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Doug Eberhardt is the author of "Buy Gold and Silver Safely" and a broker/dealer selling gold and silver bullion at 1% over wholesale cost.
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  • Is This The Bottom For Gold And Silver? - My Last Article On Seeking Alpha

    AUTHOR's NOTE: I have decided to no longer write for Seeking Alpha because of their lack of professionalism and control of content that goes against what I believe in and have written about in my book, Buy Gold and Silver Safely. They have been forcing authors to include paper stocks, ETF's or Mutual Funds as alternatives to physical precious metals for one's portfolio in every article when my company specializes in the physical delivery of metals to my clients and doesn't even sell paper assets. I have battled with the Seeking Alpha editors for years, well before they even had a Gold and Precious Metals category (which I believe I forced them to do). I gave them one last chance to post this current article you are reading as it was a timely piece based on current market action, and over 8 hours had gone by waiting on their review before I finally had to give up on them publishing it.

    If you like what I have written on Seeking Alpha or elsewhere, please sign up for our newsletter to continue reading my articles and check out my latest article;

    Is This the Bottom for Gold and Silver?

    http://bit.ly/14bkOpZ

    Thank you,

    Doug Eberhardt

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Precious Metals Broker selling gold and silver at 1% over wholesale.

    Jun 27 6:55 AM | Link | 8 Comments
  • 5 Reasons Why You Haven't Invested In Gold Or Silver UPDATED 2013

    This article is an update of my Seeking Alpha article dated 9/14/2010 of the same title.

    The price of gold and silver has moved higher for 12 straight years and you're not yet invested? Why is that?

    There are many reasons why you are not invested in these metals and most of them reveal how the deck is stacked against you in learning the truth about gold and silver and how they can hedge your portfolio from currency risk.

    This article will reveal the five reasons why you haven't yet invested in gold and silver. Keep in mind, gold and silver are not in a bubble just because their price has moved higher. Long term, it is the U.S. dollar and every other currency that are in a bubble.

    The fact that gold and silver are moving higher despite some intermittent strength in the dollar is quite revealing. What will happen to the price of gold and silver when the dollar resumes its downward trend? More importantly, gold has maintained one's purchasing power over the years even with a stable dollar which buys you less and less each year.

    5 Reasons Why You Haven't Invested in Gold or Silver

    Reason 1: Your Financial Advisor Doesn't Understand Real Diversification, Let Alone How Gold Fits Into a Diversified Portfolio

    When it comes to retirement planning, most financial advisors miss the mark in properly diversifying portfolios. The missing ingredient is the insurance against what most U.S. investors currently own; U.S. Stocks, U.S. Corporate Bonds and U.S. Government Bonds. All of these assets are subject to U.S. dollar risk. I address this further in an article I wrote Challenging Financial Advisors on the Need to Diversify Into Gold.

    For decades, the typical financial advisor diversified U.S. investor portfolios as follows:

    60% Stocks

    30% Bonds

    5% Real Estate Investment Trust (REIT) and Commodities

    5% Cash and other investments

    One's age and number of years from retirement would dictate the amount allocated to stocks. The old adage has been "subtract your age from 100 and that is the percentage you should be invested in stocks." So if you're 55, then 100-55 = 45, thus 45% of your portfolio should be invested in stocks.

    The vehicles that advisors have typically used to invest in stocks would be a mixture of U.S. Large-Cap, Mid-Cap and Small-Cap mutual funds or ETF's diversified among a wide range of sectors, with some foreign exposure. The bonds would be a mixture of mostly U.S. corporate, with some allocated to U.S. Government bonds through GNMA funds or U.S. Treasuries. The cash would be parked in U.S. money market accounts waiting for future investment opportunities.

    What do all of these typical investments have in common? They are all U.S. dollar based and subject to the fall of the dollar.

    Outside of some foreign exposure that could take advantage of currency appreciation in other countries, what in this "typical" recommendation from your financial advisor counteracts the fall of this U.S. dollar risk to your portfolio? The answer; is nothing.

    Financial advisors may add some TIPS that are supposed to be an inflation hedge, but TIPS only follow the manipulated Consumer Price Index (NYSEARCA:CPI) that doesn't take into account real inflation (are prices rising or falling? Or if over 62, has your social security check risen the past few years?) Prices are rising, and the social security payments are based on this manipulated lower CPI number which allows the government to pay out less to seniors each month.

    The fact of the matter is, an investor needs physical gold and silver bullion coins or bars to maintain their purchasing power. NOTE: The investor in precious metals needs to purchase just the type of coins that are a small percentage over the current spot price, not numismatic, rare or semi-numismatic European coins like Swiss franc, British Sovereign or French Rooster for example. Run, don't walk, from anyone who tries to sell you numismatic coins to hedge against the risk exposure your portfolio has to the U.S. dollar.

    When asked, many financial advisors don't recommend physical gold and silver because they don't sell it. I have had many advisors call me and ask them to help their clients because their clients wanted to buy physical gold and silver and the advisor didn't offer it. They may recommend quasi investments in gold or silver like ETFs, but they have their own issues as what are known as "paper" investments. For most, an investor cannot cash those paper products in and request physical gold and silver from the issuer.

    Lastly, many financial advisors don't understand this diversification because they believe that the U.S. dollar and U.S. treasuries are "risk free." They are not. While Treasuries have been strong the last few years, it is because of a complicit Federal Reserve who has been artificially pushing interest rates lower to try and stimulate the economy. To do this they have implemented inflationary programs like Quantitative Easing and Operation Twist which in a nutshell, are programs which find the Fed buying assets that can't be sold elsewhere or trying to stimulate the economy by lowering long term rates so they assume consumers will buy houses and cars. When you throw enough money at something, you can move it temporarily, but if the underlying economy is built on a house of cards like this, these stimulus programs will be tumbling down at some point when the consumer prefers to eat rather than buy a bigger house or car. Besides, banks aren't even lending much these days which defeats the whole purpose of the Fed's programs to stimulate.

    How will the Fed unload these assets in the future is the unanswered question as they are considered to be the "lender of last resort." So what happens if the Fed is wrong is the type of question no advisor prepares you for. The Fed was wrong in building up the markets that led to the first stock market bubble and real estate bubble and they are trying to blow up those bubbles again with their various easing programs. They will fail again as you can't throw debt at debt and expect growth to come from it except for the favored few who benefit in the beginning of the bubble; banks and investment firms. But we saw what happened to them in 2008/2009. The problems that led us to that financial crisis have not been resolved. For example the sub-investment derivatives the nation's top banks own are more than at the height of the crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act did nothing to curtail the nation's top banks. These banks will have struggles in the future because there are no counterparties to many of these derivatives. Congress and the Fed will attempt to step in again.

    Over the years I have critiqued many advisors including; a CFP, CFA, PhD and financial guru Dave Ramsey and their understanding of gold. I have to realize that these folks are bright individuals. I too was a financial advisor for over 20 years and considered myself bright. I would like to think I learned something over the years and am sharing it with you to make your own good decisions on your investments; to decipher for yourself whether or not gold and silver fit into a well-diversified portfolio.

    Because of this ignorance of financial advisors about the need for gold in one's portfolio, I wrote the book, Buy Gold and Silver Safely.

    Reason 2: The Media Is Biased Against Gold and Almost Always Pro-Stocks

    The media is almost always bullish on stocks and always trying to spin good news out of bad reports on the economy. As long as you are investing in stocks, they have done their job.

    Gold is competition to stocks. Investing in physical gold doesn't do anything for the economy, but it does do something for your portfolio. It makes it appreciate as it has the last 12 years. But more importantly, it hedges your portfolio against currency risk as pointed out in Reason 1 above.

    The media is owned by corporations. Corporations also do heavy advertising on various media as do Mutual Funds who try and get investors to buy corporate stock. It would be a conflict of interest for any media to talk negatively about the stock market in general as they are biting the hand that feeds them. If they say something negative about the economy, then people might pull their money from the stock market and thus owners of stocks could see their value go down. How does this negative talk about stocks help corporations? It doesn't.

    When one turns on the financial media, listen to what they say about gold (they hardly ever, ever, mention silver). I've heard all of them on CNBC and elsewhere at one time or another mock gold. In fact, I have video tape recordings I created of them doing so over the past few years you can find here; CNBC Gold Bubble Video Clips Compilation. Holding the media accountable to what they say is what matters most. Gold can only be mocked when there is an agenda for the mockers to have you invest elsewhere. 12 years of higher prices is a pretty strong case for gold.

    Steve Leisman was on CNBC in 2010 saying "the Fed has a tool box, it's still effective and there is nothing to worry about." Yes Steve, all is well just because you say it's well. We understand. That tool box however is getting empty for the Fed. This should be quite worrisome for investors. They can't lower interest rates any lower, so they have to make up other ways to try and stimulate.

    Reason 3: Our Education System Teaches Us Nothing about Gold, Let Alone Money

    If you have young children or grandchildren, ask them to do some simple math calculations using money. Set up a little store with a cash drawer of $1, $5 and $20 bills, quarters, dimes, nickels and pennies. Pretend you are a customer and you want to purchase items from them (give them some items to purchase in advance). The purpose is, to see what they have learned in school about money. More likely than not, they may know how to add, subtract and even do multiplication tables well, but they don't know how to give change for a $3.33 item when handed a $5 bill.

    While children eventually learn how to make change, they are never taught anything about the Federal Reserve or Federal Reserve Notes, the name printed on the top of all paper bills, let alone what gold used to represent in this country; money.

    Fast forward to one's college education since high school teaches you nothing from an economic perspective and the student is introduced to Keynesian economic philosophy which is all the college professors teach. This philosophy fits right in with keeping the individual ignorant on how an economy is supposed to work, and in order to pass the class, one has to go along with the nonsense they teach;

    · That debt is good (printing money).

    · If there is deflation, print more money (quantitative easing).

    · If companies and banks are in trouble, bail them out.

    Even Harvard law professor, Martin Feldstein was wrong in 2010 when he said the Fed would stop Quantitative Easing;

    There is no reason to expect the stock market to keep rising at the rapid pace of 2010. Quantitative easing is scheduled to end in June 2011, and the Fed is not expected to continue its massive purchases of Treasury bonds after that.

    Since 2010, the Fed has kept up the Quantitative Easing and the stock market is higher along with gold and silver. In December of 2009, Feldstein also called gold "a risky investment," which I refuted here. Gold doesn't change. What it is priced in changes. Most don't understand this.

    Reason 4: Your Neighbor Probably Won't Tell You They Bought Gold

    Unlike the euphoria that surrounded the run up to the dot.com bust, when everyone and their neighbor was telling you to get into NASDAQ tech stocks, or in 2003-2006 when they were telling you to buy real estate, most people who own gold today are quiet about their purchases. They don't want the world to know they own gold.

    Gold is a private transaction and should be as the more people who know you own it, the more who may come busting down your door when and if a currency crisis hits. My number one rule from my book is don't tell anyone you own it.

    In reality, the price of gold would be much higher if the owners of it were more vocal. The fact that it is moving higher for the last 12 years straight despite financial advisors, media and little word of mouth supporting it means that it's not just U.S. citizens who are buying, but the entire world is waking up to how gold can maintain one's wealth and purchasing power. Look at what's going on in Europe with debt and unemployment problems. The Euro is on the brink of further declines because Germany can't solve the problems of Spain, Greece, Italy and Portugal alone. The European Central Bank (ECB) is forced to add more debt to existing debt. This can't end well.

    Japan is also in trouble and the Yen has started to depreciate faster because of current government and past government adding more debt to the economy.

    In fact, all currencies are racing to the bottom in a last effort to be more competitive with their export prices.

    Reason 5: The Government Has an Incentive to Keep the Lid on Gold

    If the government was forced to live within its means, something I fully support, then we wouldn't have the budget deficits, wars and other waste that has caused the national debt to surpass $16 trillion and march towards $20 trillion or more in the next 4 years.

    Republicans and democrats both are responsible for where we are. Anyone that thinks this spending will be curtailed at any point in the future simply doesn't understand the nature of politicians. As long as the choice is between the lesser of two evils, it's still evil and they'll still spend. Increased spending depreciates the dollar but at the same time causes things to be more expensive. How are you keeping up your purchasing power? This is what gold and silver do.

    But doesn't spending stimulate the economy? The answer is, it has produced some green shoots, but those green shoots have roots embedded in the earth of fiat dollars. That soil isn't the same soil of our forefathers. In other words, it is not wealth at all, but just more debt which is trying to spark an economy with a wet flint.

    The recent influx of government spending has done little to stimulate the economy and the only reason the dollar is presently not crashing is because during this deflationary credit contraction, people are putting their wealth in what is currently still perceived to be "risk free" assets; the U.S. dollar and treasuries. The current move up in stocks and real estate will be short lived as this move higher is built on fluff created by the Fed.

    At some point the dollar will become weaker. At some point, gold and silver will be double where they are today. At some point, you will buy gold and silver or be left with depreciating dollars and less purchasing power to pay for higher priced items coming in the future. Ask yourself, where would you be today with your purchasing power if you bought gold 12 years ago?

    Conclusion

    Gold is still in its second and longest phase. The professionals will still try and buck you off the gold and silver bull. The dips will come. Holders of physical gold and silver care not that it falls 20% on its way to appreciating 100% or more. One can today even buy physical gold and silver with their IRA, something many financial advisors are not aware of.

    The U.S. government, Congress and the Federal Reserve will never change their colors. Our education system will always have flaws when it comes to helping people understand wealth and money and how to manage it. The media will always be biased against gold. And sooner or later financial advisors will wake up to the risk involved with the U.S. dollar and recommend physical gold and silver for your portfolio.

    Whether it be gold and silver ETFs like GLD or SLV, which are good trading vehicles, or physical gold and silver in your possession, which many prefer because they take control of their wealth, gold and silver represent insurance this day and age.

    You insure your house for fire and insure your car just in case you have an accident. Your portfolio needs the insurance that gold and silver provide.

    10% to 20% of one's portfolio needs to be in physical gold and silver bullion as insurance against the risk associated with the rest of your portfolio having exposure to the U.S. dollar. How else will you keep your wealth and maintain your purchasing power?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: Precious Metals Broker Selling Gold and Silver Bullion. Long Physical Gold and Silver

    Jan 22 3:47 PM | Link | 3 Comments
  • Senior Portfolio Manager Case Against Gold Is Flawed

    I have been known to criticize advisors, gurus, and journalists, CNBC and others over the years and their constant bashing of gold. Now that gold has started to rebound off of its most recent lows, it seems these gold haters are coming back and voicing their case against gold. Each time they do this, I will write a rebuttal.

    Just yesterday a Senior Portfolio Manager from Zacks Investment Management sent out an article titled The Case Against Gold in Today's Market which you can view in its entirety below. I couldn't find it on their website, so it must have been sent to their email list of clients and prospects they are trying to get to invest in an overvalued stock market. This is all many of these advisors know. Stocks. All hail the stocks. There is no room for physical gold in one's portfolio according to these types. But lets look closely at what is claimed by Mitch Zacks, the author of this article and see where the truth lies.

    I will go through each statement from top to bottom. It would help if you read Zacks article below first, and then come back to my critique.

    Zacks said;

    I don't see gold as a financial asset. Gold doesn't generate any income, and it doesn't pay a dividend. Thus I view it not as an investment but as a speculation.

    My Rebuttal;

    I am sure that Zacks thinks that dollars are a financial asset, yet a dollar bill doesn't pay a dividend and does not generate income in and of itself, just like gold. But dollars depreciate. A dollar from 1971 is still worth a dollar today. An ounce of gold from 1971 is worth hundreds of dollars more than in 1971 when it was priced at $43 an ounce.

    Rubies, pearls and diamonds were worth less in 1971 and also don't pay dividends, yet their prices keeps going higher. Why?

    Yes, dollar bills, when invested in a bank, can earn interest. In fact, banks are so generous today they'll give you a .19 percent interest on a 6 month CD and .30% on a 1 Year CD (national average according to Bankrate.com). So a $10,000 investment times .30% and you will have $10,003 at the end of one year. Seniors love this! (as you know I am being sarcastic here)

    Comparing apples to apples, one has done much better with gold than dollar bills, even with interest, and especially the last 12 years straight.

    Zacks said;

    Gold's value completely depends on other people to act in a specific manner for it to go up in price. The price of gold is up big over the last ten years, but prior to that, it did absolutely nothing for a long period of time, even during times of high inflation. In the 1980's gold wasn't considered a great store of value; now it is. The only thing that has intrinsically changed is the perception of what the future might bring.The high price of gold is completely reliant on people's preferences. If those preferences change, the price of gold could fall dramatically.

    My Rebuttal;

    It's actually 12 years straight, going on 13 that the price of gold has moved higher.

    Referring to only the 1980's, Zacks completely ignores what occurred in the 1970's. It was Nixon taking us off the gold standard that started the meteoric rise in the price of gold from $43 an ounce to a high of $850 in January of 1980. Fed Chairman Volcker stepped in and rose interest rates which got people to sell gold and buy long term CD's paying double digit interest. Do we have anything like that occurring right now? Is there any interest rate driven reason to do so?

    But the 1980's to the year 2000 gold did in fact linger. Why? The reason it did was because we were a producing nation. People bought our stuff. At the same time, there was no competition to the dollar. The dollar was indeed king! But what happened in 2000? There was new competition to the dollar. The Euro was introduced. The dollar struggled for much of this period after 2000, and people turned to gold to hedge themselves.

    From there Zacks claims that "perception" is what the price of gold is reliant upon. Does this same perception apply to the massive amount of debt that accumulates each year? Does the $16 trillion of amassed debt and a higher Debt to GDP ratio play into this perception slightly? Does the perception of a Congress and President (Romney's proposals too) that won't make cuts, but only try and control deficit spending weigh on this perception at all? How's that working out for Greece, Spain and Italy and many other European countries? We'll find out soon enough.

    For the price of gold to "fall dramatically" as Zacks said could occur, then government spending would have to fall dramatically for peoples perceptions to change.

    Zacks said;

    Gold has performed very well over the past ten years - its price has gone up nearly six-fold over the past decade. This is another reason why I don't think gold is particularly desirable at this point. The same way trees don't continually grow up into the sky, the price of gold will not continue to rise indefinitely.

    My Rebuttal;

    Again, going on 13 years of performing well for gold, not 10.

    While trees may stop growing, they do provide an unlimited amount of paper for the government to print. The Fed via the Mint can print unlimited amounts of paper to throw at problems. You can't say the price of gold will stop going higher when the Fed continues to give Congress all it wants in the way of paper and Treasuries. One must take away the alcohol from the alcoholic to reverse the consequences. One must stop the Fed and Congress from destroying the purchasing power of the dollar by curtailing their spending. Until the disease of spending is resolved, gold will keep moving higher without the growth limits in your tree analogy.

    Zacks said;

    Some brokers or portfolio managers will tell you that gold should be a part of everyone's portfolio, because it's just a good way to diversify assets. This is one point of view, but an outdated way of thinking. Yes, it meant something when gold was inversely correlated with the equity markets. But with assets now correlating together via gold-based exchange-traded funds (ETFs) and the like, this view has less and less credence. These days we see equity markets trending along with gold, not in opposition to it.

    My Rebuttal;

    Yes, diversification is what I preach and did so in my book, Buy Gold and Silver Safely. But how is this view "outdated?" Far from being outdated, most financial advisors have never recommended gold because the entire system down to the CFP books viewed it as a risky asset. All they ever recommended was stocks for decades, then stocks and mutual funds prior to the introduction of ETFs. Allowing investors to now invest in gold via ETFs has caused the price of gold to move higher much faster when sudden announcements by Bernanke like QE infinity are made.

    As far as stocks moving the same direction as gold these days, we can look at 2008 as an example where stocks ended the year down and gold positive. The fact that stocks are up today along with gold however is pure manipulation of the stock market. How do I know this? Because the data tells me this which I have pointed out in a couple articles;

    Stock Market Bubble and QE3 Surprise

    What the Data Really Tells Us and How It Will Affect Gold and Stocks

    The data simply is not there to support this stock market. Look at the Baltic Dry Index of 2008 and the S&P and how we're at the bottom again, yet the S&P has risen, keeping pace with gold. We'll see soon enough how this plays out, but that race to devalue the world over will soon have paper money chasing the only real wealth around; gold. At some point, gold will separate itself from the stock market, just as it has begun to the last 13 years.

    Zacks said;

    In short, gold prices are being driven by 'animal spirits,' not any sort of evaluation of its intrinsic value. There's no real reason for gold to go up -- or down -- in value. That's not to say you should think of it in terms of being 'bullish' or 'bearish,' but recognize gold as something other than an investment - it is a speculation.

    My Rebuttal;

    And this is where most advisors or portfolio managers miss the point. Saying something is driven by "animal spirits" and saying there is "no reason for gold to go up or down in value" is ignoring the entire nations debt, political structure and without any forward understanding of what this debt and future debt can lead to without it being addressed (which neither Obama or Romney have a plan for it).

    How can gold be a "speculation?" A couple times in your article you called gold a "rock." Of course its not even a rock, but a metal, but that's besides the point.

    You bury $319 of cash in your back yard 10 years ago (the price of gold at the time), dig it up today, it's the same $319 of cash. Can the $319 buy you more or less than 10 years ago?

    If you buried a one ounce gold American Eagle coin worth $319 in your back yard 10 years ago and dig it up today, it's the same coin but worth over $1,700 dollars and can buy you so much more. So what changed?

    What gold is priced in changed.

    Why does it take more dollars to buy gold today than 10 years ago? Because, using Zacks terminology, people "perceive" gold to be worth more now and in the future. One cannot discount the future. But people don't have to perceive current debt and government spending. We know it's there. They can easily draw conclusions about future debt too as they know Congress won't curtail their spending. When have they? From the era of Reagan to today, Congress has gone deeper and deeper in debt. Look at the debt clock at buygoldandsilversafely.com It's now over $16 trillion.

    To discount Congressional spending and pretend it's not there and not a future problem is a mistake. To ignore Fed action and think that someone will be there to buy back the assets at a future date without any consequences to the financial system, is also a mistake.

    Zacks said;

    When everyone who has been parking their assets in gold decides it would be more productive to go into equities or other investments, the price of gold will reverse itself. Once people decide they want to stop buying the pretty rock, the price of gold will fall.

    What is driving the price of gold is not fundamentals, not income streams, but fluctuations and perceptions about expectations. It's essentially a speculation on mass psychology, and that, quite simply, cannot be predicted.

    My Rebuttal;

    What would make anyone go into equities at these valuations? What are companies producing that people want? While I do agree with diversifying into stocks that pay dividends, my recommendations are to be cautious at present. I leave 80% of one's portfolio to "speculate" in the stock market. Dont' mess with my 20% into precious metals. Go find something else to critique.

    Gold is insurance against government spending, Federal Reserve madness and banking shenanigans, as well as future inflation. You insure your home and hope to never use it. You insure your car and hope to never use it. If you never need your gold, it won't end up worthless like those other insurance policies you bought. But don't discount the "mass psychology" that will come when people don't trust in what the Fed can do to fix things any longer. What happens if they can't? What happens when the fiscal cliff turns into a black hole?

    When Bernanke is talking of QE infinity, you may do well to get yourself some insurance that only gold provides (and of course silver). If you think you can't predict the fact that Congressmen and women don't get elected by saying "I'll raise your taxes" to pay for all this debt and future debt, then please understand that only through inflation will it be paid for. This means a weaker dollar and a need for gold insurance.

    Bernanke is fighting deflation while trying to control future inflation. Instead of letting the good weed out the bad, he throws QE at the bad. Instead of letting markets bottom out and rebound to profitability again, he prolongs the market high which can only lead to a bigger crash with the added debt. This is reality. This is why you own gold.

    The case is for gold, not against Mr. Zacks. And it's easily predicted. There is no reason you can't change your mind about it rather than stick with the industry hate of gold. Your clients will naturally benefit.

    The Case Against Gold in Today's Market
    by Mitch Zacks, Senior Portfolio Manager
    Mitch ZacksThe current dynamics in the market are causing many investors to act defensively. Whether it is the fear of inflation due to open-ended quantitative easing from the Fed, worries that the U.S. economy will fall off the "fiscal cliff," or trepidation about a possible depression hitting the Eurozone, investors can find plenty of reasons to feel anxious these days.Typically, when people fear the causes of inflation, currency debasement or other potential economic downfalls, many feel it is a good time to invest in gold. Not me.I don't see gold as a financial asset. Gold doesn't generate any income, and it doesn't pay a dividend. Thus I view it not as an investment but as a speculation.3 Reasons Investors Buy GoldGenerally, there are three reasons investors buy gold: one, as a store of value, two, as a hedge against inflation, or three, as a hedge versus the debasement of currency. Gold's value completely depends on other people to act in a specific manner for it to go up in price.Historically, gold has been known as an effective store of value, but this has gone in and out of favor. The price of gold is up big over the last ten years, but prior to that, it did absolutely nothing for a long period of time, even during times of high inflation. In the 1980's gold wasn't considered a great store of value; now it is. The only thing that has intrinsically changed is the perception of what the future might bring.Right now, countries around the world are trying to devalue their currency in order to improve exports and fight high unemployment. To some degree, real assets like gold should increase in price, but this idea is wholly dependent on people responding in a specific way to its inherent value, even when there's no fundamental reason to do so.Gold is something you can hold in your hand and it looks very pretty. Buying gold is very much like buying an antique or an expensive piece of artwork. But think of it this way: as an investor, you wouldn't buy a nice painting or an antique as a means of generating returns. Yes, the debasement of currency would have some positive effect on the value of these items, but these values are completely reliant on the perception of value of, that painting, that antique, that rock.My experience in investing has taught me that the asset class that is the hardest to own tends to perform the best. The one that's easiest, the one everyone is rushing towards, tends not to do as well.The high price of gold is completely reliant on people's preferences. If those preferences change, the price of gold could fall dramatically.When It Crashes, It Crashes Fast

    Gold has performed very well over the past ten years - its price has gone up nearly six-fold over the past decade. This is another reason why I don't think gold is particularly desirable at this point. The same way trees don't continually grow up into the sky, the price of gold will not continue to rise indefinitely.Historically, when the price of gold crashes, it crashes fast. The charts always look the same -- up, up, up and then down in a hurry. No one ever calls these turns. There is no floor when the price falls because there is ultimately no intrinsic value in gold, and no income stream to keep its value tethered to reality.As long as people continue to see gold as a hedge versus inflation or the debasement of the dollar, the price will stay high. But what if people stop seeing it this way?

    Buying Gold Has Gotten Very Easy

    Some brokers or portfolio managers will tell you that gold should be a part of everyone's portfolio, because it's just a good way to diversify assets. This is one point of view, but an outdated way of thinking. Yes, it meant something when gold was inversely correlated with the equity markets. But with assets now correlating together via gold-based exchange-traded funds (ETFs) and the like, this view has less and less credence. These days we see equity markets trending along with gold, not in opposition to it.

    Part of the reason for this: it is now easier than ever to put your money into gold. Fifteen years ago, you would have had to buy gold futures, but now gold ETFs give easy exposure. However, just because it's easier to put gold into your portfolio doesn't make it a good idea.

    The Wise Alternative

    In short, gold prices are being driven by 'animal spirits,' not any sort of evaluation of its intrinsic value. There's no real reason for gold to go up -- or down -- in value. That's not to say you should think of it in terms of being 'bullish' or 'bearish,' but recognize gold as something other than an investment - it is a speculation.

    The huge increase in the price of gold reminds me of the late 1990s. Recall the technology bubble that was driven by all the IPO activity for technology companies that weren't generating any earnings. People believed these corporations were intrinsically valuable and bought them up, but without being grounded to earnings or income most of these stocks eventually collapsed.

    In contrast solid companies that report growing earnings or pay a dividend are true investments. The intrinsic value is measurable with these firms, and as such they therefore are more sensible - and far less risky - assets to own.

    When everyone who has been parking their assets in gold decides it would be more productive to go into equities or other investments, the price of gold will reverse itself. Once people decide they want to stop buying the pretty rock, the price of gold will fall.

    What is driving the price of gold is not fundamentals, not income streams, but fluctuations and perceptions about expectations. It's essentially a speculation on mass psychology, and that, quite simply, cannot be predicted.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am long physical gold and silver bullion bars and coins

    Oct 10 1:39 PM | Link | 4 Comments
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