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alstry (36.19)

Gold is a Fools Game

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December 31, 2008 – Comments (17)

In 1793...the average price of an ounce of Gold was $19.39.

Today, the average price of an ounce of gold is approaching $900.

If you put one ounce of gold in a safety deposit box, that $19.39 of value could be exchanged for almost $900 US dollars today.....assuming the bank provided the services of a safety deposit box for free,

If you put that same $19.39 dollars in a 7% 240 year CD, that CD would be worth well over $100 million dollars today.

I know we are only talking about a period of time spanning a little over 200 years....but based on the time frames most CAPs members use.....that should give us a sufficient margin of error to provide a satisfactory statistical sample.

Cash is King my friends.....and there ain't no not nothing like the good ole US dollar.

 

17 Comments – Post Your Own

#1) On December 31, 2008 at 5:58 PM, HansHauge (32.51) wrote:

Alstry - I threw up a little bit reading your post just now. Who on here has addvocated holding gold for 240 years? Who knows what will happen at that time, and hind sight is 20-20 looking backwards.

The point that TMFSinchy, Abitare Kdakota and myself have advocated is that since there will be huge inflation coming soon (in the next year or so) Gold will provide a hedge against that inflation and likely high returns in that same time frame.

Look at gold in the last year Up 10% while the market is down 40% - Just because one strategy doesn't work for 240 years does not mean that it is a fools game in the short term, especially in these times of turbulance.

 

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#2) On December 31, 2008 at 6:07 PM, djemonk (< 20) wrote:

I know we are only talking about a period of time spanning a little over 200 years....but based on the time frames most CAPs members use.....that should give us a sufficient margin of error to provide a satisfactory statistical sample.

Still not apples-to-apples.  The dollar has only been divorced from gold for about 35 years.  Before then there was a very high degree of correlation between dollars and gold.  In fact,dollars were directly convertible into gold or silver at the time and were therefore only reflections of real money and have been consistently debased since then.

While your basic thesis that gold is not as effecient an investment as some other vehicles holds some water (especially in the gold bear market of the last 20+ years), you've been grasping at some embarrassingly thin straws on this topic.

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#3) On December 31, 2008 at 6:28 PM, alstry (36.19) wrote:

Hans,

I just don't understand the gold logic....there was HUGE inflation between 1981 and 2000.....and gold did abslutely nothing.  So as far as a hedge against inflation, the facts don't seem to support.

Has gold flucuated...absolutely....sometimes it flucs down, and sometimes it flucs up.

dj,

I live in the real world in reality.  I invest real dollars.  I lose real dollars when I lose and make real dollars when I win.  In the end, in the real world, all of my gains and losses are scored by dollars. 

To me, gold is not much more than a casino play based on emotion.  I have no problem with gambling.  Life is a gamble.  Especially for a young active heterosexual male with integrity and character who chooses to get married.  I love going to the casino, horse track, and playing poker.  In my case, the latter gives me the best odds, but all three give me better odds than gold, after factoring the carrying costs, in my humble opinion.

It is just my opinion based on the facts.  The fact is that gold has been a terrible hedge against inflation historically since it has decoupled from the dollar.  Sure, in the couple years post Nixon's act, it did fine...but since then the fact is that it has been just about the worst hedge you can find. 

Whether it will be in the future is anyone's guess. 

I am not telling you how to invest your dollars, but when you do, just make sure you give yourself the honest factual historical perspective.

 

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#4) On December 31, 2008 at 6:41 PM, rebelcow (< 20) wrote:

"[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."  -Warren Buffet

 

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#5) On December 31, 2008 at 7:43 PM, Harold71 (22.27) wrote:

Alstry may be a closet Gold Bug -- there's a capital "F" on that Fool!  Gold is a Foolish Hedge indeed! 

It is the height of ignorance to say that gold has not been a good hedge on inflation for the past 37 years.  Picking the top in 1980 or whenever it was, for a long-term "comparison" is exceedingly ridiculous.

Alstry you'll convert, just like Mish...make it quick...

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#6) On December 31, 2008 at 8:01 PM, DemonDoug (51.41) wrote:

the point with hyperinflation is will there be a peso problem like argentina/mexico or a mark problem like germany, if you had traded 1000 marks for gold in 1919 you would have made out much better than if you had put those marks in the bank, because those marks became worth = 0.

Gold is an insurance policy against your native currency going to zero.

Anyway I like silver for that purpose better, I'm actually more in your camp I think gold is overvalued currently by 40%, either that or silver is undervalued by 80%.

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#7) On December 31, 2008 at 8:41 PM, MarketBottom (29.30) wrote:

The US Dollar is the Worlds Reserve Currency, and as long as it remains in that role it is easy to compute its value. One US Dollar equals One US Dollar, it never changes. What changes is the price of commodities, interest rates, and the rate of exchange between currencies of other countries. Everything is priced in US Dollars, otherwise one could buy Canadian Dollars when the rate in 2002 was one dollar US equaled one dollar fifty Canadian and then buy Gold, but wait Gold is priced in US dollars, so if the rate stayed the same the cost of Gold would be the same. It has great advantages to be the world reserve currency.

When someone says the US dollar will be devalued, that really means that they expect commodities to rise and interest rates to rise also. That is the only way the Worlds Reserve Currency can be devalued.

As long as the US has the largest economy in the world and the largest military the dollar will remain the reserve currency.

My position on gold is when Iran is buying I want to be selling.

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#8) On December 31, 2008 at 11:13 PM, GNUBEE (24.76) wrote:

With no FDIC, most likely your CD would have been worthless. It would have appreciated for what? 140 years, then dissapeared. (I know your comment about over-analyzing before, yes. But coming from a legal background you know you should frame your argument so that it is airtight.)

So Over that time frame a CD could have been a bad investment. But for it to be a good one, you'd have to live to 240 plus.

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#9) On December 31, 2008 at 11:21 PM, jegr5347 (< 20) wrote:

Even if the dollar is replaced as the world currency, the question is by what? The Yuan that is backed by foreign currency reserves that are mostly invested in tbills. EURO, please they are worse than us. You have to deal with the trillions of dollars foreign central banks are holding in tbills. Are they going to bite the bullet and loose their foreign currency reserves in the decoupling process. Japan is certainly not taking that position in trying to match the US in the speed at which it is trying to devalue its currency in order to protect its exporters. The US holds all the cards on this one my friends.

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#10) On December 31, 2008 at 11:59 PM, DaretothREdux (40.64) wrote:

What cost $19.39 in 1800 would cost $233.57 in 2007.

Also, if you were to buy exactly the same products in 2007 and 1800,
they would cost you $19.39 and $1.65 respectively.

It gets even worse if you compare to the price of oil...

I think of the USD as a commodity and it's no different than any other in that regard. Until people begin to see their money as having value doing nothing we can never fix our current economic woes.

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#11) On January 01, 2009 at 12:28 AM, JakilaTheHun (99.94) wrote:

If bought $19.39 of shares in a horse & buggy manufacturer in 1800 and held them to 2008, you'd probably have $0 now.  That wouldn't mean that said company was a bad investment throughout that entire time frame, however.

Gold is an effective store of value that has actually gained value over time (probably due to increasingly higher real costs of extraction).  It's a very conservative investment vehicle.  Naturally then, anyone who invests in gold in order to make a killing isn't necessarily all that wise.  This does not mean that gold is a bad investment, however. 

When there is a lot of economic/political uncertainty or a high amount of inflation, gold can be a safe and prudent investment choice as one can retain their wealth via this route.  When there is a lot of economic growth and a booming economy, gold will on average underperform the stocks of most successful companies.  This is hardly a groundbreaking statement --- it's simply an application of risk-reward principles.  Gold is low risk and produces low returns over time; whereas, other investment vehicles such as stocks have higher risks and can produce higher returns over time if one makes wise investment decisions.

Picking gold to outperform right now is a bet on economic/political uncertainty and inflationary pressures.  To compare it to an imaginary investment vehicle that produces a 7% return annually is beyond silly.  As has already been pointed out by a previous poster, it's quite possible that your entire investment on your imaginary CD could've gotten wiped out completely at some point as CDs do have higher risks than gold (particularly before FDIC). 

History teaches us that currencies can lose value very rapidly once a country amasses a crippling amount of debt.  It's happened time and time again.  When that happens, holding gold won't net you a fortune, but it will protect what you already have.  Even if it offers a low return, gold can be appealing when a currency has become "high-risk".

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#12) On January 01, 2009 at 2:23 AM, Donnernv (< 20) wrote:

Alstry:

You are straining yourself to write something important, insightful and relevant.  But your keepers have let you slip out of your common-sense leash.

No one has, or will, advocate gold as a long term investment, better than all others throughout the centuries.  Through gold-backing or not, inflations or deflations, wars or peace, depressions or booms, gold has been better or worse than the alternatives, as the situation dictates.

What it has been is a protector of wealth during heavily inflating periods.  No more, no less.

When one sees a period of strong (or hyper) inflation, one turns to gold as the historic defender of wealth held.  I do not think anyone has made a stronger case than that.

Think more, write less.  And to polish your vocabulary to even greater heights, it's not "flucuating" or 'fluctuated", gold has fluctuated or is fluctuating.

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#13) On January 01, 2009 at 2:28 AM, Donnernv (< 20) wrote:

Sorry.  "fluctuated" should have been "flucuated".  Can't stop my fingers from spelling correctly.  And "flucs up" just won't leave my mind.

Law profession equivalent of Ebonics.

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#14) On January 01, 2009 at 10:13 AM, 100ozRound (29.42) wrote:

I want to mention that in 1793, Gold was cash.  If you put $19.39 in a CD in 1739, it WAS Gold. 

If you put $19.39 worth of Gold in a CD @ 7%, and $19.39 worth of Gold in a safe deposit box, which is going to outperform?

If your going to compare interest made on a paper dollar invested in a CD, with Gold in a safe deposit box, you have to start your calculations during the year that Gold was decoupled from the dollar.

 

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#15) On January 01, 2009 at 10:32 AM, alstry (36.19) wrote:

100oz,

Excellent point.......

However, I thought I clarified the decoupling issue in my comment above with the following language.....

The fact is that gold has been a terrible hedge against inflation historically since it has decoupled from the dollar.  Sure, in the couple years post Nixon's act, it did fine...but since then the fact is that it has been just about the worst hedge you can find. 

Gold 1974............$200

Gold 1980............$600

Gold 1990............$400

Gold 2000............$300

Gold today...........$900

Save the past couple years, the 1980 spike, and the few years post the decoupling..... Gold has been a terrrible hedge against inflation over most periods since it has decoupled.......I am sorry, but I simply can't change the facts.

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#16) On January 01, 2009 at 11:02 AM, 100ozRound (29.42) wrote:

I was responding to the logic in the original post - not arguing a particular side for or against Gold as a hedge.

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#17) On January 01, 2009 at 11:21 AM, alstry (36.19) wrote:

Actually Gold was not cash in 1793.  Gold was convertible into cash and cash was convertible into gold.  It is an important distinction when making the gold vs. cash comparison. 

As far as I am aware, you couldn't place gold in the bank and receive interest on the placement.  In fact, often you were charged storage fees. 

The point of being able to receive interest is central why cash has been a better hedge against inflation compared to gold...EVEN with the decoupling factored in.

 

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