Gold: Is Now the Time to Buy? 44 comments
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I was asked by a reader yesterday if now was a good time to buy gold. This is always a deceptively simple question with any investment. After writing a fairly lengthy reply, it struck me that this was probably a topic worthy of a commentary, itself.
The starting point with such a question is to note that there are two types of investors. One group prefers buying into investments where prices are already rising. Depending on how you choose to characterize such investors (or how long they wait to buy-in), these are either investors who like to “go with the trend” or “jump on the bandwagon”.
The second type of investors are much more focused on buying things while they are “cheap” than in looking for already-established trends. These “value” investors typically buy their investments while prices are falling. The reasoning being that if you want to try to buy something at its cheapest point that this will never be possible if you wait until the price of that asset has already established an up-trend.
Many financial advisors fall into the first group, for a couple of reasons. First, since they are managing other peoples' money, they often are more conservative with their buying and selling. Secondly (and more cynically), if the investment goes sour, it's much easier to justify buying something on the way up than on the way down.
Personally, I belong to the second group. While I've taken a number of puncture-wounds from “catching falling knives” over the years, this is still the philosophy with which I'm more comfortable. It is not so much a matter of saying that one approach is better than another. The most-famous and most-successful contemporary investors fall into both categories.
Instead, this is largely a matter of investor comfort. I have a very difficult time “pulling the trigger” with a purchase when the price of that investment has been moving steadily higher. Put another way, I have a greater fear of purchasing something just as it is making a short-term top than my fear of purchasing something where the price is falling – and then seeing it go even lower.
Many investors have the exact opposite “comfort zone”. Again, it's not a matter of one approach being proven better, but rather choosing a strategy which will minimize the inevitable stress which comes from investing (which, ultimately, is simply another form of gambling).
Putting aside personal philosophy, the next point which must be determined before it's possible to answer the question “is now the time to buy?” is to determine whether this is an investor seeking to enter a market, or an investor looking to add to an existing position.
The reason why the decision to invest will vary between these two categories of investors relates to “opportunity cost”. In this case, the opportunity cost in question is what does an investor stand to lose if he/she does not buy today, the price of the investment continues to rise, and there is never another opportunity to buy at this price?
This is not a prediction that this is what will happen. It is, however, the only scenario where the issue of opportunity costs arises. If the investment should go down in price in the future, then the “opportunity cost” is zero – and thus a moot question.
In this scenario, the opportunity cost is different between those investors who already hold some gold, and those who hold none. For those with no gold, the opportunity cost is 100% of the profits they could have realized if they had invested all they wanted to invest in this sector – at current prices. For those with existing holdings, their opportunity cost will only be a fraction of that total (depending on what percentage of their maximum holding they have already purchased).
What this means from a purely mathematical standpoint is that the investor who already holds some gold can afford to be more patient and “choosy” about if or when to make their next purchase. Having established that there is a lot more pressure on an investor with zero gold holdings to buy today, does this equate to answering the original question with a simple “yes”? No.
Assuming that the investor is looking to purchase gold for the specific virtues of this investment (wealth preservation and protection from significant “shocks” to the economy), with gold currently setting new (nominal) highs, a second question must be asked: is there an alternative to investing in gold bullion which offers equal or similar virtues?
The answer to this question is “yes”. There are two, obvious alternatives to buying gold bullion today. One is to buy a different precious metal, and the other is to buy shares in the producers of this commodity (or other precious metals).
The most-obvious alternative to buying (real) gold bullion today is to buy silver instead. While silver has actually outperformed gold in this most-recent rally, silver began its latest run from a position of being extremely under-valued versus gold.
As regular readers know, for roughly 5,000 years the gold/silver price ratio has averaged roughly 15:1. Today, despite the larger move higher for silver, that ratio remains close to 60:1. This historically lop-sided ratio exists despite the fact that roughly 90% of the world's stockpiles of silver have been consumed – and with current inventories (the amount of silver available for sale today) also still near historic lows (see “Your ETF-silver is for sale”).
Thus, while the price ratio is still severely skewed in favor of gold, the supply ratio dramatically favors silver. Obviously, over the long-term the complete disconnect between price and supply must be resolved by a strong move higher by silver versus gold. As a result, while we never know for certain whether the price of a good will move higher over the short-term (whether we are talking about gold or silver), we do know that over the longer-term that silver will significantly outperform gold. This offers people buying silver today some “downside insurance” which does not exist if they buy gold today.
The other attractive alternative to buying gold bullion today is to buy into the producers of gold (or silver). There are both powerful short-term and long-term arguments for favoring the miners today over bullion.
As a shorter-term argument, many if not most precious metals stocks have yet to recover to their 2006 highs – when gold was trading below $700/oz and silver was trading at less than $15/oz. This is despite the fact that gold is now roughly 50% higher in price, while silver is roughly 20% higher. Even after the impressive rally which the precious metals mining sector has recently experienced, these companies remain inexpensive versus the price of bullion.
The longer-term argument which favors the miners is the historical observation that when bullion ultimately reaches some sort of medium- or long-term top that the miners have always greatly outperformed bullion. This is not simply some market idiosyncrasy, but rather an expected behavioral pattern.
To begin with, as I have pointed out in previous commentaries, precious metals producers (and all commodities producers) provide investors with natural leverage – as a basic component of their business model and not dependent on taking on large amounts of debt (see “A Novice's Guide to Precious Metals, Part II: the miners”).
When this market approaches a top, this also implies the peak of greed amongst investors (whether it's a “top” in precious metals, or any other sector). Obviously, when greed is at its maximum, this is the time when the leverage offered by the miners will have the greatest appeal to the most investors.
The second reason why the miners historically greatly outperform bullion (especially toward the “top” of a cycle) is because of the tiny size of the precious metals sector. Just one of the trillions of dollars being thrown around by the U.S. government could buy-up every ounce of gold and silver on the planet – with enough left over to buy most or all of the miners, as well.
Thus, with a market this tiny, there simply is not enough bullion in existence to satisfy total demand. With many investors unable to sate their appetites for this sector through buying bullion directly, they choose instead to buy the best proxy for bullion: the precious metals miners.
For investors who have not yet entered this sector, and are worried about “missing the boat”, there is no need to panic and feel that you must buy gold today. Personally, I have no doubt that anyone buying gold at $1000/oz will look back a couple of years from now and consider that a “cheap” purchase. However, as I have pointed out, investing is also about being able to sleep at night between the time you purchase an investment and the time you sell it.
As of this minute, my suggestion is that buying silver, or buying shares in quality, precious metals miners is more conducive to a good night's sleep than buying gold – at the current, nominal record-high.
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Second half of the article is good, and I agree- Could have just made the second half into one article and leav it at that.
First half of the article, round and round about ranting. Unnecessary and wasteful.
On Oct 13 01:46 PM GreatWhite wrote:
> How about to counter this Author's no stop pushing of Gold and Silver
> to line his own pockets! It makes me ILL! Every article either
>
> trashes the USA (A round about way to push Gold or Silver down your
> throat), Blatenly push GOLD & Silver down your throat and last
> but not least, the 3rd type of article to kiss China's Butt! <br/>
>
> WHY DOES SA EVEN ALLOW HIM TO WRITE ARTICLES?
>
> Great White Shark~!
>
>
>
Thanks for any advice Bernie
Thanks!
Marshall Donnerbauer
I would like to point out another factor about Silver and ETF's:
According to the Morgan Silver Report the post war high point of world silver holdings was 1989. In that year the world had 2200 million oz of silver sitting in bank vaults. Since then the rising costs of mining the stuff and it's poor market price compared to Gold has reduced the amount of silver extracted from the ground and our stocks have declined.
The low point of world silver holdings was apparently 2005 when we held just 200 million oz of silver. Between 1989 and 2005 silver holdings were on a virtual straight line decline of 125 million oz per year as industrial silver usage and jewelry production was not fully replaced by newly mined silver. That's the thing about silver - its' a very important raw material and gets used a lot by industry whereas gold isn't used much -it just sits there looking pretty.
Now here's the strange thing - from 2005 to 2009 the world's holding of silver has suddenly 3x'd, and whereas we only had 200 million oz in 2005, we now appear to have 600 million oz . How come? Silver mines haven't radically increased output. The price of silver hasn't skyrocketed so that everyone is turning their silver jewelry into scrap silver. So where has all this silver come from?
Well interestingly enough silver ETF's started back in 2006, about the time the world's silver stock began its' sudden expansion. Could that be the source of these suddenly apparent new silver holdings? 'Hold on' I hear you say, 'they are supposed to buy an oz of physical silver for every oz of silver they write paper for...aren't they?' Well, let me see now, if I'm a marginal banker newly selling silver paper promises and I've got all these people buying my bits of paper saying IOU 1 oz of silver, do I really need to hold all that silver I'm writing paper for? In Fiat money banking the bankers only need 10% of the money they lend out to be in the actual bank vaults because banks lend deposits to each other, Couldn't ETF's lend deposits to each other? Or better still, sell silver IOU paper to each other and then claim the other ETF's IOU paper is silver stock? Who's going to check it anyway? Many ETF Documents of Incorporation don't specifically say that their silver has to be all physically held and externally audited. Maybe ETF providers think 'well what do investors really know? They trust Fiat paper (Good ol' US Dollars) don't they? Why not our ETF paper?'
One more point, according to the Morgan Silver Report graph, if the 1989/2005 reduction trend line of silver had carried on and hadn't made a dramatic turn in 2005, then the world should be about out of silver stocks just about now.
Hmmm... Think I'll buy a few more Silver Mining Shares.
No, they don't edit my text (or that of other contributors) - there is simply too much volume for them to do that.
However, whenever my popularity on the site starts growing too quickly, all of a sudden they refuse to publish most of my submissions.
Then, once I 'cool down' in their stats my stuff starts appearing regularly again - although I no longer EVER get an "editor's pick".
On Oct 13 09:26 PM Zell wrote:
> Have they ever altered your content?
Jeff, have you done much research into Rare Earth Minerals and the mining companies? China has something like 90% of the rare earth mineral supply which are used in everything from appliances to wind turbines. I bought a couple of mining stocks on the Canadian Venture exchange and one of them tripled in value when when China announced that they were no exporting rare earth minerals. I would appreciate more info on this topic if Jeff or anyone is familiar with this alternative to precious metals.
I've written several pieces precisely on this subject. Visit the "silver commentaries" on our site to read them in detail (www.bullionbullscanada...).
Here's how the scam works. The same bullion banks who have larger SHORT positions than in any other commodity market in history are ALSO the custodians for all the ETF-silver - for virtually no fees at all.
As I have pointed out, it should immediately make people suspicious that the world's largest shorts are supposedly SUBSIDIZING the entry of small "longs" into this market.
Above and beyond that, their short positions are just as large as total ETF-holdings (in fact almost EXACTLY the same size). However, while the ETF's are "audited" the short positions have NOT been audited for DECADES.
Thus, the "audits" of the ETF's are irrelevant. With the banksters (at BEST) only holding enough bullion to EITHER "cover" their own short positions OR to honour their "custodian agreements" to the ETF's, you would have to be a fool of the highest magnitude to conclude they would honour the custodian agreements.
As a reminder, Morgan Stanley just finished paying a (slap-on-the-wrist) fine for BULLION FRAUD (also posted on our site) - demonstrating that the banksters will not hesitate to default on their bullion contracts (with the exception of their OWN in-house positions).
On Oct 14 03:26 AM Bernie2 wrote:
> One question: I have red many warnings that silver (or gold) etfs
> don't personally hold the physical bullions and their custodians
> may not cover their hold with actual specific bullions. What about
> the recently published SGOL and SIVR. They publish a list of serial
> numbers of their bullions every days and have two independent audits
> of their vaults. One at the end of the year and a surprise audit
> in between. Isn't that safe?
> Thanks for any advice Bernie
Yes they are uncommon, however, what has previously prevented OTHER sources of these valuable materials from being produced outside of China (and Russia) is that China could produce them so cheaply that they could UNDERCUT any potential competitor.
Thus, according to that argument, China's new policy to restrict exports will now cause those non-Chinese deposits to be developed. Therefore it SEEMS that any supply issues will be short- or medium-term problems.
Unfortunately, as is often the case with such competing arguments, we won't FOR SURE until we are able to look back in hindsight.
My personal preference is to stick to commodities and markets where I have a better grasp of fundamentals. Also, from previous experience, I'm reluctant to make bets on commodities which aren't large enough to support OPEN TRADING, but instead have all pricing deals arranged privately - not enough transparency for my liking.
On Oct 14 01:05 PM Curtis Forbes wrote:
> I bought silver for the first time last November when it was under
> $9/once. Much of my decision was based on the writings of Ted Butler.
>
>
> Jeff, have you done much research into Rare Earth Minerals and the
> mining companies? China has something like 90% of the rare earth
> mineral supply which are used in everything from appliances to wind
> turbines. I bought a couple of mining stocks on the Canadian Venture
> exchange and one of them tripled in value when when China announced
> that they were no exporting rare earth minerals. I would appreciate
> more info on this topic if Jeff or anyone is familiar with this alternative
> to precious metals.
On Oct 14 01:16 PM Jeff Nielson wrote:
> Curtis, I've read some persuasive analysis that "rare earths" are
> not quite as "rare" as portrayed.
>
> Yes they are uncommon, however, what has previously prevented OTHER
> sources of these valuable materials from being produced outside of
> China (and Russia) is that China could produce them so cheaply that
> they could UNDERCUT any potential competitor.
>
> Thus, according to that argument, China's new policy to restrict
> exports will now cause those non-Chinese deposits to be developed.
> Therefore it SEEMS that any supply issues will be short- or medium-term
> problems.
>
> Unfortunately, as is often the case with such competing arguments,
> we won't FOR SURE until we are able to look back in hindsight.<br/>
>
> My personal preference is to stick to commodities and markets where
> I have a better grasp of fundamentals. Also, from previous experience,
> I'm reluctant to make bets on commodities which aren't large enough
> to support OPEN TRADING, but instead have all pricing deals arranged
> privately - not enough transparency for my liking.
I am a gold bug, but the ratio of AU/AG is numerismatics. A better reason to buy gold is to see how governments all over the world are debasing their currency.
" Just one of the trillions of dollars being thrown around by the U.S. government could buy-up every ounce of gold and silver on the planet – with enough left over to buy most or all of the miners, as well."
I dont beleive this is a true statement.
The Value Of All The Gold In The World
$5,119,829,224,091
Yep - That's trillions
Based on current spot gold price of $1,061.00
Taken from onlygold.com website as of 10-14-09.
Add in silver and you get another 20 Billion $$$$.
Additionally, silverseek .com claims that all the gold bullion would total 4-5 trillion dollars.
You make a good point, but the facts matter.
I was thinking after writing that, that I should have changed the wording or gone into more detail.
The fact is that most of the gold ever mined would NEVER come onto the market (at any price). Asian nations have countless tons adorning architecture all across the continent (and Europe has a fair amount of gold decorating some of its own architecture).
Then are all the family heirlooms and jewelry like wedding rings - where even a doubling or tripling of the price would not cause people to pawn those possessions.
It would have been better to have written "if someone would try to spend a trillion on gold and silver, they would run out of sellers long before running out of money.
Thanks for zeroing on that "loose language".
On Oct 14 06:40 PM E.D. Hart wrote:
>
> " Just one of the trillions of dollars being thrown around by the
> U.S. government could buy-up every ounce of gold and silver on the
> planet – with enough left over to buy most or all of the miners,
> as well."
> I dont beleive this is a true statement.
>
> The Value Of All The Gold In The World
>
>
> $5,119,829,224,091
>
> Yep - That's trillions
> Based on current spot gold price of $1,061.00
> Taken from onlygold.com website as of 10-14-09.
> Add in silver and you get another 20 Billion $$$$.
> Additionally, silverseek .com claims that all the gold bullion would
> total 4-5 trillion dollars.
>
> You make a good point, but the facts matter.
There is roughly 17 times as much silver as gold in the Earth's crust - which corresponds very closely with the 5,000 year average of 15:1. Obviously the ratio in recent decades has been in PART due to the ignorance of Western nations of the intrinsic value of silver, combined with decades of manipulation grossly distorting the market.
As further evidence of the relevance of the ratio, we need only observe that during the decades where silver has been grossly undervalued that global stockpiles have been consumed - the inevitable consequence of price-fixing a good below its REAL value.
On Oct 14 04:49 PM Ray Lopez wrote:
> The talk about AU/AG ratios is nonsense. Ratios change "permanently"
> all the time. Stocks used to offer huge dividends relative to their
> PE until 1958, and that ratio stopped working.
>
> I am a gold bug, but the ratio of AU/AG is numerismatics. A better
> reason to buy gold is to see how governments all over the world are
> debasing their currency.
It's an excerpt from the 2009 Ranking of Countries for Mining Investment from Behr Dolbear.
The report states that Argentina has become increasingly risky and reduces the country's grade by 4 from last year. I'd be cautious.
On Oct 13 01:36 PM Jeff Nielson wrote:
> Hi Danny.
>
> I've looked at that one a few times. An American pal I got to know
> on Stockhouse.com (a great place to learn more about Canadian miners)
> is an unquestioned expert on this company.
>
> When I asked him about buying-in when the company was at its bottom
> (and had just obtained financing), he advised me against jumping
> in - as he has a very poor opinion of the Argentinian economy (and
> government).
>
> In hindsight, there was a nice gain to be had there. I haven't done
> enough research on the economic environment in Argentina to be able
> to say any more than that.
To address a few other things that came up here: (1) I can assure everyone that the Seeking Alpha editorial team has absolutely no bias or agenda with regard to the direction of gold or any security, (2) in deciding whether to publish a submission or not, we do not discriminate in any way against more popular authors, and (3) Editors' Picks are chosen by the individual editor who publishes the piece, based on the following 3 criteria: rigor of research, uniqueness and quality of the argument, and shelf-life of the article (since EPs stay linked from our sidebars for awhile, we prefer to give them to articles that are not very time sensitive).
~ Mick Weinstein, Editor in Chief of Seeking Alpha
On Oct 14 11:09 AM Jeff Nielson wrote:
> Hi Zell.
>
> No, they don't edit my text (or that of other contributors) - there
> is simply too much volume for them to do that.
>
> However, whenever my popularity on the site starts growing too quickly,
> all of a sudden they refuse to publish most of my submissions.<br/>
>
> Then, once I 'cool down' in their stats my stuff starts appearing
> regularly again - although I no longer EVER get an "editor's pick".
>
your reference link to : “A Novice's Guide to Precious Metals, Part II: the miners” was showing today. Probably a browser fontsize misconfiguration on my part that prevented the page to display.
Again, congratulation for your enlighthening analysis.
- Benoit