JoeTaxpayer

Back in September, I wrote an article titled “All That Glitters“, and expressed my thoughts on gold as an investment. Recently, I’ve seen more charts that compare the price of oil and gold by forming a ratio, the number of barrels of oil that an ounce of gold will buy. First, on CNBC’s Kudlow and Company, and more recently in an Economist article borrowing my September story’s title. From that article, I offer this chart:

What conclusion do we draw from this chart? Gold priced too low? Oil too high? I believe both are in bubble territory, each for its own reason. Only time will tell who is the right prognosticator.

Joe

written by JOE \\ tags: Finance, gold, money, oil, Savings

A friend posted on usenet group misc.invest.financial-plan;
DEMAND (for Gold)
71% 2950 Jewelry (mostly US, China, India)
7% 300 Central banks & industry
6% 250 Hoarding
7% 300 ETFs
3% 130 Coins
5% 200 Hedging reductions
4130 Total Demand
SUPPLY
2500 Production
850 Scrap
500 Official sales
3850
(-280) Surplus (deficit)

To which I added:
Two thoughts, perhaps obvious, but bear with me.
One poster mentioned the substitution effect. Yes gold is used in electronics, but the amount in any system is so small that gold can rise to $2000, and there would be little reason to seek an alternative. I can find gold leaf selling for a few cents per square inch. Likely the gold content of a $500 computer is measured in cents. So no issue there.

Second, as the price rises, two thing happen. People find old gold jewelry they are not so attached to, as well as coins whose gold content (value) now exceeds any numismatic value. So the supply rises that way. Also, mines tend to have supplies that vary with cost. Huh? Well, there’s a cost to mining that has two large factors, yield (oz AU/ton ore) and depth (cost to dig). So if I hit an area that yields 1 oz/ton, and it costs me $800 to process, that area is noted and left unmined. At $1000, it’s reopened. This is oversimplifying, but not by much, it goes back to supply/demand, explaining how supply literally increases when the price is higher.

JOE

written by JOE \\ tags: gold, investment, mining, silver

I enjoy the copy of some of the advertising promoting gold:
“in 1920 a man could buy a suit with a $20 bill or $20 gold coin. But in 2006, $20 won’t buy a shirt, and a gold coin, now worth over $500 will buy a suit.”

So what? At 12% (the S&P return during this time according to the MoneyChimp) , your money will double every 6 years. Over 86 years, that’s more than 14 doublings, or over 17,000 times your investment, $340,000 for your $20 bill.

Someone tell me how an ad can make an ‘investment’ that will grow from $20 to $500 in 86 years, an annual return of 3.8%, look good when the alternative (the S&P) would return 680X as much.

From the 1980 peak, gold would have to exceed $4800 to outperform stocks over the same period. I look at the 35 year chart:

and I’m no technician, but ‘down’ looks far more likely than up. Within my market timing article, I discuss how buy and hold will profit if you are patient. Even buying at the market high reached in August of 1987, right before the crash would be profitable if you held long term, returning nearly 8%/yr up to the market bottom of 2003. Now, if you bought gold at $850, in 1980, and were patient, reinvesting dividends* along the way, by now, er, nearly 28 years later, you’d still be short of breaking even.

(*Gold offers no dividend of course. How could it?)

JOE

written by JOE \\ tags: gold, Investing, Retirement