Jul 01

The gold bugs are an interesting breed. They use misleading rhetoric such as “a storehouse of value” and other argumentum ad passiones to  convince you to buy. Those who caught any good part of the recent run-up from ’05 to ’12 sure are happy, but only if they sold. Buying gold at the wrong time can leave you with a bad investment for the rest of your life. Gold’s record high was in January 1980, at $875. Inflation alone would put the price at $2400 today. What storehouse of wealth? We are exactly at half that price. If you buy gold in the form of small bars or coins, you pay a dealer premium, and the buy/sell spread can be 5% or more. For those who wish to buy gold, I’ve mentioned GLD, the gold ETF. It started out as trading as .1oz of gold per share, but as with any ETF, there’s an annual expense, .40%, so the 10 GLD shares that represented a full ounce in 2005, now, eight years later, is closer to .97 ounces. The prospectus for GLD states this clearly.

[T]he amount of gold represented by each share will be reduced over time, from an initial 1/10th of one ounce of gold. Because the expenses of the Trust will be offset by the sale of Trust gold, the amount of gold backing each share (Ounces Per Share) will decrease gradually. Each share will initially represent 1/10th of one ounce of gold, but this will decline over time. This reduction in ounces per share will be reflected in the NAV of the Trust.

GLD did not exist in 1980, but if it did, the ounce you held would be .88 ounces, and today, not worth the current $1200, but about $1050. The question isn’t how long it will take the 1980 investor to simply break even, but whether it will ever happen at all. In 20 years, his .88 ounces will shrink to .81 ounces, and the $2400 target will inflate to $4335 given an average 3% inflation rate. Not impossible, just not guaranteed. When stocks are involved, time is on your side. Even if the S&P or DOW index is flat for a time, the dividends will increase your holdings, and you will be ahead long term. You bought at the 1987 high, just before the crash? Less than 3 years later, you were ahead. January 2000, the S&P at 1500? The 13 years of dividends put you ahead even as the index had a tough decade.

gold0613The gold bugs are happy to point out how gold helped their owners get through the stock crash of ’09. And they may have been right, but click to expand this chart to see how they’ve done since. Gold up 30%, the S&P up over 140% (remember to add dividends.)

The responsible fee-only advisor might suggest that gold is not meant to be used to buy a huge amount and hold for the apocalypse, instead, one should have say 10% in their portfolio, and through the reallocation process, some gets sold in years the S&P outperforms gold, and gets purchased in years the S&P outperforms. I’m working on a study to understand how such a mix would have performed compared to a stock/bond mix or 100% stock investing.

written by Joe \\ tags:

May 01

A Guest Post from Crystal –

Gold Investments are traditionally considered a diversification of one’s asset portfolio and as protection from the risk of loss versus other investment options, although investing in gold can be a solid financial undertaking on its own. However, just like any financial decision, this calls for careful consideration and background checks to say the least. There are many options to invest in gold and as Forbes.com puts it, “Investing part of your portfolio in the yellow metal is one thing, deciding how is quite another.”

In the article “The Pros and Cons of Investing in Gold” by Marcie Geffner, she quotes Chris Hyzy, chief investment officer at U.S. Trust, the private wealth management arm of Bank of America in New York, saying “gold shouldn’t be considered an investment. Rather, the precious metal acts as a hedge, or a way to try to protect wealth against the risk of loss in such asset classes as real estate, equities and bonds.”


Hyzy continues to explain that “it’s important to think like a central banker. The more growth comes from areas of the world that have high savings, the more (the price of) gold is likely to continue to rise because those savings need to be put to work in non-dollar instruments, including gold and other hard assets.”

On the other hand, the internet provides information regarding investing in the precious metal, for as long as you know how to assess proper and verified advice. Choosing to invest in or buy gold at BullionVault and in similar sites has become a choice of many investors. What should always be put in mind before going into such financial undertaking is to arm yourself with basic information and a background check of the firm you are dealing with, whether it be online or a “brick and mortar” establishment.

Marcie Geffner of BankRate.com highlights, “Gold prices can be quite volatile.” As Geffner quotes Frank Holmes, CEO and chief investment officer at U.S. Global Investors, a San Antonio-based investment fund, he says “70 percent of the time, it’s a ‘nonevent’ for the price of gold to rise or fall 15 percent in a 12-month period. In other words, investors can expect annual price swings of that magnitude or more much of the time. Gold stocks can experience even greater volatility than futures.”

On their website Consumer.FTC.com, The Federal Trade Commission (FTC), the nation’s consumer protection agency, says, “if you are interested in buying gold, do some digging before investing. Some gold promoters don’t deliver what they promise, and may push people into an investment that isn’t right for them.”

The FTC offers the types of gold investments that you can choose from as gold comes in a variety of forms:

  • Gold Stocks and Funds – It can either be buying into a mutual fund invested in physical bullion gold or an investment in a mining firm’s stocks. Forbes.com also offers this as one of four options in investing in gold. The FTC reminds, “Gold stocks and funds should only be purchased from licensed commodity brokers.”
  • Bullion and Bullion Coins – defined by the FTC as “a bulk quantity of precious metal, usually gold, platinum, or silver, assessed by weight and typically cast as ingots or bars.”
  • Collectible Coins – processed gold that have historic or aesthetic value. FTC notes, “Most collectible coins have a market value that exceeds their face value or their metal content. This collectible value is often called numismatic value. The coin dealers who sell collectible coins often have valuable coins graded by professional services, but grading can be subjective.”

The Consumer Protection Agency also provides for constant facts about gold that you would need to know:
1. Gold prices fluctuate. There are no assurances that values will increase or just be maintained.
2. “The prices coin dealers, banks, brokerage firms, and precious metals dealers charge for gold products, like bullion and coins, are almost always higher than the value of the gold the products contain,” FTC advises. Compare prices.
3. There is no existing federal law or Treasury Department regulation ordering any type of confiscation of gold.

In any endeavor, always do your research. FTC puts it simply, “Investigate Before You Invest”.

written by Joe \\ tags: , , , ,

Sep 28

Gold is now at $1600 per ounce. I’ve stated before, I believe it’s in bubble territory but there are those who think gold is going higher, not just a bit higher, but to $57,000 per ounce. I don’t want to link to such forecasts,  just google ‘gold to $57,000’ and you’ll find a number of articles on this.

Let’s look at how such a forecast isn’t just absurd, it’s mathematically impossible.

The total wealth in the world is approximately $125 trillion. This number is a few years old, but close enough for our purposes.

The total amount of gold mined to date is approximately 5 billion ounces, or $8 trillion at today’s price. If gold were to go to ‘only’ $25,000 per ounce the value of gold alone would be as much as everything else in the world. All stocks, cash, bonds, real estate, etc. Would it make sense that such a thing could be possible? Yet, these people sound so convincing, one wonders if they believe what they are saying, or if they are just scamming us all. Have they done the math?

written by Joe \\ tags: , ,