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intelledgement (98.31) Submitted: 7/20/07 4:23 PM : Start Price: $63.58 GLD Score: 52.06
My father has been a gold bug for as long as I can remember. Canadian mines, gold mutual funds, Krugerrands stashed in the bomb shelter (yep, true child of the 50s: my family had a bomb shelter), you name it, he tried some.When I was a kid, this sounded like a good idea, particularly once I learned to read an inflation chart and looked at what had happened to the dollar since 1945. $35 an ounce? Ha! Tell me another one. However, by the time I got to college and had some economics under my belt, I became more skeptical. Mathematically, the main dynamic behind the value of gold (taking on faith for the sake of argument that it is intrinsically valuable to humans for whatever reasons) is that a growing demand—as people grow more numerous and richer—is chasing a fixed supply—given that whether yet mined or not, there is an effectively fixed supply of gold on the planet. However, consider that based on the dynamics of supply and demand the market price for risk capital is 10% per year. For gold to increase in value 10% per year, year in and year out over time, the human population of the planet would have to be increasing 10% per year. Fortunately for us all, the human population is increasing at a much smaller rate than that: less than 2% (although some consider that dangerously high).Anyway, aside from jewelry and some arcane industrial applications, gold is really not all that useful. If not for its history of being used as money, or to back paper money, historical demand would have been much smaller…maybe even $35 an ounce would not seem so outlandish. So the point is, long term gold is actually a pretty lousy investment. Or, more precisely, it should be a lousy investment. Actually, when you look at the numbers, since the USA unilaterally ended the Bretton Woods system in August of 1971, the S&P 500 index has a compounded annual growth rate of 8%—a tad below historical norms—while gold has a CAGR of 9%. Go figure.But never mind, because in the event, we are not adding gold to the portfolio as an investment. We are adding it as a hedge against the probable demise of the dollar. Even if gold were sporting a 35 year CAGR of only 2%, we would still be recommending it here, because history demonstrates that when fiat money fails, gold shines. And the dollar is at significant risk of failing here. The government has a current accounts deficit. We are staring a looming demographics-triggered entitlements deficit in the face with no solution in sight. Individuals in the USA have undertaken more debt per capita than at any time in history, and savings rates have fallen so low, they are actually running in negative territory. And our trade deficit is setting historical highs nearly every month as we fail to produce stuff as valuable as the stuff we buy. All this debt is being financed by foreign lenders who retain confidence in our ability to meet all obligations…for the time being. As the risk of default rises, normally the only way to get the lenders to keep stepping up to the plate is to raise the interest rate to counterbalance the increased risk with increased reward. In present circumstances, however, increasing domestic interest rates in the USA risks crashing the housing boom-funded economy. No one—presumably excepting Al Quaeda—want to see that.As it happens—and it’s not entirely clear this is a good thing—there are lenders out there who have big incentives to keep the cycle going—even as the risk for them increases—either because they already own huge quantities of dollars and don’t want to do anything that will increase the rate at which those are depreciating, or because they are big net exporters to the USA market and need to keep those sales happening while they build up their own economies…or both. There’s an old saying that if you owe the bank a million dollars and can’t pay it back, then you’re in big trouble…but if you owe the bank a billion dollars and can’t pay it back, then the bank is in big trouble.Of course, everyone with lots of dollars can see that the value of the currency is in decline, if not in a death spiral. So there’s lots of folks wanting to cash out dollars for real property, or failing that, for a more stable currency. The problem is that with so many depreciating dollars facing a relatively limited supply of available and durably valuable property, there is a real danger of getting stuck in the exit door, should everyone attempt to stampede out of the theatre at once. So it is a delicate queuing theory problem, with crowd psychology complications. On top of all these many pressures on the value of the dollar, however, comes the killer: the specter of default. The only way we will ever be able to pay back all this debt is to inflate our way out of it. And the biggest debtor of all—our own government—still owns the printing presses. The logic is simple and inexorable: if the dollar is worth less, then dollar-denominated debt is easier to pay back (assuming it is not indexed for inflation, that is).Our best guess is that an immediate crisis is not likely. The Chinese middle class is not yet spending enough to absorb the loss of the USA consumer market, so as long as the American saps keep extending their credit card debt, it is in all the powers-that-be’s interests to retard the decline of the dollar and keep the party going. Of course this non-solution only allows the underlying structural problems to fester and worsen. And as we continue to skate further and further out onto thinner and thinner ice, the situation is progressively harder to manage; the wrong failure by the wrong hedge fund or the wrong terrorist attack at the wrong time could engender a panic that no one can head off before it engenders a selling plunge right through the surface ice into the cold, black depths below.Whether the final collapse comes next winter or next decade, it is important to keep one’s assets protected from the declining dollar. Owning some gold through this time of turbulence is part of that plan.The streetTRACKS Gold Shares ETF (GLD) is not the only gold ETF, but it is the gorilla in the band, with some 80% of the market ($7.5B marketcap). The trust that constitutes the fund actually owns bullion; when the fund started out in 2004, each share was equivalent to one-tenth of an ounce of gold. (As the trust’s 0.40% annual expense load is provided for through the sale of small portions of the gold, this fraction declines modestly over time.)GLD is not our answer for the end-of-civilization. There is no way for retail investors to redeem shares in actual gold. (Brokerages can buy 100,000 share blocks, or redeem them for gold; that is where the shares we buy come from.) If the NYSE closes due to an overall market collapse, it would be helpful if you had already traded in your GLD shares and used the proceeds to buy actual gold coins, or probably better still, razor blades, alcohol. Asprin, ammo, chocolate, and some pre-1965 circulated US coinage (when they still contained silver). Assuming you know how to use the ammo effectively, that should set you up well for post-apocalypse life…but we digress.What GLD does do for us is provide a cost-effective, convenient way to maintain an interest in gold bullion. Because GLD is an ETF, one can trade it whenever the market is open (in fact, it trades until 4:15pm most days). No hassles with insurance, transport, storage, or transaction fees. So long as the NYSE is still operating, GLD is a good way to hedge against a decline of fiat currency in general, and the dollar in particular.For more information about the GLD ETF, check out the streetTRACKS website:https://www.ssgafunds.com/etf/fund/etf_detail_GLD.jsp
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Ludraman1 (< 20) Submitted: 9/11/07 6:17 PM
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Very thorough analysis. Good writing style too ! I like the casual way that yourefer to the shutting down of the NYSE - shocking scenario for all of us who care about stocks and shares but definitely a view that is behind the rise in gold.
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cubanstockpicker (76.58) Submitted: 11/17/07 10:18 PM
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Adjusted for inflation, Gold is worth exactly the same as it has for the past two hundred years on a continuous timeline 200 YEARS. ONE DOLLAR IN GOLD IN 1807 would have made you one dollar today, adjusted for inflation. One dollar in equities, and well I am sure you know the rest, You are a good stock trader as your rating shows. Yes gold has its bulls with some great years, followed by straight down nose dive bears. The institutional investors, that have the luxury of buying dirt cheap and waiting forever are slowly now getting out of gold. It may not happen now, but whenever the consensus of ANY MARKET BECOMES 100% BULLISH, you run out of buyers, and, unlike PUBLIC COMPANIES, gold is not coming out with a new exciting product.By the looks of the latenight infomercials touting gold as the best investment in the world, they have the same look and feel of the same commercials running towards the end of the last gold run, only to be followed by a straight nose dive. Unlike other commodities, e.g. oil, copper, paladium, etc... Gold has very little use except as a monetary weighted value that moves at the pace of inflation in the long run. Gold right now is 22% higher than its all time high in the 80's, right after the 77-79 housing bubble burst. By the way, gold tanked soon after. Gold may make one feel powerful by owning it, BUT GOLD DOES NOT HAVE EARNINGS, it has no demand and supply like oil and it doesnt report quartlery like stocks. Why should gold keep going up?GOLD GOES DOWN TO 500 IN THE NEXT YEAR AND A HALF. PROBABLY LOWER. IM NOT PSYCHIC, JUST BASING MYSELF ON THE WIDELY ACCEPTED TREND.
intelledgement (98.31) Submitted: 11/29/07 1:52 PM
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cuban,We agree with you in principle: historically gold has been (and likely will continue to be) a bad investment vehicle. Where we think you are going off the track here is in mechanically applying T/A to a situation where F/A is called for. Gold is a buy here for dollar-denominated investors because the dollar is tanking. It is a hedge, not an investment. Just a coupla questions to illustrate the point:What does your history tell you invariably happens to the value of gold when fiat currency fails? If the dollar merely continues it's current rate of decline for the next 18 months (we expect the death spiral to accelerate after the election but never mind), $500 in 2007 money will be worth $600 or so by mid-2009 in then-current-value dollars. Conversely, for gold to fall to $500 by mid-2009 in then-current-value dollars, the price would have to decline to the equivalent of about $400 in 2007 dollars. In an environment of supply-constricted commodities and challenged fiat money...do you really think that is likely?
cuban,
We agree with you in principle: historically gold has been (and likely will continue to be) a bad investment vehicle. Where we think you are going off the track here is in mechanically applying T/A to a situation where F/A is called for. Gold is a buy here for dollar-denominated investors because the dollar is tanking. It is a hedge, not an investment. Just a coupla questions to illustrate the point:
What does your history tell you invariably happens to the value of gold when fiat currency fails?
If the dollar merely continues it's current rate of decline for the next 18 months (we expect the death spiral to accelerate after the election but never mind), $500 in 2007 money will be worth $600 or so by mid-2009 in then-current-value dollars. Conversely, for gold to fall to $500 by mid-2009 in then-current-value dollars, the price would have to decline to the equivalent of about $400 in 2007 dollars. In an environment of supply-constricted commodities and challenged fiat money...do you really think that is likely?
ikkyu2 (99.38) Submitted: 11/29/07 4:31 PM
I think that both intelledgement and cuban are fundamentally mistaken about demand for gold. Demand for gold is not created simply by population growth. If 100 million severely impoverished people are born in sub-Saharan Africa, world gold demand will not change at all. Those people have 0 demand for gold; their demands, that they will labor to satisfy, are for clean water and enough protein so that they do not immediately die. Likewise the percentage of people worldwide who demand gold is small - but it is increasing as the global middle class increases. A lot of people are speaking about demand for gold in India - where it is used as part of weddings in a way that is almost religious (i.e. irrational), and in China, where it is being hoarded by an emerging middle class.As a kid I read all the 'gold bug' newsletters - C.V. Myers, anyone? - and read a lot about how gold was a great inflation hedge. But historically it has not been a great inflation hedge, because supplies and demand over time have been artificially controlled. (Russia's dumping on the market of nearly all the ex-U.S.S.R.'s gold reserves in the 90's and early 00's kept the price far lower than it otherwise would have been.)In long terms - decades, like intelledgement is talking about, or centuries, as cuban is talking about - I think the unmodified noun "inflation" should be banned from the discussion. Currency calculators are a joke; not even a troy tonne of gold could buy you a dose of penicillin in 1907 if you had pneumonia. In shorter terms it is useful to talk about the dollar's decline "against" something, or inflation "measured against" some other thing. For the last few decades global demand for gold was centered in the U.S. and therefore decline in the dollar against other currencies was not wholly reflected in the gold price. It is because this situation may be changing - *along with a decline in the dollar* - that I think gold is now a decent short term inflation hedge. (If the decline in the dollar doesn't continue, and I think that's possible though unlikely, gold may not be as good an investment in U.S. dollar terms.)
intelledgement (98.31) Submitted: 12/05/07 2:49 PM
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I think that fundamentally, all three of us are in agreement that gold is lousy as a strategic investment, all three of us are in agreement that there are tactical moments of opportunity when it makes sense to own gold, and none of the three of us are counting on poor folks in sub-Saharan Africa - who btw are decreasing in numbers, not increasing with the scourge of AIDS added to the "normal" problems of droughts and bad government - as net gold purchasers in our market calculations. You and I further agree that this one of those tactical moments whilst cuban has it wrong on this last point.
netdance (93.82) Submitted: 1/30/08 6:36 PM
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Um, if gold maintains it's inflation weighted value as you say (it doesn't, btw), and it's only 22% above the high point in the 80's, what was the inflation between then and now? Hint: Larger than 22%.There's a lot of room on the upside, as I'm sure you found out in November.
netdance (93.82) Submitted: 1/30/08 6:37 PM
Sorry, that post was a reply to Cuban's post.
devilTHEORY (25.35) Submitted: 2/11/08 8:35 AM
It does if you start with the dollar from 200 years ago. If you use inflation adjusted numbers from 1980, well yeah you are right but that has nothing to do with what he said. It's called a book, and please don't try and defend yourself with how you are still somewhat right.
hattyr (91.56) Submitted: 2/27/08 3:09 PM
just curious - why the ammo for a market collapse? shoot the brokers?
intelledgement (98.31) Submitted: 3/05/08 12:34 PM
hattyr wrote> > just curious - why the ammo for a market collapse? shoot the brokers? LOL heck, no...not unless they try to steal our stockpiles of razor blades, alcohol, or silver coins, that is. (And it takes more than just a stock market collapse to get us to this scenario; we need a major economic collapse.)
hattyr wrote>
> just curious - why the ammo for a market collapse? shoot the brokers?
LOL heck, no...not unless they try to steal our stockpiles of razor blades, alcohol, or silver coins, that is. (And it takes more than just a stock market collapse to get us to this scenario; we need a major economic collapse.)
bullshiite (84.16) Submitted: 3/23/08 4:10 PM
Intelledgement-Great post I really enjoyed reading it. I thought everyone would like this article and perhaps it may explain the correlation between higher gold prices when there is a lot of government debt. The article has to do with FDR's controversial decesion to make it illegal to own more than $100 in gold. From my understanding of the article the government wanted to create a consistant amount of inflation (2-4%) in order to reduce their own debts. Here is the link:http://jimbovard.com/blog/2006/12/06/the-great-gold-robbery/
cubanstockpicker (76.58) Submitted: 4/02/08 11:48 AM
Netdance,When people start evacuating gold as an investment when it does nothing and has no mining, industrial, chemical manufacturing value except luxury as you have seen god is down 200 dollars in less than a month. Gold is not an investment vehicle, especially when Late night TV is announcing GOLD as the next greatest investment. The door wont be big enough for everyone to run out. No big deal, gold is down 20%. Not a huge loss. But what will carry it to profit? Read David Dr mers book on "contrarian invesment strategies". Even look up gold historically and the gold trend for 200 years. BTW, there used to be a real pegged dollar to gold until 1953 or so. Now Gold has less of a pegging unlike the euro or other monetary funds that have a bit more action and are based on the economic strength of a country.In the old old old days, before this unpegging, governments were replaced faster and revolution was abound. How many major countries today will have a revolution? The US, france, germany any major foreign power will not even be near a revolution, and if it did, it wouldn't start printing its new money with revolution leaders face on it and throwing out the old one. Gold was important back then, because your coinage had to be printed on gold to have a value. now the value we hold behind it is in great part psychological.As for CV Myers, and his gold bug letters, If I played a public service announcement from then, we would all laugh. "Lets hide under our desks in schools to protect ourselves from Nuclear War""7 out of 10 doctors recommend Camel cigarettes", War of the Worlds was a big hit and believed by most.Gold is a post nuclear, post Armageddon bargaining chip, but if any of the two disasters did happen, and we were alive, we would need to worry about water, then food, then shelter watch Survivorman, LOL. as sick as it may sound, pulling gold chains off corpses or walking into a wrecked jewelry and picking up a few items is just as simple. And we wont need to worry about taxes then now do we?
cubanstockpicker (76.58) Submitted: 4/02/08 11:50 AM
lol, i think people would use lead, thats all they can afford after realizing "broker" was a state of being.
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