Chris B

Gaza War: Expect a Spike in Oil, Gold

These Israeli/Palestinian bush wars have been going on for DECADES, so I would advise against using the nightly news as a source for investment ideas. This could cool down just as easy as it could heat up, and do you really think Israel is looking to escalate the war after losing the Lebanon war just a year and a half ago?

On an ironic note, arch enemies Iran and Saudi Arabia are profiting from Israel attacking Gaza as the price of oil has risen to $48!

Gold - Not the Safe Haven People Think it Is

When you buy or short gold, you are purchasing a hedge on future inflation rates, nothing more. If inflation expectations rise, gold rises. If inflation expectations fall, gold falls.

When you purchase physical gold, you pay enormous transaction and storage costs and risk loss or theft, but get the additional benefit of "anarchy protection" in the rare event that all counterparties and the currency fail. The values that the market assigns to these attributes changes on a minute-to-minute basis, which is why the price of gold is so volatile.

To be clear, gold's value, just like a currency's value, is purely psychological. There are lots of elements and compounds on the planet that are more rare or costly to produce that people do not assign the value they assign to gold. Gold's value as an inflation hedge or as anarchy insurance is based on the premise that its psychological value will endure. That may be a solid assumption, but be aware of it. Canned goods, water filtration devices, medicine, pesticides, fuel, or ammo might increase in value faster if things got truly desperate.

Countdown of Manipulated Gold Price Running Out

"I would happily trust another asset but can't find a better one than physical gold with no counterparty risk. "
-mmarc

Have you considered how easily gold coins can be diluted or forged?

1) In your Chinese / North Korean / US backyard workshop, glue two disks of carbon and lead together such that the average density of the combination is the same as gold.

2) Insert disks into coin mold, pour in $100 worth of molten gold for a thin cover. Deburr and polish.

3) Sell these coins to poor and middle class American conspiracy theorists at 500% over cost. They will pass density, magnetism, spectrometer, scratch, etc. tests and are untraceable. After all, who ever cuts a gold coin in half before buying it?

Sounds like counterparty risk to me!

Countdown of Manipulated Gold Price Running Out

scotsamurai,
Gold, like real estate, will revert to its historical mean when interest rates rise from historic lows and inflation expectations fall from historic highs. For investors, gold is an inflation hedge - a bet that inflation expecations will be higher tomorrow than today. It is nothing else. Consider it a contract or a Vegas bet.

Your hedging strategy will limit your losses or your gains. My question is... why?

Given that gold's historical rate of return is around 2% (roughly = inflationary expectations) and pricing is wild and uncertain right now, wouldn't a bond yielding 6-8% from GE or JNJ fulfill your purpose a lot more safely? If you're worried about an unprecedented dollar crash, check out the yields on FXA or BZF.

It sounds like you're betting on another 15% run-up in gold, but you're willing to accept 10% when that happens in exchange for less risk. Question that assumption about gold going up 15%. Then question whether the added risk of losing 10% when gold goes down 15% is worth the couple extra points of possible return vs. bonds. Then, imagine a scenario where you roughly break even and calculate your opportunity cost from not buying the bond. Finally, consider the benefits of paying 15% taxes on your long term bond gains vs. your marginal tax rate on your short term options gains, if you have any.

Gambling is a fun, but unprofitable hobby. Take enough risk, and eventually you'll lose.

Countdown of Manipulated Gold Price Running Out

Why is it that everyone who owns gold becomes a gold salesman? Kind of like a pyramid scheme.

Gold is an inflation and interest rate hedge - that's all it is! When the price of oil and other commodities was skyrocketing, people were predicting massive inflation as a result. Then oil and other commodities tanked, along with expectations for high inflation. Turns out, demand for energy and commodities always drops during recessions!

The recent bail out money only partially replaces the wealth destroyed in the financial panic. Higher interest rates in late '09 to 2010 are visible from here.

That's why the price of gold changed. Quit pointing fingers. It's immature. You got caught on the wrong side of a trade - so what? Hopefully you documented your purchases so you can at least harvest losses for tax purposes.

Conspiracy thinking and ideological attachment to investment categories will bankrupt you. The best way to invest in gold is to start a business forging and selling collector coins to goldbugs for 10-25% over the metal price. Just be sure to keep your inventory low in case prices fall. Hey, isn't that exactly what's happening?!