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Why I don't own gold...Investing vs. Speculating by Seth Klarman

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September 30, 2010 – Comments (39) | RELATED TICKERS: GLD

 

As I mentioned a while ago, I recently bought a new Kindle from Amazon.com.  It's a very impressive device, though I must say the print is a little on the small side...at least on .pdf documents that weren't designed for it, like the one that I am reading right now.

Yesterday I started reading the famous value investing book "Margin of Safety" by Seth Klarman.  While the book is technically out of print, one can find .pdf copies of it all over the Internet.  I am on a particularly interesting chapter of the book right now that talks about the difference between investing and speculating and it got me thinking about gold and why I don't currently own any.

I'll be the first to admit that I have obviously missed out on some serious gains by not investing in gold thus far and the metal hits new highs day after day.  I certainly can understand why one would think that with interest rates so low and governments printing money that we will see significant inflation.  Still, gold doesn't generate any real income.  The only way to make money on it is to find someone who is willing to pay you more for it than you paid. Unless his views on this subject have changed since he published "Margin of Safety" Klarman would call buying gold speculation, not investing.

Here's what he has to say on the subject:

"...assets and securities can often be characterized as either investments or speculations.  The distinction is not clear to most people.  Both investments and speculations can be bought and sold.  Both typically fluctuate in price and can thus appear to generate investment returns.  But there is one crucial difference: investments throw off cash flow for the benefit of the owners; speculations do not.  The return to the owners of speculations depends exclusively on the vagaries of the resale market.

The greedy tendency to want to own anything that has recently been rising in price lures many people into purchasing speculations.  Stocks and bonds go up and down in price, as do Monets and Mickey Mantle rookie cards, but there should be no confustion as to which are the true investments...

Investments, even very long-term investments like newly planted timber properties, will eventually throw off cash flow.  A machine makes widgets that are marketed, a building is occupied by tenants who pay rent, and trees on a timber property are eventually harvested and sold.  By contract, collectibles [and precious metals I might add] throw off no cash flow; the only cash they can generate is from their eventual sale.  The future buyer is likewise dependent on his or her own prospects for resale."

Anyhow, I'm not saying that gold is going to crash or that others are wrong for purchasing it.  Heck it could soar to $2,000 or more next year.  I'm just saying that for me, I prefer to purchase businesses that generate cash, hopefully increasing amounts of it over time.  If we end up seeing inflation, the value of stocks in general should benefit anyhow.

That's my $0.02 for the day.

Deej 

39 Comments – Post Your Own

#1) On September 30, 2010 at 2:07 PM, blueberrygoo (74.04) wrote:

Not everything has to be about making money, although gold and PMs are a good way so far.  I like holding some physical PMs just in case... just like one might also own a flashlight, batteries, a gun, bottled water, matches, etc.   I don't hold it to make money but it's part of being prepared for situations that it might prove useful (like doing my own dental work, ha!)

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#2) On September 30, 2010 at 2:35 PM, walt373 (99.83) wrote:

I think there is one thing you are not considering. You say investments throw off cash - but what's so good about cash? Cash is not useful to anyone unless it can be exchanged for real goods and services - so how you benefit from cash also "depends exclusively on the vagaries of the resale market." Holding cash can be seen as speculating on the US dollar. The appeal of gold is not as apparent when you are considering an environment where currencies are relatively stable, but in a unstable environment (like with hyperinflation), cash is speculative as well. My view is, real goods and services are the true investments because you can use them regardless of if other people want to buy them or not. And this would in turn include assets backed by real goods and services, like stocks (but they do also own cash and use cash in their businesses, so they are kind of a hybrid...).

That said, I don't own gold either. I'm not a momentum investor... I'd be willing to learn, but I haven't yet (much harder imo because it's not as mathematical and fact-based compared with value investing). So for now, I'll just stick with what I know.

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#3) On September 30, 2010 at 2:37 PM, walt373 (99.83) wrote:

I'm not a momentum investor...

...or a macro investor. Or other types of investors that may be interested in gold.

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#4) On September 30, 2010 at 2:44 PM, paperpump (96.91) wrote:

its a great book, and am glad you found a .pdf.

The book is quite different from security analysis or intelligent investor- as seth states in the introduction "ideally, this will be considered, not a book about investing, but a book about thinking about investing." He discusses strategy, philosophy and where most investors go wrong. Truly a great read. It should almost be read alongside you can be a stock market genius as they cover many similar areas and the same case studies.

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#5) On September 30, 2010 at 2:54 PM, chk999 (99.98) wrote:

That book is a truly awesome book.

That being said, there is nothing wrong with speculating, if you know that is what you are doing. A rational speculation is one where your analysis of the situation shows you that the odds of a favorable outcome are in strongly in your favor.  Ben Graham covers speculation in Security Analysis and is not irrevocably opposed to it, the question is did you do enough research and analysis.

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#6) On September 30, 2010 at 2:57 PM, ChrisGraley (29.95) wrote:

Suppose I told you that if you didn't do something, you are guaranteed to lose money?

If you keep a significant amount of cash over a long time-frame, that cash will definately be worth less in the future than it is today.

Keeping as much of your cash as you can in gold over time is not speculation, it's sanity.

I thought about putting forth my own book suggestions and debating about gold as an investment, but your post was without malice and I would never advise that someone should invest in something outside of their own level of comfort.

I wish you luck Deej and would be happy to give you a few book suggestions if you are interested.

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#7) On September 30, 2010 at 3:19 PM, BillyTG (29.27) wrote:

Echoing the sentiments about your preference of purchasing "businesses that generate cash," it sounds like you're missing the whole point on why exactly gold (and other metals and agricultural land, and many commodities in general) are so attractive right now: They are an alternative to fiat cash which is being systematically devalued around the world at this moment. I understand your argumentabout gold not generating income, whereas businesses do, and land and soybeans are productive and consumptive assets, respectively...but GOLD IS A CURRENCY. A stable, limited, rare, universally desired, historically proven currency.

 Anyways, I agree with you that stocks should rise with inflation, and practically any investment is better than holding dollars under the bed or with fixed-income tools. There are plentyof ways to profit besides buying gold, and I watch your CAPS picks for ideas:)

 Did you look into the Nook at all? I have no experience with any e-reader, but have heard great things about the Nook, too. Can't you adjust the size of the words on the screen?

 

 

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#8) On September 30, 2010 at 3:24 PM, ElCid16 (97.35) wrote:

Keeping as much of your cash as you can in dividend-paying equities over time is not speculation, it's a proven method of generating excellent returns.

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#9) On September 30, 2010 at 3:42 PM, Robuh (24.35) wrote:

Why does every anti-gold argument on this site get met with "If you hold cash for the long term it will lose value so buy gold"?

There are about a bazillion assets (financial and other) that you can purchase that appreciate in real terms far better than gold over the long run. 

Deej was talking about owning gold versus other investment vehicles and all of the sudden the USD is brought up. It's completely off topic.

I can go blue in the face saying that holding cash as an investment for long periods is absolutely dumb and holding gold is a close second because it has virtually no chance of appreciating in real terms over long periods of time.

The counter arguments offered never compare gold to stocks/bonds/collectibles except for over the last several years. It's always pitted against cash which is the absolute worst long term "investment." It's just getting silly here.

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#10) On September 30, 2010 at 3:48 PM, Robuh (24.35) wrote:

ChrisGraley

Let's assume for a second that the US dollar kept its purchasing power indefinitely. Even then, why on Earth would I want to own US dollars for long periods of time? It's a complete misallocation of capital. 

If gold is to step in as this perfect replacement currency then the same question arises. Why would I want to own it at all as an investment? 

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#11) On September 30, 2010 at 3:58 PM, Robuh (24.35) wrote:

Deej, try using this:

http://www.mobipocket.com/en/DownloadSoft/ProductDetailsCreator.asp

It's a free tool that lets you convert PDFs into Mobi format which is a lot better on a Kindle. 

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#12) On September 30, 2010 at 4:18 PM, XMFSinchiruna (27.52) wrote:

Deej,

Thanks for sharing your thoughts on gold in such a respectful manner. With all the negativity about, it's a welcome respite.

I echo the comments by walt373 and ChrisGraley above.

To Robuh, I would merely respond that the speculative nature of unbacked fiat currency is indeed relevant when the issuance of same is utilized as the core differentiator between speculation and investment.

I discussed the topic in an article once, but now I can't find it. :(

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#13) On September 30, 2010 at 4:33 PM, Valyooo (99.61) wrote:

I agree with Sinchi, for agreeing with walt373 and ChrisGraley.

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#14) On September 30, 2010 at 4:35 PM, TMFDeej (99.27) wrote:

Thanks for reading everyone and for the civil debate on what can often be an emotional subject.  I don't know of any other type of investment or commodity that evokes such passion in people as gold.

The eBook creator looks interesting, Robuh.  I might have to try it out.  Thanks for the link.

Deej 

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#15) On September 30, 2010 at 4:52 PM, FracturedVision (< 20) wrote:

Robuh

You're right, gold doesn't make sense as an investment, but it does make sense as a store of value.  If all other assets are measured in a devaluing currency, holding gold makes a lot of sense.  In today's economy, the non-performing asset trades that banks are pawning off to the government are effectively debasing our currency without causing inflation, so even as stocks rise, gold may still outperform in real terms.

Otherwise, in a prospering economy, there is no reason to hold gold and even less of a reason to ever hold cash.

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#16) On September 30, 2010 at 4:55 PM, outoffocus (23.12) wrote:

 I'm just saying that for me, I prefer to purchase businesses that generate cash, hopefully increasing amounts of it over time. 

Maybe I'm missing something here, but arent precious metals miners businesses that generate cash over time?

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#17) On September 30, 2010 at 5:28 PM, Robuh (24.35) wrote:

FracturedVision

That's probably one of the best articulated reasons for owning gold that I've heard around here. If you do not believe that a balanced portfolio of financial assets that is occasionally rebalanced will provide real returns over the next 20 years then you need to look elsewhere (i.e. commodities or collectibles.)

A world economy that will shrink in terms of production on a per capita basis over the next 20 years is an impossibility in my mind. Even if I believed this then gold would still be low on my ownership list. I would probably trade commodity contracts or acquire items that have industrial value. Gold is only a store of wealth as long as everyone agrees that it is.

 

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#18) On September 30, 2010 at 5:45 PM, Robuh (24.35) wrote:

Sinch, if stocks were priced in gold and dividends were issued in gold I very much doubt that my real return from owning stocks over the long run would be any different. 

If bonds were priced/redeemed in gold and coupons were issued in gold I'd be terrified of owning bonds. I have no idea what the trading value of a gold ounce will be in several years and I'd be at much higher risk at losing wealth. Using US dollars I can approximate the devaluation of the currency and better define my risk based on the bond yield and maturity date.

It's much easier to predict the "value" of a US dollar over time compared to a gold ounce. If gold truly kept its purchasing power consistently over any time frame then it would be a completely different story. It does not. Its price volatility is dizzying.  

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#19) On September 30, 2010 at 5:52 PM, Valyooo (99.61) wrote:

Just wanted to add that my macro economics teacher basically called me a gold bug in class on tuesday

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#20) On September 30, 2010 at 6:03 PM, XMFSinchiruna (27.52) wrote:

Robuh

To the contrary, my friend. The U.S. dollar has lost 97.3% of its purchasing power vis-a-vis gold (real money) in less then 40 years since Nixon closed the gold window. I doubt whether stock and bond investors predicted that sort of erosion of value in the currency in which their investments were denominated.

If you had been holding stocks and bonds denominated in and paying dividends in gold over the last 40 years, you'd be a gazillionaire in today's dollars following gold's 3,757% appreciation over that timeframe.

Your risk of losing wealth in U.S. dollars is far greater than your risk of losing wealth in gold. Gold is a protector of wealth... that is its very nature. Yes, there is near-term volatility, but the longer-term stability of purchasing power via gold is well documented. Under the monetary paradigm of the post-Bretton Woods world, meanwhile, the U.S. dollar is guaranteed to lose purchasing power.

Anyway, I respect your decision not to invest in gold. If you do not perceive gold as stable money, then gold is not for you. If you prefer industrial goods, perhaps silver is beckoning? :)

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#21) On September 30, 2010 at 6:30 PM, Option1307 (29.92) wrote:

Nice thoughts Deej, +1.

I have held some gold/metal stocks for several years now but I can't say I am buying anymore at this point in time. So I can understand your point.

Thanks for sharing.

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#22) On September 30, 2010 at 7:29 PM, walt373 (99.83) wrote:

@ChrisGraley

Keeping as much of your cash as you can in gold over time is not speculation, it's sanity.

I don't know about this... at least the "as much as you can" part. Gold is really volatile compared to cash and the value of real goods/services. Cash is supposed to be the safe and stable part of your portfolio, and I don't think gold qualifies, at least not until you can pay a mortgage or college tuition with gold. Imagine if someone allocated all of their "safe" assets to gold in 1980.

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#23) On September 30, 2010 at 7:36 PM, goalie37 (93.30) wrote:

I have a question regarding the thesis that investments pay cash.  Does that only apply to dividend stocks or to any stock with a positive free cash flow, regardless of their payout?

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#24) On September 30, 2010 at 8:34 PM, Robuh (24.35) wrote:

Sinch, if stocks and bonds were denominated in gold the price action would have been much different over the last 40 years. Stock price appreciation would have been much less without the inflationary effects.

Stocks over the long run have always been a better investment. The 40 years that you use is pretty much the best starting point to get favorable comparisons and even then stocks are slightly better. If you were to use 30 years or 20 years then the comparison would be much different.

Losing wealth in dollars is guaranteed, steady, and somewhat predictable which makes dollar-denominated instruments easier to use in terms of risk management.

I was a silver investor for many years but I got out. If I was bearish on the outlook of the global economy for the next 20 years, believe me, I would be a huge silver owner again. I see too much opportunity in owning other assets.

I don't actually care about a stable currency to be honest. Currency instability can offer some very good investing opportunities. Furthermore all of my fixed-income assets (bonds and preferreds) are currently denominated in other currencies and have short durations. I'm certainly not blind to the fiscal and monetary problems of the U.S. but I start salivating when I think about high yielding bonds after inflation peaks and starts to subside. That may not come for another 10 years but in the meantime, at some point, U.S. treasuries will be a great shorting opportunity.

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#25) On September 30, 2010 at 11:20 PM, rofgile (99.25) wrote:

I found a link to Margin of Safety for anyone else who wants to read it.  Maybe we should have a Motley Fool Book Club?

http://ifile.it/9cf7etr/MoS.pdf

I can't believe it is $1000 used on amazon!  

 -Rof 

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#26) On September 30, 2010 at 11:46 PM, tekennedy (76.31) wrote:

+1 Rec, very good discussion and I have another book to read.

@goalie37- Another point mentioned was that an investment in timber lands is considered an investment despite not generating current cash flow as it will generate cash flows in the future.

"Investments, even very long-term investments like newly planted timber properties, will eventually throw off cash flow.  A machine makes widgets that are marketed, a building is occupied by tenants who pay rent, and trees on a timber property are eventually harvested and sold."

I take the point to be a return on assets is required which can then be reinvested.  I don't think its too far of a logical leap to compare investments internally reinvested within the company vs. externally reinvested dividends. 

On another topic the actual value of the dollar has been a topic which has interested me for some time.  A conclusion I have drawn has been that the value arises due to network effects: the more people who work for money(buy it in a labor sense) and the more people who sell it(buy goods) the stronger it gets. 

I have been unable to find a similar parallel for gold beyond an indirect sense as people buy and sell it (on an arguably speculative manner) and governments own it(are there still any major currencies backed by gold?). Yes I agree to the thesis that over longer terms there will probably be more fiat currency and a similar amount of gold which may lead to an increase of value over time... 

I however am uncomfortable holding gold as there is no way to compare it to other "currencies."  A way to value currencies is to compare the cost of a basket of products; as you don't purchase items with gold this can't be done so golds fair value is tough to measure.  I would consider gold as a shorter term holding, as I view cash, if I were able to measure this relative value.  Over the long term stocks and bonds are the true way to grow wealth.

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#27) On September 30, 2010 at 11:58 PM, totallyoblivious (30.19) wrote:

You've pretty much nailed how I feel about gold.  If I'm going to invest in a metal, that metal had better have a cost associated with its ability to be used in practical applications.  An expensive yellow paperweight doesn't fit the bill.

I also got a latest gen Kindle recently and was struggling with the text size of .pdf files, and it turns out there's an easy solution.  Your Kindle creates a username@kindle.com email address for you.  If you send an email to that address, attach the .pdf file to the email, and put the word "convert" in the subject of the email it will transfer the file to your Kindle in Kindle format, which allows you to adjust the text size.

 

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#28) On October 01, 2010 at 8:10 AM, XMFSinchiruna (27.52) wrote:

Robuh

Even though I don't share it, I find your perspective interesting. Thanks for the thoughts.

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#29) On October 01, 2010 at 9:02 AM, JakilaTheHun (99.94) wrote:

Why does every anti-gold argument on this site get met with "If you hold cash for the long term it will lose value so buy gold"?

I'm with Robuh here.

Over long-term horizons, gold has always underperformed equities.  It has always underperformed real estate, as well. It's not even an "inflation hedge" if the 1980s and 1990s are any indication, as gold got destroyed throughout that period.  If anything, it's an uncertainty hedge; and once uncertainty is removed, it's appeal is lost.

Gold is a commodity. It's like a lot of other commodities such as silver, copper, platinum, and palladium.  The only difference is that gold's value is more mystical, because the major buyers are central governments, collectors, investors, and people who want high-priced jewelry.  These consumers all tend to be very price insensitive. 

Contrast this with copper or palladium, which is bought by manufacturers, who are very much concerned with price.  If the manufacturers' demand starts waning, price can plummet quickly.  If demand skyrockets, prices can do the same. 

For this reason, gold doesn't have as strict of a market connection as the other metals.  It is more based on perception.  There are no cash flows.  There are no price-sensitive end-buyers. Gold is essentially like owning a tech stock in the '90s; you are speculating on the value and you could be way off. 

That said, those tech companies really did have intrinsic values and gold does, as well.  If you understood the intrisic values of those tech companies and bought in early, you could've made a fortune.  Same deal with gold. 

Gold's intrinsic value is based on the marginal costs of the miners and relative scarcity.  If all miners are able to extract gold for $400/oz and they are selling it for $3000/oz, that might be a good sign that it's overvalued.  If gold miners are selling for $700/oz and it is costing them $900/oz to mine it, that might suggest it's undervalued.  

I suspect its intrinsic value is somewhere in the $800 - $1100/oz range.  I'd guess around $950/oz. But this is mere speculation, because all mines have different costs and it's difficult to gauage a real 'intrinsic value', because it's totally dependent upon demand. If demand plummets, no reason gold can't fall back to $700 - $800/oz.  If demand continues to charge up at record high levels, no reason it couldn't go to $1600 - $1800 /oz.

But the idea that gold is 'protection' or a 'safe asset' is just completely bogus.  There are so many better things to buy if you are a risk-averse investor. At least REITs have cash flows.

 

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#30) On October 01, 2010 at 9:08 AM, JakilaTheHun (99.94) wrote:

I will say that I find silver-mania even more baffling than gold-mania.  Silver is an industrial metal.  It is subject to completely different dynamics as gold and can not, by any stretch of the imagination, be called a "safety investment."  If anything, it's the exact opposite: it's a cyclical investment that tends to do well in booms and poorly in busts.

That said, it's probably a better inflation 'hedge' than gold, because it is tied to the same dynamics as inflation (i.e. economic activity).  However, it can be supercharged (i.e. 1% deflation, might mean 30% silver price deflation; 4% inflation might mean 100% silver price inflation.)  

 

In the long-run, almost all commodities underperform the broader market. This is because manufacturers and end-users are always looking for efficient ways to cut-costs.  They will try to create technologies that make commodity-extraction cheaper; and they will try to find substitutes. 

Commodities tend to only perform well in boom periods that tend to last from about 8-20 years.  We are in an 11-year boom period right now. 

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#31) On October 01, 2010 at 10:47 AM, PaxtorReborn (29.86) wrote:

Well said Jakila.

At this point and time, gold is a bad inflation hedge, because even if massive inflation occurs, due to the recent run-up much of it is already priced in to gold.  Meanwhile there are many other inflation proof assets that are fairly or perhaps even underpriced right now.

eg. U.S. Real Estate

Also, if you're an end-of-days survivalist nutbar, firearms and canned goods are much better inflation resistant assets. 

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#32) On October 04, 2010 at 6:16 PM, rfaramir (29.36) wrote:

'High levels of inflation make "investing," in the Graham-Dodd sense of the word, very hard. And inflation makes speculation almost necessary. Just don't confuse speculation with gambling - they're very different. Speculation is the art of capitalizing on politically created distortions in the market.' --Doug Casey in "Thoughts on the Greater Depression"

Inflation is caused by the central bank (i.e., government, even when there is a fig leaf of independence) not being on a gold standard.

@Robuh and Jakilla: That's your mysterious link causing gold to come up in discussions like this.

Jakilla wrote: "Gold is a commodity." You got it!  It's the commodity that the free market has chosen as the best currency due to its natural properties.  Governments hate it because they cannot control it (short of confiscating it).

Seth Klarman: "investments throw off cash flow for the benefit of the owners; speculations do not. "

With this simplistic definition, all growth stocks are speculations, and only dividend-payers are investments.  Are you prepared to defend that? 

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#33) On October 07, 2010 at 4:03 PM, MKArch (99.71) wrote:

JMHO but if we ever get to the point where there really is hyper inflation in the U.S. I don't think anyone is going to give a damned about gold, you'll want to own canned food and ammunition.

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#34) On October 08, 2010 at 12:42 PM, dicartacash (85.74) wrote:

"Holding" gold may indeed be a defensive strategy against the headwinds of currency debasement, but investing in companies just because they throw off cash is, by itself, a losing proposition.  As good investors we try to peer into the future and identify undervalued assets today, weather that be a company or a commodity.  The real difference is whether or not you are investing in innovation.  THAT is the source of intrinsic wealth creation.  It is why I'm quite bullish on technology in general.  But as a passive investor there is no guarantee that you will be the beneficiary of that wealth creation simply as the holder of the stock, and the tradable value of innovation is a very transient thing.

To a lesser (but recently growing) extent, the same risk exists with currency, therefore gold is a valid strategy of preserving wealth. I agree with suggestions of other posters and I'd recommend a basket of non-expiring commodities.  Palladium, anyone?

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#35) On October 08, 2010 at 1:16 PM, lctycoon (< 20) wrote:

"The U.S. dollar has lost 97.3% of its purchasing power vis-a-vis gold (real money) in less then 40 years since Nixon closed the gold window. I doubt whether stock and bond investors predicted that sort of erosion of value in the currency in which their investments were denominated.

If you had been holding stocks and bonds denominated in and paying dividends in gold over the last 40 years, you'd be a gazillionaire in today's dollars following gold's 3,757% appreciation over that timeframe."

If gold was actually an inflation hedge, then shouldn't the price of gold be substantially less than it is now?  The US dollar lost 97.2% of its value in 40 years.  So an inflation hedge should have gained somewhere around 100% over this same timeframe.  Gold didn't - it gained about 37x what an inflation hedge would have.

Take a look at any chart of gold prices vs. inflation.  If gold is an inflation hedge, then it's a pretty lousy one.  Gold is an uncertainty hedge, as was already said.

While we're working with the gold standard interval, what did stocks do in those same 40 years?

"With this simplistic definition, all growth stocks are speculations, and only dividend-payers are investments.  Are you prepared to defend that?"

If he doesn't, then I will - growth stocks are like investing in new growth timberland.  They may not produce cash flow (aka. dividends) now, but the expectation is that they will someday.  Also, the companies that the stocks represent do produce cash flow.

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#36) On October 08, 2010 at 2:04 PM, BillyTG (29.27) wrote:

@Ictycoon,

you'll hear this repeated again and again on these boards before it goes mainstream:

Gold is a currency, not a commodity.

Gold is a not an inflation hedge, but a hedge against political instability and government default.

There is a whole world out there besides the dollar, so any attempt to find correlations with the dollar, especially in this uncertain climate, is futile, as you have shown. And actually, that climate is precisely one very big reason why gold continues to climb.

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#37) On October 11, 2010 at 8:36 AM, MKArch (99.71) wrote:

Off Topic but HRG strikes again! Any thoughts Deej?

 

http://biz.yahoo.com/e/101008/hrg8-k.html

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#38) On October 27, 2010 at 7:20 PM, BrockMont (63.60) wrote:

look the real deal is gold itself is garbage you want silver its both a industrial metal and a ancient form of real money.. warren buffet himself purchased 3 million ounces of silver... BRK-B is a reccomendation by the fool itself! BRK=buffets company.. so i feel silver is 100 percent not speculation.. its used in batteries, laptops, cell phones, medical equipment, SOLAR PANELS... theres less physical silver on the market for investors to buy right now than gold.. look at the price difference of silver/gold its value investing in metals... value investing i feel is not speculation but a good strat in investing. plus theres tons of stocks that don't pay dividends. if you want to read someone who knows whats up check out richdad.com and soon i will be starting a blog on investing, market outlook etc. unless the fool wants to scoop up a foolish investor haha

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#39) On October 29, 2010 at 8:06 PM, tobernator1000 (< 20) wrote:

The thing that confuses me the most is when people tell me "gold is currency". To me, currency is anything that replaces the barter system, in that it is easier to carry around and divide than, say, a sheep or a song. All currencies exist to replace "useful" goods and services ("useful" is a completely subjective term, but can loosely be defined as "things people want") and have no value of their own (beyond gold as a paper-weight, or paper dollars to wipe your... ummm... mouth). All currencies are ONLY valuable if people are willing to give you "useful" goods in exchange for the currency. That is my definition of a currency, and I think it's important to start from there so we at least know what we're talking about. If you have another definition of a currency, I would be interested to hear it.

Given the previous definition, dollars (or any other fiat currency) is exactly as good as gold as long as people are equally willing to exchange it for "useful" goods. Gold has no more or less intrinsic currency-ness than dollars or fingernails or bytes in some bank's computer. It can be argued that Gold makes a BETTER currency than any of those things because it is more finite, easily divisible, hard to counterfeit, etc. but that doesn't make it a currency and other things not a currency. The only thing that can do that is people's willingness to trade it for "useful" goods.

If the U.S. government spontaneously printed a trillion-trillion-trillion-trillion dollars people would probably stop accepting dollars for "useful" goods because they would think the government was trying to steal their stuff in exchange for something worthless, and rightfully so. Thus, the dollar would cease to be a currency because people would not be willing to trade for it. This is what most proponents of gold argue is about to, or is already, happening.

However, gold right now is a very terrible currency (for me) because almost nobody is willing to give me "useful" things for it. I can not walk into Best Buy and get a plasma TV in exchange for a gold nugget. I can not buy a Kindle over Amazon by shipping them an envelope full of gold dust. I can not walk into the grocery store and buy a soda no matter how much or what form of gold I have on my person. On the other hand, I have a tiny piece of plastic that will manipulate some bytes on a bank's computer and for that someone will give me a soda, which makes it a good currency.

Some proponents of gold claim that society is coming to an end very soon. I'm not convinced of that, but let's say it's the case for the sake of argument. The next thing those people tell me is that I will need gold, food, water, and ammo. If society comes to an end I can see the need for food, water, and ammo, but in that situation will anyone really give up any of those three things for a shiny rock that you can not eat, drink, or shoot something with? I am not convinced of that either, and so I don't believe gold will be a useful currency (again, based on my previous definition) even if society collapses.

If there is some middle ground in which the dollar fails but society remains intact, then, MAYBE, gold will become the new currency. That's the only reason I can see to actually own physical gold. However in that case, I think it's much more likely that some other fiat system that already exists will replace the dollar as the thing I can use most easily to get a soda. That, to me, is currency. 

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