TAG | Methods of investing in gold
Why the Gold Slump is Not Over
by Alexander Green, Investment U Chief Investment Strategist
Monday, January 09, 2012: Issue #1682
Not long ago, my colleague Mark Skousen asked a roomful of attendees at an investment conference how many of them owned gold. Virtually every hand in the room went up.
“And how many of you have ever sold any of your gold?”
Virtually every hand in the room came down.
For many investors, gold is their “forever investment,” the one asset they never plan to sell. That could be a mistake, a big one.
I can assure you that the institutional investors who have bid gold up the last few years consider the metal a “hot date,” not a long-term marriage. And that bodes ill for prices in the short to medium term.
Yes, I was bearish on gold a year ago. But I’m more bearish on it today. After all, the trend is your friend.
True, gold went up in the first half of 2011 and didn’t peak until August. But take a look at a five-month chart.
It’s not a pretty picture.
Of course, gold is hard to value under the best of circumstances. It has very few industrial uses. It generates no earnings, pays no dividends, accrues no interest and provides no rental income. That means the best any of us can do is guess where it’s headed next.
So why am I guessing it will be lower? Let me count the ways:
1. Gold is a wonderful inflation hedge. But the metal is up more than five-fold over the last 12 years and inflation is still not a problem. Is it not conceivable that inflation could tick up and gold – having already discounted this – moves lower?
2. Gold is a great performer in an economic crisis. But we already had the crisis. It ended in 2008. Things are getting slowly better, not worse.
3. With gold prices still in the stratosphere and the value of the rupee falling, India – the world’s biggest consumer of gold – is likely to experience a pronounced drop-off in demand this year. Not good.
4. Gold is now well above the marginal cost of production. New mines are opening and old mines are re-opening. It’s Economics 101. Greater supply depresses prices.
5. If you believe the gargantuan debt load that Washington has run up will cause gold to rally from here, you may want to think again. Japan’s debt load as a percentage of GDP is more than twice ours and the end result has been disinflation, not inflation. Why will it be different this time? Indeed, George Soros and several other major speculators are openly forecasting outright deflation. That would not be good for gold.
6. Note that while gold ended the year up in 2011, gold shares dropped 16%. Already, equity investors are taking a dim view of the sustainability of gold’s advance. I think they’re right.
7. Investment demand for gold has soared in recent years. Seven years ago, it made up just 16% of total demand. Today it’s more than 40%. But hedge fund managers who piled into gold, unlike Mom and Pop, have no emotional commitment to the metal. These are hair-trigger traders. When the primary trend turns unequivocally south, you can bet these guys will dump gold faster than a freshman girlfriend.
I’m not suggesting that anyone bail out of gold. You should hold at least 5% of your liquid assets in gold and gold stocks, and perhaps more. But if you’re one of those folks I meet who has 30%, 50% … even 80% in the barbarous relic, you’re really sitting at the roulette table at 3 AM.
No one can say unequivocally that the bet won’t pay off. But there could be a steep price to pay if it doesn’t. The last time gold was a bubble, investors were down more than 60% two decades later.
As Mark Twain said, “History may not repeat itself. But it rhymes.”
Good Investing,
Alexander Green
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Gold: The Ultimate Salvation Investment
0 Comments | Posted by Alexander Green in Alexander Green
Gold: The Ultimate Salvation Investment
by Alexander Green, Chief Investment Strategist
Thursday, May 27, 2010: Issue #1269
There are a lot of reasons to buy gold.
Besides being lovely to behold, gold has an attractive combination of chemical and physical properties. It’s virtually immune to the effects of air, water and oxygen. It will not tarnish, rust, or corrode. And it is completely recyclable.
As Time magazine pointed out last week: “It is an amazing metal. It can be pounded into a sheet so thin that light passes through it, yet the sheet won’t crack. Gold can be stretched into wires thinner than a human hair, yet those wires will conduct electricity beautifully. Implant it in a human body in the form of a medical device, and it will resist the growth of bacteria. Gold is beautiful, pliable, ductile, strong. The Stone Age, Bronze Age, and Iron Age all came and went, but gold is forever.”
In short, gold is used in everything from wedding bands, to fillings, to optic lasers – and more…
- Thousands of mechanical devices require gold to ensure reliable performance over long periods.
- Billions of gold-coated electrical connectors are used throughout the computer, telecommunications and home appliance industries.
- Weather and communications satellites depend on gold-plated shields for protection from solar heat.
- Even the automobile industry depends on gold-coated contacts for sensors that activate air bag systems.
The price of “the barbarous relic” recently hit new all-time highs. But that has little to do with gold’s fabulous properties.
Gold is also the color of anxiety. And investors are fearful right now…
Why You Don’t Want to See $5,000 Gold
Like all sensible investors, I own gold and gold shares. But I truly do not want to see the metal soar to $5,000 as some are predicting. Why?
Because, in all likelihood, that will be bad news indeed for the economy and our standard of living, not to mention the rest of your investment portfolio.
By and large we are living in disinflationary times. Yes, the price of food and oil (and hence gas at the pump) have climbed over the past few years. But technology and deregulation have reduced the prices of many other things…
- Look at the computing power you get for the money today. (And look how those computers lower costs for business.)
- Deregulation has brought down the price of airline tickets 25% – in constant dollars – over the past 15 years.
- When I went to college out of state many years ago, I didn’t call home that often for one simple reason: I couldn’t afford it. But the break-up of Ma Bell has reduced the cost of long-distance calls to a pittance.
There is little threat of sharply higher inflation in the near term. But the longer term is a different story. And as the mess in Greece has proven, poor decision-making can cause long-term problems to suddenly show up on your doorstep.
Gold: Your No. 1 Economic Insurance Policy
Right now, gold is rising due to a lack of confidence in government and the reality that government bailouts don’t necessarily fix problems. Sometimes, they just kick the can down the road awhile.
All the European Union has done, for instance, is take the risk of owning Greek sovereign debt away from banks and other creditors and passed it on to taxpayers. Politicians often believe they can do magical things with other people’s money.
- We all know what happens when an individual exercises long-term irresponsibility in his financial affairs: personal bankruptcy.
- We’ve all seen what happens when a highly leveraged business can no longer service its debt: corporate bankruptcy.
- And in the years just ahead, Westerners may very well see what massive fiscal irresponsibility does to national governments, their debt ratings and their currencies.
No one can say exactly how and when this will play out. But there is a distinct possibility that gold will be your salvation investment.
That means – just like property and casualty insurance – that gold is something you really can’t afford not to own.
Good investing,
Alexander Green
