I think that people who are buying gold right now are out of their minds. Evidence that gold is in a bubble:
1) Ads selling it everywhere
2) Meteoric rise uncorrelated with inflation
3) Huge markup from producer to consumer
Gold really has no significant use besides jewelry and as a store of wealth. It doesn't earn a return like stocks or bonds. One day (probably after our economic troubles subside), gold owners are going to realize that their gold doesn't do much except look pretty and the wailing and gnashing of teeth will be tremendous. (As in, "the $20000 worth of gold I bought is now worth $7000).
As seen on a bumper sticker: "Fearful people do stupid things."
Full disclosure: I don't own any gold bullion, securities or derivatives nor do I intend to within 72 hrs.
God, I wish I could keep this brief, but I have been watching these markets for over 20 years. When you look back at history and see that gold toppled over $800 ounce in January of 1980 (at that time, an all-time high), we were pretty much in the same economic mess that you see today. Remember Jimmy Carter? Also, silver topped out over $50 an ounce as the Hunt brothers out of Texas were trying to corner this market. I remember the local pawn shops advertising they will pay 3,000% face value for any dimes, quarters, etc., minted before 1964!!...then 3,100%, etc.
ReplyDeleteAhhh, the memories...I remember bringing in rolls of silver dimes and quarters that I saved from my paper boy days (for no other reason than they were silver) and I cashed in! I will never forget walking out with a wad of CASH that I actually used toward my first car. I peddled my bike as fast as I could get home and hid it. I never had so much cash in my hand and it was MINE! I will never forget that day.
Today, gold’s price is definitely up, but James’s question is valid…why would you buy it? Investors flock to gold because it is real and tangible. We all have been told that owning gold protects one from inflation, but where does that protection begin and where does it end?
Other than jewelry and my company’s dental appliances, there are very little industrial uses for gold…however, remember…this element does not “age”. It does not tarnish nor oxidize. Since the beginning of time, it has been the monetary standard that has established value for all of human civilization. Gold is what it is…shiny, pretty, and finite in supply…really, nothing more.
Now, when you go back to 1971 and see that the U.S. dropped gold as our monetary standard (it was a fixed at $35 per ounce), it was again legal to buy and own gold. What happened? Gold shot up to over $150 per ounce and that began a roller coaster ride composed of three distinctive periods: 1974-1980 where gold rose 385% from $155 to $850. 1980-2001: gold then fell 70% to $255 and now with 2001 to present, gold has risen over 700% to just over $1,900 per troy ounce! Today, gold is at $1,724 per ounce (London P.M. close) as of 2/7/2012.
Today sure looks like 1979-1980 all over again, doesn’t it? But as my customers continue to ask me…how high can it go? I can only share what I know from a historical perspective. First…we have to consider the age-old supply & demand indicators. Gold’s supply is pretty much finite and whatever gold they recover on Discovery’s “Gold Rush” or what they mine out of South Africa is so minuscule that it really doesn’t affect the world’s limited gold supply. So…
Gold’s pricing are determined mainly by investors rushing to gold because of today’s economic fears with our dollar’s value, our debt load, our credit rating, etc. Face it, our economic outlook is very similar when Carter was in office. Couple today’s news with new investors like China and India where BILLIONS of their citizens are buying gold, it is easy to see why demand for gold has skyrocketed.
ReplyDeleteWhat I find interesting is that people will tell you that you want gold in your portfolio because of inflation. Well, inflation today is flat with the exception of fuel and food prices (I recently paid $1.99 per pound for an apple…an APPLE!). Does anybody really believe that gas will NOT top $5.00 a gallon? Anyways, investors again buy gold because they see a huge tide of upcoming inflation because of our dollar’s value (lack of), our massive debt, and the world’s current economic climate. All these factors make gold attractive. They figure, it is just a matter of time before all hell breaks loose...so they are attracted to gold’s “safe” standing…after all, gold has never been worth ZERO!
This time around we have something today that back in 1980 we did not have – a threshold. There was nothing for 1980 investors to measure to…there were no “all-time highs”. For gold today to exceed the 1980’s inflation-adjusted highs, it will require a huge commitment because speculators will be watching closely to see if today’s prices meet and exceed what occurred in 1980 dollars.
If you were to adjust 1980 dollars with today’s dollars, you have a factor of 2.8. That means 2.8 times 1980 dollars is almost equal to $2,400 per ounce as “today’s” all-time high and threshold. As you can see, we are not there yet…and even if we reach $2,400 per ounce, the question will be asked, will we experience another massive sell off like took place in 1980? That is a question any investor should ask.
Again, looking at gold’s history, gold ran out of gas in 1980 (so to speak as I pushed my AMC Concord to the gas station c/o OPEC’s oil embargo), so what happened next? – there was a massive sell off! When gold reached (what was LATER deemed) its all-time high of $850 per ounce on 1/21/1980, less than a month later it dropped to $600 per ounce! How would you like to have been the person who bought gold at $850 or silver at $50 per ounce at the start of 1980? Ouch!
Certainly the possibility of history is repeating itself is there. However, the alternative – i.e., a move to other investments – carries a good probability and risk like anything else. While owning gold and silver can be alluring (I just love the sound these coins make – “PING”), it may be a good time to think about going elsewhere with less risk and greater earnings potential.
If anything, silver is a more attractive “buy” than gold when you run the numbers, but honestly…I haven’t had any luck with precious metals since I dumped my dimes and quarters back in the late 70’s and then raced home with the largest wad of cash I ever seen.
Disclosure: I too have no positions in any gold stocks or any precious metals mentioned, and have no plans to initiate any positions within the next 72 hours.
Land is also finite in supply and is a good inflation hedge while earning a return (if managed correctly). If course liquidity, fungibility and portability are all issues with land. Despite all that, with the price of land right now, I think it is a better hard asset to invest in right now.
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