bearfund

Four Reasons Why Gold's a Slam Dunk Investment

SWRichmond, it's best just to ignore CLH and his twin JasonC. They either work for the government or are well qualified to do so. Keep your backside covered when they're around unless you want a hefty dose of sunshine blown up it.

In the meantime I'll continue using gold (which is neither an investment nor a trade) as my functional store of value and my metric for the worth of investments. Gold does not "go up" or "go down"; it simply stores value. Paper money goes up and down, and the prices of goods and services denominated in that paper lag the paper's moves (wrongly leading people to believe it's the metal what's changing in value). In the long run CLH and his kind will be broke and the government they worship will have only more worthless paper to offer for their sacrifices. Those of us who saw through their lies and impossible promises will still have about the same amount of purchasing power we have now, which is to say the same amount of purchasing power we'd have had in 1975, 1925, or 1725.

Yes, really. The first US gold coins were struck in 1849, had a value of $1, and contained .04837 oz t gold; today that gold is worth $40.15. Between 1849 and 1971, the value of the dollar with respect to gold changed slowly; various forms of gold and/or silver standard were in place. Had you kept the 1849 coin until 1970, you would find that the dollar had declined by about half, so that the coin could then buy $2.04. The coin's purchasing power would have been little changed from 1849, but so too was the dollar's - the government forces setting the value of the dollar in those 122 years did a rather poor job of debasing the currency. Since then, however, the dollar has depreciated rapidly. The coin, ignoring historical value, has not. It remains about as valuable today as it has been every day since it was struck - but no moreso. This is why gold is not an investment; it is unlikely to experience a significant increase in real value, nor does it produce income.

By comparison, a Jan 20, 1880 New York Times article suggests that shares in the newly-formed Union Pacific Company, then worth 4.7 oz t gold ($96.50), would now be worth about 147 oz t gold ($122,000), a 2.7% annualized real return not counting the substantial dividends. A good investment creates value; gold merely stores it. This also highlights both the importance of dividends and the tiny real rates of return on even quality investments. Most of the "capital gains" associated with equities are nothing but debasement at work. For example, had you bought GOOG at $96 in August '04, you would have a nominal annualised return of 48% (367% overall). In real terms, however, that's a somewhat less impressive 24% (135% overall) - for buying on the ground floor of a huge success story. Future returns will surely be much lower. Had you bought the S&P 500 in 1970, you would have paid 2.01 oz t ($85). Today it's worth 1.55 oz t ($1283). This reflects the reality that most companies are not very good investments (or perhaps that unsound money weakens any investment). It also means that dividends matter, a lot. Had one either reinvested the dividends or stored them in gold, the outcome would be dramatically different. Conventional wisdom holds that dividends account for 30-35% of total returns. In fact they account for most or all of the real return. Dividend yields in gold are the same as yields in dollars, but capital gains over time are subject to debasement. This is one of the main reasons I prefer dividend-paying stocks: I have the ability to store my income in gold. Most companies that retain earnings do so in their home fiat currency, so that they lose value over time. With a sufficiently long horizon, the average investment will return no capital appreciation in real terms. Therefore, when considering broad market total returns, dividends are in fact the whole story; this is a natural and expected consequence of a free market (capital will be allocated to those investments that produce greater incomes, expanding capacity and lowering incomes, thereby reducing the equity value greatly). That does not mean that the average investment produces no income, however. Choosing good businesses that generate consistent income, capturing and storing that income (in gold, of course), and reinvesting a portion of it selectively (good businesses at good prices), is how an investor creates long-term growth of real wealth. Everything else is speculation, including owning gold in the hope that it will over some period of time "go up" more rapidly than the dollar declines in purchasing power. You can be assured that such imbalances will be arbitraged away; you are doing nothing more than playing a game of chicken with the market.