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To Thine Own Self Be True

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February 23, 2009 – Comments (19)

Hello fellow Fools!

I've been facing a possible financial decision over the past little while -- a possible investment I've been toying with that I've been hearing an awful lot about in the financial news lately -- that being gold.

Gold as an investment vehicle has a lot of proponents, and for quite a few good reasons.  There are a lot of people here on CAPS who know a lot more about the shiny stuff than I would probably ever hope to, and many of them are bullish on gold.  After all, given the financial crisis there's a lot of uncertainty out there regarding the value of stocks and even cash, and that sparkling metal is a hard asset that has a history of holding its value well -- especially when macroeconomic circumstances seem the most dire.

After all, I've been hearing a lot about gold lately.  One of my favorite radio programs which doesn't often deal with finance/investing matters had an author on not long ago explaining all of the reasons why gold is the place to be during the (what he believed would be) the continuing financial collapse.  Turn to just about any form of finace/investing media and you'll likely see some lively discussions about gold.

And who hasn't heard the multitude of 'Cash for Gold' commercials urging people to stuff their unused/unwanted gold jewelry into an envelope and exchange it for cold, hard, cash?

This morning, though, I went back and read something I wrote in my blog back in late 2006.

While gold is a great inflation hedge, that's about all it is in my opinion. When one invests in gold, one is not investing in what I call an economically generative act. Gold bullion just sits there, and while it can go up or down in price, it doesn't actually *create* wealth.

When I wrote the preceeding excerpt I never thought I'd be turning to it more than two years later --let alone using it to remind myself why I have yet to add gold to my investment portfolio -- but I still find it to be true.

Which reminded me of something else I blogged about in July of 2007.

In my Foolish interview I mentioned buying Yahoo at pretty much the height of the dot-com bubble, even though for a great while I had steered clear of all things tech – partly because I didn’t understand the industry well and partly because I thought the valuations were incredibly high.  I ended up, like a lot of investors, succumbing to the frenzy after watching stocks like this go up, and up, and up, and missing out.

I'm not equating gold investing to investing in tech companies at the height of the dot-com bubble -- but this exerpt sheds a great deal of light on my real motivations behind my toying with the idea of adding gold to my portfolio.  I haven't changed my mind about my fundamental reasons for not having been a gold investor to date -- I'm simply worried that all of the media reports I've been hearing may be right, and that I may be 'missing out' by not investing in gold.

And that would be a lousy reason to invest.

I also can't help but keep thinking about those 'Cash for Gold' commercials.  Maybe it's simply a sign of our tough financial times - increasing numbers of people who've lost their jobs or are facing some other personal financial crisis turning to this source of cash in increasing numbers.  I can't help but think, though, that it might be a sign that gold might be entering 'bubble' status in its own right.

Either way, I won't be investing in gold today, or likely anytime soon.  For those of you who are invested in gold or are considering it, I'm not saying to get out of gold, or not to invest.  There are a lot of very bright people out there who think that gold is a great investment today.  What I would ask you to do, though, is to honestly ask yourself why you are investing in gold.

As I write this, I am certainly glad I asked myself that very same question.

Regards,

Russell (a.k.a. TMFEldrehad)

19 Comments – Post Your Own

#1) On February 23, 2009 at 11:07 AM, FreundInvesting (29.42) wrote:

I agree 100%. I am not investing in gold, nor will I be for the forseeable future. Why buy gold when you can buy oil, which is also an inflation hedge and is actually USEFUL to people.

Just my .02, though!

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#2) On February 23, 2009 at 11:12 AM, soobaroo227 (59.23) wrote:

I'm with both of you.  Gold feels too much like a bubble to me right now with all of the hype.  I'm sure it has a decent bit of upside potential, but I just don't feel comfortable with putting money into it and possibly being caught on the wrong side of the bubble. 

 Oil sounds like a much better investment to me with how low the prices are right now.  Sure, it will take a while for oil prices to rise a decent bit with the world economy doing poorly, but eventually it will have to.  If not, I'll just collect dividends and be happy with buying it at these cheap prices.

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#3) On February 23, 2009 at 11:21 AM, FreundInvesting (29.42) wrote:

http://blogs.reuters.com/great-debate/2009/02/23/commodities-send-coded-clues-on-inflation/

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#4) On February 23, 2009 at 11:34 AM, djemonk (< 20) wrote:

I will buy gold when it's selling for less than it's worth.  I love gold and gold miners and believe gold will have an increasingly important place in portfolios over the next decade as the sun sets on the Dollar empire and we head into a more turbulent future. 

That being said, buying gold when it's at its peak is not a wise investment decision.  We might not be at an ultimate peak right but let's look at some probabilities.  

Probability that gold will hit $1500 = ?? %

Probability that gold will hit $2000 or higher = ?? %

Probability that gold will hit $990 = 100%, as that's where it is now.  If you bought gold at less than $990, you are sitting on an unrealized profit.

You have to estimate the probabilities for yourself and build in a margin of safety to see whether continuing to hold gold makes sense. I wouldn't even begin to guess how to estimate those probabilities, ergo I am on the sidelines.

If you are a gold investor and you've been buying steadily over the past decade or so, congratulations.  Your day has come.  You are currently holding an in-demand investment.  Gold, metals, and miners are highly cyclical so we're back to Buffet's analogy of dancing at the ball.  Remember that there are no clocks so you won't know when it's 11:58 and it's time to get out.

The only scenario in which fervent gold buying makes sense is if you believe that the dollar will not survive and gold will replace it as the world's reserve currency.  Obviously in that scenario my calculations all break down because they all involve the dollar as the base currency. Also in that scenario, it's likely that radiation levels on the surface will be so high that humans will retreat underground and let the space mutants live in the ruins of our civilization.

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#5) On February 23, 2009 at 11:39 AM, chk999 (99.97) wrote:

One pretty decent rule is that when you see an investment being advertised in infomercials, it's time to sell. By that time the smart money is long gone, the dumb money is all in and the moronic money is just starting to come in.

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#6) On February 23, 2009 at 11:47 AM, socialconscious wrote:

Respectfully you may agree or disagree but it does not change the fact in unsure times gold is like a security blanket. Also look at the difference between physical gold and GLD The premuims are huge and speaks to demand as well as dealer greed. Besides oil is kinda squishy Gold you can warm up and put in a blanky. I will admit its a short term play here.  

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#7) On February 23, 2009 at 1:17 PM, rocksnot (28.99) wrote:

Gold is not even that good of an inflation hedge.  What it IS, though, is a place to put your money when your emotions grab hold of you and you think the world is coming to an end.  So... In my opinion, gold's price has more to do with Obama, congress, and the world economies than it does with inflation.  Which is one reason we've seen it rise in the face of a rising dollar.

Gold has no large intrisic material value.  It is an emotional investment, always.  So... since I believe that the people of the world are still too optimistic, I'm in gold.  I think in the next year or less Obama's shine will wear off, Americans will realize that he nor congress can really do anything about the mess we're in, and that their actions so far are making things worse.  THEN real despair will set in.

So that's my exit strategy... When everyone really loses faith in our gov't, and when Obama's approval falls below 50 percent, I'll exit gold.  I know those things may seem disjointed, but after all, gold is about emotion.

Remember, gold is worth exactly what we think it is worth, just like stocks or any other investments.  Discussions of intrinsic value are only relevant so far as they influence what a majority of people think something is worth.  If more people are scared 6 months from now, gold will be worth more.  It's that simple.

I could bet against the 500 or something like that instead, but options and inverse leverage are expensive over time, while something like GLD is efficient inside retirement accounts.

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#8) On February 23, 2009 at 1:45 PM, socialconscious wrote:

Agreed on the gold Rocksnot are statements are identical

What it IS, though, is a place to put your money when your emotions grab hold of you and you think the world is coming to an end

Respectfully you may agree or disagree but it does not change the fact in unsure times gold is like a security blanket

 However lets get it straight Obama INHERITED a mess from W. If I INHERIT a house in disrepair anything I do with it is constructive.I agree this is a tenous time at best but the new conservative policy is speak loudly about the bailout and turn down any cabinet posts despite an absence of tax or personal problems. i.e  Sen. Judd Gregg withdrew his nomination as President Barack Obama's commerce secretary Thursday, citing "irresolvable conflicts 

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#9) On February 23, 2009 at 1:52 PM, kdakota630 (29.56) wrote:

socialconscious

The difference between President Obama's situation and the house example is that in your example, you likely didn't campaign for over a year and spend millions of campaign dollars to inherit the house in disrepair.

Yes, President Obama walked into a bad economic situation, but it's not like he didn't realize how bad it was when he applied for the job.  He campaigned on "change" and fixing the situation, so let's see him do it rather than complaining about the economy he inherited.  So far it doesn't look like too many people are impressed with his "change".

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#10) On February 23, 2009 at 4:16 PM, Hoffmanjt (< 20) wrote:

Change begins at home..........just like charity.  Everyone in the good ol' USA should realize that gold is only used when we want to show our wealthy side, our high emotions that we want to marry the gal we can't live without, or because we fear the financial unforeseen future. Faith, then, is needed by all.  No one person can change this cascading situation. However, if we all contain our emotions and don't dump them in the stock markets or buying habits, perhaps, we may alleviate some of this freefall in all these arenas.  Don't condemn, don't blame, and be positive in in your daily attitudes toward the markets, our financial institutions, and our government.  Give the system a chance to work.............be patient! 

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#11) On February 23, 2009 at 5:12 PM, BigFatBEAR (29.17) wrote:

Rec'd just for the title. It's always good to hear top 10 players' thoughts on contentious things, such as gold...

I'm aligned in thinking with above posters - USO > GLD, both intrinsically, and from a perspective of long-term value.

chk999 had a good point with dumb (and moronic, lol) money filing into gold, while smart money is long gone. I may be dumb money (in that my portfolio is tiny and I'm not a hedge fund), but gold doesn't present any value to me at current levels.

I'm getting increasingly greedy as others are increasingly fearful.

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#12) On February 23, 2009 at 5:37 PM, DemonDoug (70.52) wrote:

a better insurance policy would be silver.  easier to procure, not as flashy, will hold it's value if fiat currencies go to zero, you will be less of a target for robbery.

I'm sure you've held 10 and 20 dollar bills before.

Ever hold a 1000 dollar bill?  That's what you'd be holding with a gold coin.  Don't know about you, I get a little leery with that type of moolah on me.

My recent leanings have been bearish on gold - in fact, i just green thumbed 3 inverse gold ETFs.  But on top of the fundamental reasons, I agree with you Russell, the ads and infomercials remind me of the exact same type of thing that was happening with real estate earlier this decade.

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#13) On February 23, 2009 at 9:14 PM, nuf2bdangrus (< 20) wrote:

Gee...I dunno....My CAPS score stinks, that said I've done better with gold than eny other asset class....because the one thing about gold is that you can't create it out of thin air, as you can dollars.  It is money, always has been, and always will be.  I sold a third of my gold on Friday....the rest I hold is physical not paper.  I will buy the paper on a correction to the low 900's.

 

I like oil and gas better, because they are the ultimate currency....but that said, with the incredible crisis we find ourselves in, I think gold has to be part of a core holding.  In perilous times, it may shine when other things dull.  I believe it has an outside shot of a  double....but not any time soon.  I would never short it, I would eitehr own it, or stand aside.

 

Now.....I really like to buy things that nobody wants....and that would be things like  BP DVN  CHK  APA  CNQ  BQI  etc etc.  We'll want them soon enough.

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#14) On February 24, 2009 at 3:34 AM, uclayoda87 (29.24) wrote:

Instead of the metal itself, buying mining companies and energy companies during the market sell offs appear to a better diversified play on the eventual dollar collapse.  Plus many of these companies pay a better dividend than most money market funds.  Two funds I like:  USAGX and VDIGX.

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#15) On February 24, 2009 at 11:50 AM, rocksnot (28.99) wrote:

@socialconscious:  Didn't mean to imply that it was in any way Obama's fault.  He's only been president for a month.  What I do mean to say is that there is nothing anyone can do to stop this train, which built momentum for 15 years.  But people have "hope" in Obama, just like they had in Bush at one time.  That shine will wear off soon as people stare reality in the face.  When I see that, is when I'll sell my gold, because despair will be most widespread at that point.

@BigFatBEAR:  You said, "I'm getting increasingly greedy as others are increasingly fearful."  Me too, which is why I'm in gold.  :)  It depends on how you look at it.

@DemonDoug:  Good points, although there are much smaller gold coins available than 1 oz.  For example, at Kitco right now you can buy a 1/20 oz. coin for $77.  And it is not like those are rare coins. And in a crisis,you can just as easily cut one of those small coins into 4 pieces with a pair of tin snips.  But sure, OK, having some silver wouldn't hurt.  Personally, I'm just in GLD anyway.

Honestly, I think the REAL reasons that some of you are bearish on gold is that you think the stock market and economy are turning around around 6 months from now.  I could scream my head off about how our situation looks like Japan or the Great Depression, but at this point, I think most of us have already made up our mind about what our current crisis looks like.  

I'm personally trying not to be bullish or bearish.  Just trying to be right.  To be clear, I think the fundamental value of gold is about zero.  But it is, and always will be, the ultimate hard currency in human minds.  It's value is therefore always relative to what it's value was last month.  If people are more scared this month than last, then it will go up.  That is my bet.

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#16) On February 24, 2009 at 12:07 PM, rocksnot (28.99) wrote:

Of course, as I write this, gold has gone cliff diving today.  It's proving to be worth exactly what people think it is worth, and today, we have Bernanke and Obama talking about how everything is gonna be just fine.  Woohoo!  Maybe I should go out and blow some discretionary income.

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#17) On February 24, 2009 at 12:50 PM, socialconscious wrote:

kdakota630 (99.87)... Its early and the economy is in such a mess its a politcal "hot potato."  

He started campaigning before it was evident the economy was in such a mess but yes he could have turned down the job---> Yes, President Obama walked into a bad economic situation, but it's not like he didn't realize how bad it was when he applied for the job.

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#18) On February 26, 2009 at 6:00 PM, mustbepatient (29.43) wrote:

I find it a little odd that everyone is talking about how gold has no intrinsic value.  Gold is a form of money that has a finite supply, unlike dollars, euros, yen, or any other paper currency, and this is its source of value.  As the US government increases the money supply, gold will go up.  However, there is a lot of bullishness out there now, so I have sold out of my gold stocks and am awaiting a pullback before loading up again.

As far as gold vs. oil, gold historically holds up much better in times of trouble.  Here's the oil/gold ratio over the past three years:

http://stockcharts.com/h-sc/ui?s=$WTIC:$GOLD&p=D&yr=3&mn=0&dy=0&id=p94747232901

As far as the main point of the article goes, I agree wholeheartedly.  There are many, many sectors of the stock market that I ignore completely because it's not worth it to me to understand them well enough to invest.

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#19) On February 28, 2009 at 2:39 PM, RRRobertson (< 20) wrote:

Yes a growth company (stock) creates wealth with new ideas, etc. and can go 10X+.  Right now with our economy in 09 and beyond,  creating sales and profit growth is like swimming upstream aginst the economy, it is hard to do and even then stock price appreciation may be deffered until a time of less fear.  Gold might be a good short term trade until things get better considering the atmosphere of fear here and in Europe, inflation on the horizon and the Gold "buzz" going on now that may drive up the price (no matter how rational or irrational it is).

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