SPDR Gold Trust (ETF) (GLD)

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

I'm going with DemonDoug, AnomaLee, rd80, and chk999 on this one.
It is harvesting time in the political season! Therefore, it will be irresistible for Congress to NOT appear to be doing something during this banking bailout. As much as we may dislike and outright despise a Wall Street bailout, Congress will more than likely pass something. Putting money into GLD (or GTU) will hedge the inflation problems this sort of bailout will most definitely bring on.

As AnomaLee pointed out in his pitch, "the national debt has increased by over 30% in three weeks". If that's not a recipe for inflation, skewer me please!

History is replete with the result of the actions that Marxist in the White House is taking.
Yet every one seems to think doing the same thing again will lead to a different result.
What he wants, we don't need.
When the majority of people loose faith the the "full faith and Credit of the United States" (that's all the dollar is backed by you know) the dollar will become "Charmin".
I feel like Noah, every one called him a nut until the first rain drop fell.
Don't buy gold as an investment buy it as a hedge against insanity.

In my personal portfolio, I'm long the real stuff, since Oct 1999, prior to the Y2K scare. At the time, it was believed that gold would no longer be used to back the World's currencies. Countries were dumping their gold in the open market and the price dropped. Too bad... because I was a buyer then, and I'm still a buyer today. I will sell when it gets around $950 to $1,200 an ounce in the next few years. there will be some ups and downs, but I think as Greenspan once said, (something like this) " markets always go higher than they should and just the reverse on the downside" I don't think the future surge in gold is as fundamental as it is perception and sentiment...it will just continue to run until it reaches a saturation point. When I go to get my groceries and the bagger asks me if I saw the price of gold today, I will know it's time to sell.

GLD - SPDR Gold Trust which was formerly StreetTRACKS Gold Trust. It is fractional ownership in the gold bullion trust and the goal is to track the performance of gold bullion. Why I like this ETF: Gold is going up! (see below). Why I don't: This is essentially paper gold. It is a gold fund backed by gold assets, but the underlying shares can be diluted. For a fund with a more rigorous auditing / ownership process, CEF (Central Fund of Canada) is the best. 50% gold / 50% silver, rigorous auditing, and it is held in Canada! TMFSinchiruna is the most ardent propent of CEF and I agree 100%.

Gold and Silver - Relationship to the USD
Gold and Silver are money. Most people think they are commodoties, which is not inaccurate. To some degree they are; Gold is a reasonably useful industrial material, and silver is a highly useful industrial material. But gold and silver's value is because they have respresented wealth for so long. They are money, and they have value because they are non-dilutive.

Why is Gold and Silver going up? The question is incomplete. The complete question is why is gold and silver going up relative to the US Dollar. Remember, gold and silver are money. And like any form of money it must be valued relative to other currencies. Gold and Silver are going to continue their rise (in terms of USD) because of the extremely inflationary actions of the FED and the current government (and most likely the next government as well). It is a very sad and very unfortunate fact that the USD is being debased and devalued by the current government's fiscal policy. The US Dollar Index is on a very steady decline. There is no reason for it to rise in the current environment. The FED is printing money and trying to inflate the US out of its current economic dilemma. In order to make any kind of dent in inflation The FED has to take a much tougher stance. ... Their most recent "tough talk" on inflation... "We may not cut interest rates next meeting, and it might stay at 2% for the next serveral sessions"... Wow, that is the FED being "hawkish" on inflation. Meanwhile liquidity is being pumped into the system and the dollar is being devalued.

The recent gold and silver correction has provided a good buy-in opportunity. It is already on it's way out of the correction, having made up >50% of its retracement already. It is not too late yet. Once gold goes back over $1000 again, there is nothing on the horizon to hold it back. The FED has made it clear that dealing with inflation takes second seat to proping up the financial system. Unless something drastic (such as a major rise in interest rates) occurs, gold and silver will keep rising.

History has carved out several instances whereby financial advancement has led to the fundamental revaluation of an asset class. Taking a cue from the same, with the launch of streetTRACKS Gold Shares (GLD), inclusion of gold in an asset allocation model for diversification purposes has become relevant for many investors.

GLD fund issues shares equal to roughly one-tenth of an ounce of gold, at current market prices and seeks to offer direct exposure to gold price fluctuations in a more liquid and convenient format. One of the fastest growing US-listed ETFs in history, the fund has grown to over $10 billion in assets and is now the ninth largest ETF in the U.S.

Softness in manufacturing sector combined with worries about terrorism and North Korea's atomic program has worked against the dollar. On the back of same, gold prices are on an upsurge and have able to garner the focus of various hedge funds. Due to the direct correlation with the crude oil and inverse correlation with dollar prices, investors who use the commodity as an inflation hedging technique and diversifying their portfolio, are moving towards gold funds.

Going ahead, the gold prices envisage a positive environment, with supply of gold is coming under pressure due to lack of any big finding in the past years. On the flip side, the demand is ever increasing, thanks to the increasing demand from the largest consumer India. Further, many central banks across the globe have decided to increase their gold reserves which should further augment the prices in coming years.

Though the fund has posted some hefty returns since inception, with one-year returns for 2006 being 13.94%, it cannot be considered as a tame investment in the eye of a volatile scenario and the wild fluctuation of gold prices. Turning to the investors’ perspective, for a short-run atleast, gold prices are well paced on the charts for a strong move up.

Devaluation of the US dollar will cause gold to increase over the long term.

Gold is dropping as people realise we are in a deflationary environment

Gold is useless

Gold is a must for every portfolio. All investors should have at least 15% of their assets in gold, silver or other precious metals. Gold protects buying power, the ultimate inflation hedge. This stock is much easier (and cheaper) than buying gold coins, bars or bullion. And, you don't have the storage, safety deposit boxes, insurance headaches, costs and hassles to deal with. Gold is going to triple within the next few years so buy GLD today!

Gold's price should increase due to a declining dollar. Most of the major stocks will soon go down, especially with the baby boomers starting to retire shortly, allowing the miners to beat the S&P 500.

All of this government spending is making me nervous. I'm afraid one of the pay backs will be increased inflation down the road. Gold, commodities, and TIP's may be worth accumulating.

Nearly every government around the world has seemingly joined forces in an effort to flood the world in liquidity (assumingly to foster economic growth), and are increasing their money supply (M3) at over 10% per year. But guess what? They're not growing at the same rate they are increasing the money supply, and money supply - GDP growth = inflation. That's a very simplified version, and some economists may dance around citing statistics, theories, etc saying it's wrong, but obviously, if you have more money and growth doesn't keep up, the money becomes worth less. It's simple supply and demand. The US government's ex fuel and food inflation numbers lead those who don't realize that basic fundamental truth to believe that inflation is being successfully contained and moderated by the financial 'wizards' at the FED, but in reality, inflation is much higher than the FED's numbers suggest. To the average American, this is obvious, as prices on the basic necessities of life increase at a rapid pace every year. Commodities, and precious metals in general, act as hedges against this inflation. As long as the world is awash in liquidity, inflation will continue to rise, and precious metals will follow.

Declining consumer spending driven by deepening real estate price drops leads FED to lower rates in vain effort to avoid full blown recession. This drives down the dollar exchange rate and in turn inflates the price of gold (in dollar terms).

Logic.

The more I think about it, the more I realize Gold is perhaps my favorite long-term pick. Think about it... why do you get into stocks in the first place? To keep pace with or beat inflation. The implication there is inflation is long-term. What benefits from inflation? That's right, gold.

And gold also benefits from fear, which is apparent in recessions.

So a pick that should do well in both inflation and recession, IMO, you can't beat that.

Lee

With a weaken dollar and increasing federal budgets, gold is a way of hedging against inevitable inflation that will result. Futher, China has been accumulated massive US dollar reserves and has indicated that they wish to diversify their exposure to the dollar. Although they will probably do this by buying other currencies, gold and silver are very likely options as well.

The DOW broke 13000 today. While i'm a long term bull for the stock market i think having a hedge against "crazyiness" is good. I started a small postion in GLD in real life today. This is the kind of fund that can give you a safety net.

The problem of fiat money system is government can print as much money as they want and it is doing it now, the unlimited creation of money is the root cause of inflation, enough said ?