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TMFAleph1 (95.09)

A Rational Opinion on Gold

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June 06, 2010 – Comments (15) | RELATED TICKERS: GLD , AUY , BRK-B

There is so much rubbish being written on either side of the debate on gold, that when you come across someone with a few sensible things to say, it's worth pausing to listen to them.

Whether you are a gold bull or bear (I happen to be rather more bullish), this Barron's interview of John Hathaway, manager of the Tocqueville Gold Fund, is useful reading (The Golden Mean, Jun. 5, 2010).

On the question of whether gold is a buble now, Hathaway frames the question in an illuminating manner (I have added the emphasis):

"The price of gold as quoted in dollars -- or in Zimbabwe dollars, to make it a really absurd example -- can look like a ridiculous chart. In terms of bubble analysis, it might look very dangerous. But then you look at what is driving it and you say, well, what is the real bubble? It really has been money creation."

Asked whether people should wait before investing in gold and whether it is possible to time the gold market, Hathaway responds:

"It is very hard to say. Diversification into some form of gold exposure strategically still makes sense. If this were a football game, we would be at the beginning of the third quarter. The first two quarters lasted about 10 years. The first quarter you had this stealthy accumulation. Second quarter, gold became more fashionable to talk about, and you began to see some very high-profile, smart investors coming in. The third phase will be more people jumping on the bandwagon, and the fourth quarter is just silly season. It's just Greenspan's irrational exuberance."

Alex Dumortier

15 Comments – Post Your Own

#1) On June 06, 2010 at 3:29 PM, wolfman225 (63.81) wrote:

So....are you advocating that we stake a position in gold now and then sell into the upcoming "silly season"?

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#2) On June 06, 2010 at 3:38 PM, TMFAleph1 (95.09) wrote:

I'm not advocating anything, but -- as I have indicated in several articles over the past 15 months or so -- I share Hathaway's opinion that "diversification into some form of gold exposure strategically still makes sense."

Alex Dumortier

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#3) On June 06, 2010 at 3:57 PM, wolfman225 (63.81) wrote:

I was just asking.  I've looked at different ways of getting into gold and I keep getting hung up on the different premiums involved in the transactions. 

In a recent interview on Glenn Beck's radio show, the CEO of Gold Line talked about how some of their "lower cost" vehicles for physical gold had premiums of 18% for both buy and when sold.  I dunno, but the way I understand that is  you would need to realize a gain of 36%, after taxes just to break even.  Or am I mis-understanding how the process works?

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#4) On June 06, 2010 at 4:08 PM, fewl10 (< 20) wrote:

That's ridiculous.  No physical gold dealer would charge a premium of 18% and stay in business.  Where are you getting such stupid numbers?

Blanchardonline-- you can get physical coins for $35-50 over spot-- that would be Eagles, or what have you.  Do the math:  Even a $100 premium for a $1200 eagle is just 8.3%, and how much of that is absorbed in minting costs, etc?  A Gold Eagle is certainly worth more than raw bullion.

 

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#5) On June 06, 2010 at 4:21 PM, wolfman225 (63.81) wrote:

I was just relating what was said in the interview.  He said 18% on buy/sell.  I didn't think it was realistic, either, until I remembered that jewelry retailers customarily run mark-ups of 100-200% (or more).

I do know that collectible coins run huge premiums, also.

As I said, I'm a novice in all this about gold and trying to gather information and educate myself instead of just jumping in blind feet first.

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#6) On June 06, 2010 at 4:54 PM, TMFAleph1 (95.09) wrote:

wolfman225,

I would be very wary of gold outfits that advertize through infomercials or that have commercial ties to Mr. Beck. Not that they are necessarily disreputable, but I highly doubt that they represent a cost-effective way to own gold. My Foolish colleague Chris Barker knows a thing or two about the proper way to get exposure to physical gold, see How to Get Physical With Gold, Jun. 1, 2010.

Best,

Alex D

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#7) On June 06, 2010 at 6:11 PM, alberta911 (68.44) wrote:

Debt-to-GDP  vs. Default-to-GDP

Who does not understand Russian Roulette?  You hit a bullet in the chamber and you blow out your brains...you hit a global defaulter and you blow out the world economy..
 
When you understand that a 10 - 12 percent default in derivatives market is equal to the world's GDP....you understand why gold and farm land has attracted attention and investors

Solid global regulation of over-the-counter derivatives does not seem to be on anyones agenda.......

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#8) On June 06, 2010 at 6:34 PM, 1315623493 wrote:

He left out one important thing. Yes, there has been lots of money creation, but at the same time, there has been a HUGE amount of deflationary contraction as capital disappears off the table. Without the money creation, we would not have 0% inflation but more like -1% or more deflation. My opinion of gold's rise is speculation of future inflation rates and that to me is bubble-like behavior.

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#9) On June 07, 2010 at 8:59 AM, XMFSinchiruna (26.96) wrote:

wolfman225

I second Alex's recommendation to avoid any outfits advertising on tv or through popular spokespeople.

Peter Schiff offered an interesting discussion recently in one of his video blogs about his experience calling into Goldline, and the highly uncompetitive premiums involved.

For physical bullion, the web-based APMEX has a stellar reputation for consistently low premiums, solid selection, and reliable service. You are correct though to think ahead toward capital gains taxes, which are assessed at the collectibles rate. I do not recommend GLD, the popular bullion ETF, because I see a potential conflict of interest between the custodian bank's market-making short position on the COMEX and the need for GLD investors to trust that physical holdings remain unencumbered by ledger entries or other mechanisms that permit gold sitting in a vault to be used in multiple ways.

I do recommend the closed-end funds CEF (about 50%/50% gold and silver) and PHYS. One pays a premium to get into these shares, but that premium is an indication of the demand for them. The best time to get into them is when they issue a periodic non-dilutive share offering that lowers the premium. As you will see in the article that Alex linked to above, the key there is to be sure to file (assuming you are a U.S. investor) form 8621 to make a QEF election for each year in which you hold shares... this will ensure your tax liability remains at the normal (non-collectibles) capital gains tax rate.

Bullion exposure is great to have, but it certainly is an onerous proposition at this stage. I continue to recommend that all investors interested in gold exposure consider at least some exposure to carefully vetted, high-quality mining stocks. They can be very volatile, but in the long run, the quality vehicles will experience greater percentage gains than the underlying metal prices. Bullion for security and diversification away from the still very fragile USD, and mining stocks for a touch of profit atop wealth preservation.

Good luck!

Fool on!

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#10) On June 07, 2010 at 9:01 AM, XMFSinchiruna (26.96) wrote:

alberta911

precisely ... derivatives remain at the epicenter. Well said.

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#11) On June 07, 2010 at 12:23 PM, wolfman225 (63.81) wrote:

Thanks for the info Alex and TMFSinchinura. Much appreciated.  In your opinion(s), am I ok in relying on a service/broker to hold my gold for me?  Or should I go with a broker that will ship the gold to me?

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#12) On June 07, 2010 at 12:31 PM, portefeuille (99.66) wrote:

One pays a premium to get into these shares, but that premium is an indication of the demand for them.

Paying a large premium to hold gold is a stupid thing to do.

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#13) On June 07, 2010 at 12:34 PM, portefeuille (99.66) wrote:

http://www.sprottphysicalgoldtrust.com/Net-Asset-Value/default.aspx

there are more entertaining ways of throwing money away ...

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#14) On June 07, 2010 at 1:00 PM, TMFAleph1 (95.09) wrote:

wolfman225,

Chris may feel differently and he is more knowledgeable than I am in this area, but I think that for most -- if not all -- investors, it makes no sense whatsover to bear the storage costs associated with gold.

I would go even further by submitting that a difference of opinion on this question will often separate the gold bull from the gold bug (for the record, I consider myself the former, not the latter).

Best,

Alex D

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#15) On June 07, 2010 at 1:10 PM, eaglessoar (64.33) wrote:

Just an open question to everyone thinking and talking about Gold, do you think it is a better idea to invest in actual companies in the industry such as Yamana Gold (NYSE: AUY) or in ETFs like Market Vectors Gold Miners (NYSE: GDX)

 

Mike 

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