phillips49

The Bedrock Case for the Return of the Gold Bull

The is no arguement that the US financial system is stressed. However, this does not mean that gold is a safe haven either. There are those that would say, it's different this time, but looking at the history of gold prices though booms and busts over the last 30 years, gold is a lousy investment and certainly not a hedge against inflation. Gold was flat from 1981 to the end of 2004. (23 very long years) It lost ground against inflation all during that time. If you bought gold at $400/oz in 1981, then to have just even purchasing parity today, gold would have to be $1,150/oz. In 2005, gold began to climb. So what happened ?....A period of enlightenment? ....No, actually, the introduction of gold ETF's happened in the 4th quarter of 2004. Everyman suddenly had access to gold if they wanted to play. The ETF itself actually created an artificial demand for the metal that wasn't there before. The current price is sustainable only if sellers don't out number buyers. In other words you are dependent on the guy next to you to hold and not sell. Until of course you get scared and decide to sell yours first. Investors have been fleeing all asset classes, including gold.
It is also a mistake to liken gold to currency. The governments of the world won't let that happen. And they will conspire together to make sure it doesn't happen. Gold will never be accpted as legal tender in the grocery store. It will always have to be converted into paper. They own enough gold, that if even partially sold, would drop the price of gold into the last century. If you bought a 1000 shares of GLD, this summer when the hype was high, say at $90.00, then you're out a lot of money in a very short period of time. What has inflation done in the last one month? It sure didn't rise 14%. I'm not anti gold or a nay sayer. It just is what it is!

Where Are Precious Metals Heading?

Bearfund:

If cash is a lousy investment and gold = cash, then gold must be lousy investment. Because gold is a commodity it is an unreliable proxy for cash. It is subject to supply and demand and is only worth what someone is willing to pay for it at a particular time. It is highly volatile over short periods of time and unrelaible over long periods of time. Yes, the example posed is extreme, but it is also real. By 1984 gold had declined to $331/oz. In December, 2002, gold was still only $346/oz. Cash invested at 4% interest would have yielded $668 in that time frame. Bread doubled in price in that same time frame. If bread could have been preserved, bread would have been a better investment than gold for those 18 years. A buyer of gold in 1984 would not have had parity purchasing power until 2007. 23 years is a long time to wait to get even. Neither the dollar, nor gold has any particular value except what it can be exchanged for. Money can be made in gold by some, by just plain luck in timing and by some pros with a good timing system and instant information. For the average person cash is a safer, more reliable position in a bear market. Gold today is 4.4% lower than it was on July the 15th. Cash is still the same value.

Where Are Precious Metals Heading?

Ownership of gold as an inflation hedge has everthing to do with timing, hype and fear and little to do with reality. Let me explain. My dad bought into the the sky is falling, everything is failing in 1979. He bought gold at $750 an ounce. ( I inherted it ) To have the same buying power today, gold would have to be 312% more than what he paid for it, assuming 4% compounded inflation a year. (1.04) to the 30th power, or $2340 per ounce. It hasn't even come close. In the same time frame the Dow Jones industial average has risen from 830 to 11000 or 13 times. The same investment in the Dow would be worth $9,750. The Dow may be ugly at the moment, and it has certainly been ugly in the past, but the history of sound investing is on it's side.