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: , , , ,

Apr 11

Universe Today broke the news that NASA (The US space agency) is planning to capture a 500 ton asteroid. That sounds big, but it’s only about 7 meters wide. The article came with an artist’s illustration of what this would look like.

This would be a moderately interesting story, but unrelated to finance, right? Not so fast, dear reader. Universe Today also had a Q&A; What Are Asteroids Made Of? It turns out that “the metallic asteroids are composed of up to 80% iron and 20% a mixture of nickel, iridium, palladium, platinum, gold, and other precious metals..”
20% precious metals? If this asteroid is of the metallic type, we are looking at 100 tons of precious metal.  If half is nickel, not so precious, we still have 50 tons, or 100,000 pounds of treasure. At $1,000 (It’s still a variety of metals, so I’m estimating the average) per ounce this multiplies to $1.6B from a projected cost of $100M to fund this venture. I wonder how long it will take before commercial ventures attempt asteroid mining.
It may be that the composition suggested in the article is wrong, and even the metallic asteroids are lower in the truly precious metal compared to iron, copper and nickel. That would be a shame. It’s still years away, but it’s interesting to ponder the idea that we have the technology to begin a space mining operation.

Is this too great a logical leap? Is this idea still science fiction? If it’s all possible, and the numbers work out as I suggest, what would be the impact of the price of these metals? There is currently estimated to be under 4 billion ounces of mined gold on the planet, would a few hundred thousand ounces at a time be absorbed, or would it send the price crashing down?

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: , ,

Jun 05

Let’s start this week off with DoughRoller’s article Is Dave Ramsey Right that Credit Cards are Evil? Both DR and I are of a similar mind, the blame assigned to card use is far overdone. There are pros and cons to everything, and Dave’s “all or none” approach isn’t for all of us.

At Consumerism Commentary, Rob Bennett had an intriguing The Good Side of Stocks’ Lost Decade, which I read and understood. The premise is that for savers early on, this decade provides a lower cost. In 30 years time, look backwards, there will be a nice stock market price chart, and Rob will be able to say, “every purchase made during this bad time was made at a great discount to the trendline” and he’d be dead-on right. I, personally, am at the other end, where a sustained S&P 2500 would put me in a position to retire.

At Bible Money Matters, my Friend, (and the guy that designed my logo) Peter asked Is It Harder To Not Fall Prey To Consumerism When You Can Afford It More? Some great comments there, mine ended with “There’s an age/income/asset level that prompts the “you can’t take it with you” conversation.”

I think Gold is in bubble land, a financial accident waiting to happen for most gold gamblers. It seems Financial Edge agrees, with 5 Signs Gold Has Peaked.

A recurring question, this week tackled by LifeTuner, Is Paying Off Your Mortgage Early a Good Financial Strategy? The desire is out there, but the reality is far from the no-brainer many think it is. Read Chris’ article for more thoughts on this. (Note – no link, as the original article went missing)

I follow Lorie at Clutter Diet for some great tips on how to declutter my life. As many bloggers are quick to point out, clutter can cost you, so there really is a strong tie to one’s personal finances. This week Lorie’s article 4 Ways Clutter Can Kill Your Sex Life was getting some buzz on twitter (it was originally published in 2009) and caught my attention.

Last, another older post really impressed me – Balance Junkie’s Are You Ready for Biflation? A fascinating view on how we don’t live in a single economy, for the last decade the costs of goods and services haven’t risen at the same pace, in fact, goods have gotten cheaper while services have risen. Check out the article for a great discussion.

written by Joe \\ tags: , , , ,