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Investing Advice Inspired by Jack Bogle
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raddle
Joined: 25 Sep 2008
Posts: 251
Location: West TN
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 Posted: Tue Nov 03, 2009 12:42 pm Post subject: Raddle's Top 10 Bad and Good Reasons To Own Gold |
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With gold posts popping up like weeds, I'm providing this list as a public service. I like gold and silver. Precious metals play a valuable role on my balance sheet. There are good reasons to own it, but there are even more bad reasons and sales pitches. So without further ado:
Raddle's Top 10 Bad and Good Reasons To Own Gold
Bad Reasons to Own Gold:
ROI. With an expected real return of 0 minus transaction and holding costs, it is a horrible investment from an ROI point of view.
Inflation protection. Gold is not unique in this respect, and it doesn't even do that great a job except over the very long term. There are multiple options for inflation protection that yield a positive return. Personally, I look no further than TIPS, but I have seen others make the case for stocks or REITs. There are also less liquid alternatives.
Stability in a portfolio. Same argument. There are myriad ways to build a stable portfolio that don't include an archaic metal, for example using mostly Treasuries or stock hedging instruments. There are also less liquid alternatives. The world has not been "off gold" for very long, historically speaking. There is no gaurantee that its hedge-like behavior will remain undiminished going forward.
Gold is money. It is not money, unless perhaps you live in Zimbabwe. It may have been a medium of exchange for thousands of years, but no longer. At least I've never met a cashier that would accept a gold coin.
They can't make more of it. No, but they can mine it. It is vulnerable to devaluation if cheaper mining methods or new large deposits are discovered (a la silver).
"It has never been worth 0!" and "Some experts say it could go to $2000 by June 2010!" ...
Good Reasons to Own Gold:
It is private. This is my number one reason. No one has to report on how you got it, how much you have, or what you do with it.
It is uncomplicated. As a result it is difficult for anyone to cheat you out of it. You won't lose it because an institution you have no control over goes under, and it won't be artificially debased or inflated.
It is liquid.
The tax treatment is easy, and gains are deferred.
It does provide inflation protection and stability in a portfolio to some extent. These bad reasons become great when you narrow the field of alternatives down to only private, liquid assets. --
In conclusion, if you do not own gold and you are comfortable with the level of privacy, simplicity, and assurance you receive from the current custodians of your wealth, I would not recommend gold to you. |
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TJAJ9
Joined: 12 Sep 2009
Posts: 374
Location: Philadelphia, PA
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| Posted: Wed Nov 04, 2009 4:17 am Post subject: |
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I don't see anything wrong with someone holding a small amount of gold for whatever reason they see fit. Don't go off the deep end and make it a huge percentage of your portfolio, though. I don't think that's a wise decision.
Personally, I don't hold any gold because I don't believe there is any need to. I wouldn't mind having a couple of gold coins (one ounce) as collectibles, though. Same thing with silver--I wouldn't mind having some silver coins also, although I don't.
BTW, I think gold is way overpriced at the moment. |
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SquawkIdent
Joined: 23 Dec 2008
Posts: 89
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| Posted: Wed Nov 04, 2009 5:46 am Post subject: |
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Nice post. But, why guesss whether now (or any other time) is a good time to own gold.
Stay diversified...hint PRPFX or 4 x 25. |
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neverknow
Joined: 05 Jun 2009
Posts: 719
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| Posted: Wed Nov 04, 2009 6:56 am Post subject: |
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| TJAJ9 wrote: |
BTW, I think gold is way overpriced at the moment. |
Apparently, the central bank of India doesn't think so - because yesterday they bought 200 tons at $1045 from the IMF. Perhaps their time horizon is longer then any of ours?
neverknow |
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Wagnerjb
Joined: 19 Feb 2007
Posts: 2975
Location: Houston, Texas
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| Posted: Wed Nov 04, 2009 12:36 pm Post subject: |
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| neverknow wrote: | | TJAJ9 wrote: |
BTW, I think gold is way overpriced at the moment. |
Apparently, the central bank of India doesn't think so - because yesterday they bought 200 tons at $1045 from the IMF. Perhaps their time horizon is longer then any of ours?
neverknow |
OK, but doesn't that mean that the IMF thinks the price is too high? The existence of a two-sided transaction doesn't tell me whether the price is too high or too low. 
_________________
Andy |
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GRT2BOUTDOORS
Joined: 05 Apr 2007
Posts: 510
Location: New York
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| Posted: Wed Nov 04, 2009 1:00 pm Post subject: |
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| neverknow wrote: | | TJAJ9 wrote: |
BTW, I think gold is way overpriced at the moment. |
Apparently, the central bank of India doesn't think so - because yesterday they bought 200 tons at $1045 from the IMF. Perhaps their time horizon is longer then any of ours?
neverknow |
Actually, it's well known that the population of India are very (can't emphasize that enough) fond of gold jewelry. So yes, if they want to pass on those heirlooms then they do need gold for the burgeoning demand for rings, necklaces, trinkets and baubles.  |
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rrosenkoetter
Joined: 06 Jun 2008
Posts: 762
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| Posted: Wed Nov 04, 2009 1:12 pm Post subject: Re: Raddle's Top 10 Bad and Good Reasons To Own Gold |
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| raddle wrote: | | Inflation protection. Gold is not unique in this respect, and it doesn't even do that great a job except over the very long term. |
I'm not sure I understand this... The one time we had near hyper-inflation in this country (late 70s), gold shot through the roof very quickly...
One instance does not mean it will correlate again in the future the same way... But I truly fail to see how one could take that one instance and predict the exact opposite for the future. |
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rrosenkoetter
Joined: 06 Jun 2008
Posts: 762
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| Posted: Wed Nov 04, 2009 1:16 pm Post subject: Re: Raddle's Top 10 Bad and Good Reasons To Own Gold |
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| raddle wrote: |
Gold is money. It is not money, unless perhaps you live in Zimbabwe. It may have been a medium of exchange for thousands of years, but no longer. At least I've never met a cashier that would accept a gold coin. |
You ever meet a cashier at the local Wal-mart that will accept Japanese Yen or a Russian ruble either? You saying the only thing that is actually money is Dollars? Gold IS money... just like dollars and yen and euros are money.
None of them have intrinsic value. |
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neverknow
Joined: 05 Jun 2009
Posts: 719
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| Posted: Wed Nov 04, 2009 2:00 pm Post subject: |
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| Wagnerjb wrote: | | neverknow wrote: | | TJAJ9 wrote: |
BTW, I think gold is way overpriced at the moment. |
Apparently, the central bank of India doesn't think so - because yesterday they bought 200 tons at $1045 from the IMF. Perhaps their time horizon is longer then any of ours?
neverknow |
OK, but doesn't that mean that the IMF thinks the price is too high? The existence of a two-sided transaction doesn't tell me whether the price is too high or too low. |
Perhaps. Or perhaps the IMF was raising cash. I have no idea.
neverknow |
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stratton
Joined: 04 Mar 2007
Posts: 6233
Location: Puget Sound
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| Posted: Wed Nov 04, 2009 7:03 pm Post subject: |
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| neverknow wrote: | | TJAJ9 wrote: |
BTW, I think gold is way overpriced at the moment. |
Apparently, the central bank of India doesn't think so - because yesterday they bought 200 tons at $1045 from the IMF. Perhaps their time horizon is longer then any of ours?
neverknow |
The people running central banks can performance chase just as easily as anyone else.
Paul |
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Chet
Joined: 06 Jul 2007
Posts: 34
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| Posted: Wed Nov 04, 2009 9:00 pm Post subject: |
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| Wagnerjb wrote: |
OK, but doesn't that mean that the IMF thinks the price is too high? The existence of a two-sided transaction doesn't tell me whether the price is too high or too low. |
The IMF is a quasi-governmental organization headquartered in Washington that makes highly under-collateralized loans to poor countries. I would not look to them for investment wisdom.
Also, they still value their gold at $35/oz, so if they sell at anything above that they think they made a big profit. 
But the REAL reason this sale is big news is that the central banks, collectively, have just turned the corner and gone from net sellers of gold to net buyers. The gold bulls who got in under $300 have been predicting this.
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raddle
Joined: 25 Sep 2008
Posts: 251
Location: West TN
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| Posted: Thu Nov 05, 2009 11:06 am Post subject: Re: Raddle's Top 10 Bad and Good Reasons To Own Gold |
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| rrosenkoetter wrote: | | raddle wrote: | | Inflation protection. Gold is not unique in this respect, and it doesn't even do that great a job except over the very long term. |
I'm not sure I understand this... The one time we had near hyper-inflation in this country (late 70s), gold shot through the roof very quickly...
One instance does not mean it will correlate again in the future the same way... But I truly fail to see how one could take that one instance and predict the exact opposite for the future. |
Inflation (or deflation) happens every year to some extent. Therefore we have more to go on than just the period in the late 70s. Gold as an inflation hedge is just one of the sales pitches gold sellers are out there promoting. Sometimes they are pretty slick, too. The chart below looks pretty convincing, right? This is a great example of how to lie with charts. You have two completely different Y-axis, and if the two shapes are similar at all, you can line them up so that it looks very much like they correlate. The truth is that if gold was really a good inflation hedge, then the inflation-adjusted price of gold would be relatively flat, while the graph shows a very non-flat red line. You may be able to argue that over the entire 40-year period, the price more or less goes sideways, but in most 5-year periods there is significant movement up or down. Gold prices have been driven by fear more than anything else. For example, gold did not remotely keep up with inflation during the period 1990-2000; market exuberance was rampant and fear was low. The only reason gold provides any inflation protection at all is that it is a non-depreciating hard asset. Because you never know when fear will strike/abate, you can't count on it to keep up with inflation unless you are talking about the very long term.
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As for gold being money, people who have chosen to believe this are living in the past. If something is not a medium of exchange anywhere, it is not currently money. The only place this is happening to my knowledge is Zimbabwe as I noted. The only reason gold is being used for bartering in Zimbabwe is because there is enough gold in the region that poor people can live on what they pan out of the streams. This is analagous to 3rd world pearl divers trading the pearls they collect directly for food and other services. The rest of the world is 'off gold.' |
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