Is Gold the Next Bubble?
I'm an amateur investor. Pretty much as amateur as they come, really, because I don't have much money to work with (which really limits the options). I've always been tempted to diversify my portfolio with a gold-based ETF or mutual fund. But every time I look into it, I'm discouraged by how high the price of gold already is. It can't keep going up forever, can it? And I don't want to be the sucker who buys into gold just before prices plummet. The last time I thought about investing in a gold-based financial product, gold was around $900 an ounce. Now it's over $1400 an ounce.
But gold is looking awfully bubblicious, muses Megan McArdle:
In the wake of the Fed's decision to do even further quantitative easing, a decision which has invited criticism from China, Russia and the Euro zone, gold has now shot above $1400 an ounce. Perhaps I'm too ready to call bubbles in assets, but this sure looks like one to me.
[...]
The whole idea of gold as some sort of unique store of value is badly flawed. It doesn't make a particularly good currency, and it also doesn't make a particularly good investment. Except when investors are panicking, its price tends to be driven by supply and its industrial and jewelry uses, which means that it's an excellent way to lose money by buying when you're panicking and then having to sell out as it's on its way down. Given that the price has already risen more than fourfold from a decade ago, this looks particularly likely right now.
It's not that quantitative easing may not cause inflation--it might. In fact, that's sort of the point; the Fed wants a little more inflation in the money supply, in order to ease the unemployment rate. But consider how much inflation there would have to be for this gold price to make sense...
Any professional (or less amateur, at least) investors out there in the Ricochet mosh pit that care to opine about gold? Is gold the next bubble, or is it an investment that will pay off in the long run?
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Jul '10
Re: Is Gold the Next Bubble?
For traders, gold is a good place to go. For your retirement? Hard to say given the uncertain political direction. While Megan is correct that a lot of gold is a bad currency, is the dollar better?
Gold is going up in anticipation of inflation, not because of it.
Edited on Nov 9, 2010 at 3:47pmJun '10
Re: Is Gold the Next Bubble?
Look at it this way: It's not the value of the gold that goes up and down--it's the value of the dollar that goes up and down.
May '10
Re: Is Gold the Next Bubble?
It's not an investment. It's a store of value and hedge against inflation. It's been the ultimate source of wealth protection in just about every society everywhere for 5000 years. In 1900 one ounce of gold could buy a quality mans suit. The same is true today.
May '10
Re: Is Gold the Next Bubble?
Just yesterday I heard Stuart Varney recommending an allocation in the 10-15% range for gold. I'm currently invested in dirt and dirt related industries, so I'd take Stuart's advice (although caterpillar is kicking butt for me!)
Re: Is Gold the Next Bubble?
etoiledunord: Look at it this way: It's not the value of the gold that goes up and down--it's the value of the dollar that goes up and down. · Nov 9 at 3:46pm
Yes, but as Megan asks:
May '10
Re: Is Gold the Next Bubble?
Because euros are also a fiat currency (essentially backed by nothing but the full faith and credit of the issuer).
If it will make you feel better having some gold bullion coins (American Eagles) under your mattress (or squirrelled away somewhere really safe) go ahead (although I'd recommend items like a Smith & Wesson detective special, or compact .357)
Read the account of Tulipmania in "Popular Delusions and the Madness Of Crowds" before "investing" any significant fraction of your assets in gold.
http://www.gutenberg.org/ebooks/24518
It's a lot more interesting than you may think.
Jun '10
Re: Is Gold the Next Bubble?
I heard this, too, and went 5% into GLTR which is an ETF based in precious metals, and another 5% into GNR, also an ETF, but diversified into metals, mining, and energy. You certainly don't need to have actual gold in your possession to play it.
Jun '10
Re: Is Gold the Next Bubble?
I've often wondered, what is the intrinsic value of gold? Can you eat it? Can you light or warm your house with it? The only value of gold is as a market hedge against inflation. If all heck breaks loose and society breaks down, I'd rather own a whole lot of gasoline or rice or cattle. If one owned gold for years by purchasing a little every month, it would be a sensible investment, but not better than equities. To change one's portfolio to invest 10% in gold right now would be foolish.
Jun '10
Re: Is Gold the Next Bubble?
Nick Stuart: Because euros are also a fiat currency (essentially backed by nothing but the full faith and credit of the issuer).
If it will make you feel better having some gold bullion coins (American Eagles) under your mattress (or squirrelled away somewhere really safe) go ahead (although I'd recommend items like a Smith & Wesson detective special, or compact .357)...... · Nov 9 at 4:07pm
It's a market, like anything else. You buy some of this, and some of that, believing that a big drop in one type of investment won't adversely affect your other investments. Ideally, they'd work like a teeter-totter. Maybe Iowa farmland will be the next good investment. The price of grain is going up. We have high gold prices because we have Obama. I think that's the main driver.
Aug '10
Re: Is Gold the Next Bubble?
Look at this image http://bespokeinvest.typepad.com/.shared/image.html?/photos/uncategorized/2007/12/06/dollargold1.png
Compare it to housing in 2006 http://mysite.verizon.net/vzeqrguz/housingbubble/
Then watch this fun Roller Coaster representation of Housing Prices: http://cinerati.blogspot.com/2007/04/housing-market-as-roller-coaster-ride.html
Gold's precipitous rise looks a lot like that of other bubbles. Follow Nick Stuart's advice and read Tulipmania.
Jun '10
Re: Is Gold the Next Bubble?
And beans, lentils, flour, split peas, pasta, etc. Don't forget the ammo, firewood, and provisions for water purification. That's what I call diversified!
Jul '10
Re: Is Gold the Next Bubble?
I am a very amateur investor, but at the water cooler I noticed the following progression. September 2008-February 2009, out of cash and cash based investments into gold. February 2009 to present, holding the gold but buying ammunition. Bernanke's machinations may well result in ammunition being used as money after the collapse.
I have always wondered how the dollar's "globalness" affects its utility as an instrument of domestic monetary policy. It seems the reported velocity of dollars has dropped from 11 transactions per year a generation ago to 3-4 transactions per year. If there are more dollars in foreign markets rather than domestic, how do we keep score?
The gibe about gold not making good currency is a cheap shot. Any commodity based currency has an instant vulnerability based on the reliability and predictability of the commodity supply. The gibe about the four fold increase in price ignores gold prices as a measurement of the level of non-confidence in currency managers. The inflation knock is especially disingenuous, the price rise appears to have occurred as a hedge in recognition of multiple factors mitigating for massive currency instability.
I notice ricochet remains on a dollar basis.
Oct '10
Re: Is Gold the Next Bubble?
You guys are forgetting silver, which has more industrial uses than gold, has been used for the coins people carry in their pocket before, and is quite a lot cheaper than gold. I rolled an old 401(k) over into a silver IRA a few months ago, and am currently up around 50%. I couldn't be happier.
Jul '10
Re: Is Gold the Next Bubble?
In addition to its value for jewelry making and such, gold has many uses in the electronics industry as a quality conductor. Historically, in the event of collapse, gold has been the most reliable means for acquiring needed goods and services. Among the must does for the next House is rolling back the outrageous Federal tracking of gold purchases.
Jul '10
Re: Is Gold the Next Bubble?
Diane, you're a little late to the game. I bought gold and silver in 2007, but I'm not sure I would buy them at present price levels. Another issue is that the commodities markets - especially for silver - are rank with manipulation, not only by huge Wall Street firms, but also by sovereign governments. As the price of precious metals rises, it exposes the weakness of their currencies. They don't like that.
As others here have noted, precious metals are primarily a store of value - a hedge against inflation. They've performed much better than that over the past few years, but after their meteoric rise in the past two months, I would be very careful from here on out.
My suggestion? Invest in dividend-yielding oil stocks. I've done very well with Exxon-Mobil over the past 3 months and it is still down 30% from it's 3-year high. Meanwhile, it pays a dividend of 2.49% per year. Oil prices are going nowhere but up and XOM is probably the best-managed company in the world.
May '10
Re: Is Gold the Next Bubble?
The problem with gold is that at any time the state can artificially set its price. Remember, the gold confiscation of 1933 was an Executive Order (#6102) not an act of Congress. If Obama wants to halve or even slash to a third your investment tomorrow he can.
May '10
Re: Is Gold the Next Bubble?
Ads for gold are placed by two kinds of entities: gold sellers and gold brokers. Has it occurred to you that all the ads currently posted by sellers hyping gold as an investment were placed there by people who own gold and want to sell it? What do they know that you don't?
(Of course the brokers don't care. They make their money on the transaction. they get you going in and they get you coming out.)
Aug '10
Re: Is Gold the Next Bubble?
Yes, but how many minutes of cell phone talk time could an ounce of gold buy in 1900?
I'm not entirely being silly -- one of the problems economists have in constructing long-run time-series for inflation, GDP, etc, is that the basket of goods changes over time as new goods are invented or existing goods radically improve in quality (or more rarely, as goods fall out of widespread consumption, as is currently happening with tobacco).
Also, when investing in gold, don't forget to diversify your portfolio with women and sheep. (Skip the first 50 seconds).
Jul '10
Re: Is Gold the Next Bubble?
A compact .357 is the very definition of a gun that is very difficult to shoot accurately. You want home protection? Pump action shotgun, preferably a Mossberg 500.
Aug '10
Re: Is Gold the Next Bubble?
Is it in keeping with the spirit of Ricochet to dwell on such personal matters as money or to mostly gaze into the clouds or horizons ? We are of an age where the health of our machines is defined in terms of gas money and horsepower. But ah'm watching our President on the fox and he is too cool! Crass is it's own bad myth. The currency of our varied ideas is awesome !