Gold: Weighing the Virtues and the Risks

My brother forwarded this link from the NY Post by Hilary Kramer (remember her?) about gold. The article spelled out the recent history of the price of gold, some reasonable opinions as to why gold could go higher and then different ways to get into the space.

Over the last few years gold has gone up a lot in price due to several factors. Collectively we know a lot more about gold than we did ten years ago and are collectively much more interested in owning it one way or another than we used to be.

The article itself was somewhat generic, tilting toward owning gold as being a good idea based on what appears to be a visible path toward loss of purchasing power of the greenback at some point.

Unfortunately, there was very little heed given to the risk of initiating a position in something that is up a ton already.

I have been very consistent in talking about owning gold as a little bit of insurance against an external shock and if it is going up for other reasons that is OK, but I expect that if gold is doing well it probably means most other things are not. That sentiment is certainly true over the course of this decade even if not true for the last six months.

Now gold is at an all time high and concerns about the dollar could contribute to pushing the price higher or not. It seems like the price will go up, but that is usually the case when something has already gone up a lot. With gold up here it is very likely that there will be a lot of articles in mainstream publications like the one linked to above that go heavy on the virtues and light on the risks.

Gold may go up a lot more or not but it makes sense to be skeptical if, as it keeps going up, more and more people hop on the bandwagon. Obviously this could apply to any sort of tradeable, investable asset and while this line of thinking is not new it is worth repeating every so often.

Gold iPod! I'd hate to put that one through the wash.

Comments

[Mad Hedge F...:]

cgu Paul Tudor Jones nicely summed up the fundamental argument in favor of gold. The yellow metal is accumulated, and not consumed, and is the ultimate store of value. Gold does particularly well during times of excessive monetization, inflation, and instability of the banking system, as we are seeing now. Central banks, which have been consistent sellers for the last 20 years, are about to flip to net buyers. If non G7 central banks, like China, want to increase their gold holdings from the current 20% of reserves to the 35% weighting now owned by the G7, it will require 1.3 billion ounces of new purchases, or 20% of the total world supply. Certainly they are getting fed up with their ever depreciating dollar holdings. Witness last week’s Bank of India purchase of 200 metric tonnes. ETF’s now own $50 billion worth of the barbaric relic, about 3% of the world total, making them the sixth largest holder in the world, and retail demand for these gold proxies is expected to explode in coming years. Private investors, mutual funds, and pension funds are all underweight gold. This is all happening in the face of declining production from traditional gold suppliers like South Africa. It all adds up to a whole lot of new gold buyers and a shrinking body of sellers. Paul didn’t give any specific price targets other than “up.” Long time readers of this letter know I have been banging the table about gold all year. Time to salt away more American eagles for those college funds and grandkids.

Nov 16 12:01 PM

[doubleguns:]

Keep a trailing stop on your paper metals. It could be ugly coming down but that will just be a great buying opportunity.

Nov 16 02:05 PM

[optionsgirl:]

It's options expiration week, isn't it?


On Nov 16 02:05 PM doubleguns wrote:

> Keep a trailing stop on your paper metals. It could be ugly coming
> down but that will just be a great buying opportunity.

Nov 16 02:09 PM

[The Recusant:]

Hmmm, it would seem wiser to think about what the price of gold could likely be rather than from where it came when deciding whether to buy into it now or not. I guess it's a cup half full or half empty kind of thing.

Nov 16 07:30 PM

[robert99:]

I think we're at the beginning of the bubble. We'll see a large correction at some point, but when it will occur is anyone's guess. When it does happen though, it will probably be brutal. That will be the time to jump on the gold bandwagon.

Nov 16 08:41 PM

[Roger Knights:]

Let's say you're a central bank. You're overweight dollars and underweight gold, historically speaking. The dollar is on a long-term decline. What are you going to do?

1. Not sell more gold to buy dollars.
2. Buy gold on dips.

Central banks set the price of gold. Their reserves are enormous in comparison to the gold market. Other market participants are relatively minor. There's only a 10% downside risk before Asian banks buy gold. The likely upside is a continuation of the 17% annual rise in gold over the past nine years--and a potential jackpot if there is a "gold rush."

In five years, gold will likely be up 50%--with little downside risk as central banks continue to backstop its price at 10% below the market. What else can compare? Bonds, stocks, and real estate have much greater potential downsides, and more limited upsides, over that period. Even non-agricultural commodities are risky.

Nov 17 06:22 AM