have real gold in a safe or buried in your backyard. The wise gold bug would have managed portfolio risk by also investing in a good arsenal of guns, as the demise of government bonds would likely lead to the end of the rule of law as well. Gold held by your broker or through ownership of gold stocks or exchange-traded funds will not come to the rescue; these bytes and bits are not superior to default-free bytes and bits, for example, U.S. Treasuries. Canned food may actually be a better store of value in this “world coming to an end” scenario.
The ever-increasing complexity and globalization of the financial system, rapid spread of international trade and the availability of risk-free investment instruments that were not available to investors in previous economic crises may have changed investor behavior during economic doomsday times. Financial instruments such as Federal Deposit Insurance Corp.-insured checking and savings accounts, U.S. Treasury bills and Treasury inflation-protected securities may challenge gold’s status as the safest haven in times of inflationary crisis.
Treasury inflation-protected securities may turn out to be the key challenger to gold’s store-of-value supremacy status in the future. Aside from being issued by the U.S. Treasury and therefore backed by the full faith of the U.S. government, they also protect investors from inflation - one of gold’s most-valued qualities. TIPS’ principal is tied to the CPI: The principal value increases with inflation and falls with deflation. When the security matures, the original or adjusted principal is repaid, whichever is greater.
Though TIPS appear to have superior financial properties to gold, they still lack one of gold’s main attractions - tangibility. After all, they are still just bytes and bits on a brokerage firm’s or bank’s mainframe, or pieces of flammable paper stored in a safe.
Holding gold has costs
Any cash flow-generating asset, like a stock or a bond, can be valued on the future cash flows that it is expected to generate. Predicting gold prices is extremely difficult because gold is not a cash-generating asset. In fact, it is important to note that gold actually has a negative yield. Gold is a cash-consuming asset; its safekeeping and transportation cost money. TIPS, as well as any bonds and dividend-paying stocks, have a positive yield; they pay investors for holding them.
Gold is also considered a good currency hedge, especially for the U.S. investors who are concerned about the declining dollar. Again, our financial ingenuity is stealing gold’s long-held exclusivity on that trade, providing options that were not available a few decades ago. To protect themselves against the declining dollar, U.S. investors can use currency futures and options, foreign-currency-denominated mutual funds and certificates of deposit; they can buy foreign stocks on foreign exchanges or through American depositary receipts; and, of course there is a most recent development - currency exchange-traded funds.
In both the long run and the short run, gold prices are driven by fear of the world coming to an end and investors’ expectations of future inflation. Although gold has some industrial applications - in jewelry, dentistry, computers, jet engines, electronics, as a superconductor, etc. - linking its intrinsic value directly to its price is difficult. Perception of its ability to store and preserve real value, especially in an inflationary environment, is the key driver of gold’s price.
As long as investors perceive gold to be a refuge in times of uncertainty, gold will act as such. It is important to note that gold’s monopoly as an instrument of choice at the time of fear and uncertainty has been undermined by other very capable and often superior financial instruments.
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This article has 43 comments:
The government lies about inflation and taxes the TIP annually.
How many of the stocks and bonds "ever" created are around today. Have you seen a roman stock certificate, Egyptian stock or bond, ANY STOCK OR BONDS from 1000 years ago, 500, 300, 200, 150?
Gold lasts through the centuries, through the rise and fall of nations, pulled from the sunken corpse of ships long lost, dug from tombs in Egypt and China. None of your bonds, fiat, stocks etc...... can hold a candle to that!!!!
Gold is a safe retreat from uncertainty and instability. It is not an instrument for protection against fear at all. Rather it represents the confidence of an island of calm serenity in a sea of confusing currents and storms.
When you have your life savings spread out in stocks, bonds and other pieces of paper it's good to know that, whatever may happen, you have a strategic reserve always in place to plug a gap in your strategy or the failures of something unseen.
Ask those who have lost their life savings in the market or housing collapse if they would not be better off today had they held a little gold.
I have lived in Thailand for three years. There are dozens of gold shops in every city of any size. Every Thai lady wants gold chains and ornaments. They know that there is no record anywhere that they have the gold and that anytime they have a serious need for money they can take a chain to a gold shop and walk out in ten minutes with cash. Try to talk one of them into one of the alternatives in the above article? Waste of time and breath.
I wish I have bought some. I regret I still have.
On Jun 18 09:11 AM Roger C. Wren wrote:
>
> I have lived in Thailand for three years. There are dozens of gold
> shops in every city of any size. Every Thai lady wants gold chains
> and ornaments. They know that there is no record anywhere that they
> have the gold and that anytime they have a serious need for money
> they can take a chain to a gold shop and walk out in ten minutes
> with cash. Try to talk one of them into one of the alternatives in
> the above article? Waste of time and breath.
Sorry for the typos.
That's how it works in ordinary times. It doesn't work in extraordinary times. If the government goes broke, it will find a way to wiggle out of its obligations, just as state and local governments are doing, just as GM and Chrysler are doing, just as Iceland did. Necessity knows no law. It's blinkered to think, "It can't happen here." It's happened everywhere else, given time.
"our financial ingenuity is stealing gold’s long-held exclusivity on that trade, providing options that were not available a few decades ago. To protect themselves against the declining dollar, U.S. investors can use currency futures and options, foreign-currency-denom... mutual funds and certificates of deposit; they can buy foreign stocks on foreign exchanges or through American depositary receipts; and, of course there is a most recent development - currency exchange-traded funds."
The current crisis is global. The current breathing spell is only an intermission in the drama. All countries are more or less up to their eyeballs in debt and burdened with an over-leveraged banking system, and/or with untrustworthy institutions and governments. Jumping from one sinking ship to another that seems to be sinking more slowly is risky and not attractive to everyone. (Especially not to central banks, which don't want to buy stocks anyway.)
==============
I think the real potential for gold appreciation is the turn in sentiment by central banks away from sovereign bonds as being "as good as gold," their fading inclination to sell their gold, and especially the search by numerous foreign governments for a new basket-based reserve currency to replace or supplement the dollar. Any such basket of currencies and commodities would have to include gold. Over the next few years, central banks will become net buyers of gold, instead of the net sellers they've been for decades. As a result, gold could rise by 50%--just for starters.
For private investors, the enormous hole of debt that the US and other countries have gotten into makes conventional investments less attractive than they were in ordinary times, and gold more attractive, over the long term. If ordinary returns are going to be limited and/or risky, gold's zero-return counts less against it.
Don't put all your eggs in one Armageddon either. We could have more than one.
On Jun 18 10:27 AM Prudent Man CFA wrote:
> If Armageddon comes I would rather have a bushel of corn or a shotgun
> than a bar of gold.
Do we have enough natural resources here to protect us from somthing like that?
How much more money can we borrow?
Thank god all my money's in gold locked up in a vault safe from those blasted beagle boys.
My Poem
The end of the word as we know it I'm told
Is when everything here has been purchased and sold
When I am sitting alone in my bunker of doom
With tin foil hat and some Spam in my tomb
An AK47 and 40 round clips
A lot of Jack Daniels and a prayers on my lips
I'll sleep all the better, .. I invested in "TIPS"!
But if after all the world isn't gone
And later step out into a new “shining dawn,”
Then off to the Pub for a few pints of beer
Sans worry, sans trouble, sans evil, sans fear
Saying a round for the house, been in my bunker and it sucks
Replies Lindy the Barmaid, well thanks very much
Six pints and three halves will be nine hundred bucks
I must have forgot in my story thus told
That my bunker holdings included some gold
So I lay down an Eagle as happy as can be
I now own a Pub and get freebies from Lindy
There isn't a moral or a lesson to learn
It isn't a canticle or a fable that fits
But I'm glad that I balanced my position in TIPS.
One final word on our civilization
In short on contango and of course backwardation
$hit happens we know, we can like it or not
Say your prayers, make your peace and keep your eye on the Spot.
Amen
Gold earns its keep during times of extreme political and economic upset when faith in government and the monetary system are in collapse. Thankfully these times have been rare. Long term owners of gold seem to be true believers who expect the worst at any moment, there have always been plenty of indicators. But if the worst does arrive then we will have bigger problems than owning gold can solve.
On Jun 18 08:33 AM doubleguns wrote:
> "most of the gold ever mined is around today"
>
> How many of the stocks and bonds "ever" created are around today.
> Have you seen a roman stock certificate, Egyptian stock or bond,
> ANY STOCK OR BONDS from 1000 years ago, 500, 300, 200, 150?
>
> Gold lasts through the centuries, through the rise and fall of nations,
> pulled from the sunken corpse of ships long lost, dug from tombs
> in Egypt and China. None of your bonds, fiat, stocks etc...... can
> hold a candle to that!!!!
The problem with 'schlock' like this is that it's so severely flawed, it would take an entire commentary just to detail the flaws.
The only relevant time-horizon to compare gold to other investments is since Nixon defaulted on U.S. gold-obligations in 1971. And even then, 30 years of constant price-suppression greatly hides exactly how superior gold has been as a store of value.
Suggesting that gold "competes" with stocks and bonds is a joke. Gold (and silver) have NO competition as investments - save for perhaps the gold and silver miners.
On Jun 18 09:32 AM DONE_SONZ wrote:
> Editors' pick? What a joke.
You do not seem to have many friends here.
Although it can be used for speculation now; it's main attraction is as a sound store of value - particularly in these uncertain times. "It's barely kept up with inflation..." Duh-uh! That's the whole point of the stuff.
Viewed as financial insurance; it takes on a very different mantle.
I got gold!!!!!!
On Jun 18 01:44 PM Itsonlymoney wrote:
> Your time line of a 1000 years is a tad long for my tastes. What
> has gold done in a lifetime and has it been of benefit is more to
> the point. Gold is ultimately important only as to its value relative
> to other things, that's why all the gold is still around. If the
> 20th Century is an indicator then its value as an investment is mixed
> indeed. Gold pays no dividends or interest, you can not live in it
> or burn it to keep warm, it is not edible, and for most everyday
> transactions it is awkward.
>
> Gold earns its keep during times of extreme political and economic
> upset when faith in government and the monetary system are in collapse.
> Thankfully these times have been rare. Long term owners of gold seem
> to be true believers who expect the worst at any moment, there have
> always been plenty of indicators. But if the worst does arrive then
> we will have bigger problems than owning gold can solve.
The landscape has changed. Tectonic forces been unleashed that have changed the very land under our feet. What was true the last 30-50 years will not be true going forward.
Those countries that own lots of claims on US assets in the form of t-bills will be looking to protect their investments as the credibility of the US dollar reserve status becomes more dubious.
They need not dump them, but just stop accumulating them at the pace that was apparent up until 2007. The game is over, the jig is up, Jeanie is out of the bottle (insert your own cliche here).
Going forward we are in a new world with the balance of financial power shifting to the wealth producing nations, and the natural resource producing nations, and away from the sclerotic over consuming nations.
Gold is an illogical relic? The truth is the dollar is. To say otherwise is pure denial. It might take 20 years, but the dollar is going to be much much less dominant in the future.
Finally, the market for gold is so thin (relative to the market for dollar denominated paper) that only a very small fraction of those dollar based assets need to migrate to gold to make the price jump.
Ar you serious about tips? Do you really trust the United States Government to tell you the true rate of inflation?
Please be serious.
Here is a point completely missed: gold is a proven (through millenia) asset which is <b>not an obligation of anyone else</b>. When you have gold, you have MONEY. When you hold paper (any kind of paper), you have paper -- at best the obligation of someone else.
Gold is attractive to many of us at a time when (1) the world is awash in debt, or the obligations of every Tom, Dick and Harry; and (2) defaults are rampant from Iceland to GM, from AIG to California. Who would have thought that two of our three carmakers would be bankruptcy? One out of every four homes is mortgaged above market value. ARE YOU SURE YOU WANT TO OWN DEBT?
Paper money is a zero-coupon perpetual bond ("Dan Quayle bond" -- no interest and no maturity): it earns no interest and cannot be redeemed for anything. It is only good as a medium of exchange as long as people keep accepting it. But it loses value over time to inflation which is the government's unlegislated way of taxing each of us (stealing our wealth).
An investment based on what the U.S. government determines is the value ? Can they change the formula ? Can they fudge the numbers ?
Of course, I know they would no more do that than they would take over the auto manufacturers or tell companies how much they can pay employees. Sometimes I just get a little carried away.
Since October 2000, the stock market has been a disaster with the S&P 500 dropping by a third. During this same time frame, the price of gold has risen more than 250%. If people would have had their insurance policy - gold - their overall wealth would not have taken such a devastating hit.
On Jun 18 01:18 PM Terry Finn wrote:
> I have been buying 2 U.S. 1 oz. Gold Eagles each week for the last
> 20 years at my local coin shop for cash. My investment has QUADRUPLED
> in those 20 years. This is a super way to not worry about the latest
> group of corrupt mobsters in Washington and Wall Street that are
> destroying the economy for the U.S. citizens. Even my two IRA's and
> my 401K have doubled by investing in hard metals that are not based
> on the printing press toilet paper coming out of Washington. Let
> the fools keep believing in the newest "PRINTING PRESS PAPER" scam
> to come along. I'll happily keep my 1 ounce gold bricks.
Gold is insurance for one's cash currency, not an investment per se.The chart shows that cash from 1800 has become totally worthless while gold has retained its value.
screencast.com/t/Rz1n4...
Gold is MONEY, not an INVESTMENT. An INVESTMENT is APPLIED MONEY. It is not an alternative to STOCKS and BONDS; it is an alternative to FRNs. It is not a segment of portfolio, therefore; it is an alternative paradigm to net worth. It is a basis of dollar pricing just as much as it is priced in dollars. We trolls have flipped the ratio. We have counted the bird in hand and not the two in the bush. And as much as we are "religious fanatics", so are you. Our "faith" is in a metal recognized for its value since the foundations of civilization. Yours is in the unholy trinity of The Fed, The Treasury, and The IMF.
I have peace with my choice.
That said, everything has to go to hell or you have to be extraordinary lucky on your entry & exit since gold has no intrinsic ROI.
I've found serious collectors of almost anything are rabid about their hobby. Throw in the Armageddon factor and the fine monetary characteristics of gold and you have die hard fanatics.
Some people have been holding since before the days of Howard Ruff waiting for a collapse so they can be vindicated.