Buying Gold and Other Precious Metals – How to and Should You


Gold has definitely been on a tear lately.  (See recent charts: http://www.kitco.com/charts/techcharts_gold.html).  The metal has risen from the doldrums of $300 per ounce in 2002 to over $1300 per ounce.  There was a brief pause last winter when the economy started to come out of its thaw, but it has started to move steadily higher again.

The talk shows are all touting gold (because gold peddlers are paying them to).  All sorts of gold sellers and buyers have come into being or arisen from their slumber.  Each of them will tell you that the price is set to move far higher.  Given the huge move upwards, while stocks went essentially nowhere, who would ever want to buy stocks instead of gold.  Stocks are risky – gold is forever, right?

Today I’ll discuss the “how to” of gold buying – some of the peculiarities of the process, and the “should you” – is this the time to buy gold?  First the “how to.”

How to: 

  • Gold is surprisingly easy to buy.  Besides all of the companies hawking gold on the talk shows, most brokerage houses have arrangements for purchasing gold.
  • Gold is typically sold in 10 oz bars.  Before the price of gold went through the roof, one would cost the investor about $3500.  Now, the price is $13,500!  If that is too steep, there are also coins that can be purchased in smaller ounce amounts.
  • Gold can either be stored for you (I picture a guy picking up a bar of gold from one stack when you buy it and moving it to another stack.  When you sell, he just puts it back.  In actuality, it probably doesn’t move at all) for a fee or delivered to you for a fee.  Note that these fees eat away at your profits, since you need to pay the storage fees (or for a safe deposit box if you have it delivered to you) even when the metal is not moving up in price.

Should you buy gold 

  • As stated above, gold always costs you money while you hold it unless you are willing to take the risk of keeping it in your closet or burying it in the backyard.  Even then if you want to include it on your home insurance, if they will let you at all, will probably require a special rider which costs money.  Time therefore works against you when you hold gold.
  • Looking at the long-term chart: http://goldprice.org/30-year-gold-price-history.html , one can see that gold is high now, but it actually went through a bubble in the early 1980’s.  (This market is looking more and more like the 1970’s, despite the talk about the Great Depression).  It took over 25 years to re-reach the highs set then.  With adjustments for inflation, gold is actually about where it was in the 1980’s.  This shows that it could be a long time before your gold investment gets back to the purchase price, let alone the inflation adjusted value, if this is a bubble you’re buying into.
  • Looking at the really long-term chart: http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartsfixed/Gold1800to2000.gif , one can see that gold stayed at a fixed amount forever, then countries went off of the gold standard, at which time it increased in price.  In actuality, however, gold never goes anywhere in terms of the amount of goods that can be purchased.  Workers used to be paid in gold coins because they knew they could always trade them for the same amount of goods.  Since we were taken off of the gold standard to allow the government to print more money by inflating the dollar starting in the 1930’s, the number of dollars needed to buy an ounce of gold has gone up, but the value of those dollars has gone down proportionally.

The conclusions: 

  • Gold is not an asset – it does not provide any income.  It is simply a way to preserve a certain amount of value for a long time.  If you are wanting to give some money to your great, great, great grandchildren by scattering buckets of money through the woods and leaving a treasure map, this would be a good vehicle.
  • If you are looking to make money, gold is a lousy investment.  It costs money to hold and only grows at the rate of inflation.  Stocks also grow with inflation since the assets of the companies become inflated as well.  Also, companies just raise prices when the value of dollars declines.
  • This is a bubble, just as was the big increase in the 1980’s.  Even if you’re looking to speculate, the train has left the station.  This is not to say that the bubble won’t continue (bubbles always expand farther than anyone would imagine, and always result in a greater pop than anyone would guess when they inevitably do pop).  Maybe gold will hit $2000 per ounce.  But the odds are against it, and are getting farther against it each day.

The bottom line:  If you’ve got some old jewelry you don’t want – maybe that wedding ring from the ex or an old, broken chain from your aunt, go sell it.  Prices will probably not be this high again until the next generation is facing their thirties.  Buying gold is normally a bad investment, however, and buying when we’re already well into a bubble is near suicide.   If you want entertainment, take a nice trip.  If you don’t like money, give it to a stranger at the grocery store. 

Don’t be holding the sack, however.  Bubbles are built on the greater idiot theory – don’t be the greatest idiot!  Any questions?

Much as I enjoy writing about investing, it doesn’t make sense unless people are reading. If you’d like to keep the articles coming, please return often and refer a friendhttps://smallivy.wordpress.comComments are also greatly appreciated, as is lively and friendly debate.  Also feel free to link to or reference posts – all I ask for is fair credit.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

Is Stock Picking Dead?


An article in the Wall Street Journal  today states that many stock pickers are having trouble beating the market lately.  (See the whole article here: http://online.wsj.com/article/SB10001424052748704190704575489743387052652.html)

The reason is that stocks are being driven by macroeconomic events, such that they are all moving in lockstep.  Because of this, a stock with great fundamentals will do no better than one with bad fundamentals.  Everything goes up during one week when good news occurs, everything goes down the next when bad news occurs.  It is stated int he article that this has rarely happened, and that the last time it did to this extent was during the Great Depression.

It is often the case that when there are big events, good and bad, all stocks will behave in the same way.  The old joke is that during a bull market everyone is a genius.  There are definitely many who bought shares of some stocks that were beaten down on a whim in early summer 2009 who have seen their investments grow handsomely.  The fact is that with the rally that occurred, for the stocks that survived most of them went up and up by a lot.

During the great route of 2008, most stocks, good and bad, also declined severely.  Look, for example, at the share price of the insurer AFLAC: http://finance.yahoo.com/echarts?s=AFL+Interactive#chart2:symbol=afl;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

This stock went from the mid $60’s to a low of $13.5 in less than a year, with the stock free-falling during th last few weeks.  Immediately after the worse was seen as over, once it was verified that the world did not come to an end, the stock sprang back, hitting a high of $55 in less than a year before falling back a bit again with the recent weakness in the economy and the effects of the European debt crisis. 

There are many stocks that have similar pricing patterns over that period.  Look through the stocks of any growth stock form the 2000’s and you’ll probably see the same, “V” pattern.  These companies are not seeing their businesses approach failure and then suddenly recover.  These companies are simply being dragged around by the market, which went from a bull market, into a panic, and then rallying back to correct for the over-sold condition.

Usually this trend would end and the good stocks would start to outshine the bad.  Certainly there are good companies that should succeed and bad companies that should not.  There is a question this time, however, whether there are other forces at work that have “changed the rules of the game.” 

Specifically, are the various investment funds that allow investors to buy whole market segments causing the market to move more in lockstep than before?  Is this new correlation of stock movements a permanent feature?  Certainly there is quite a bit of market volume now driven by these funds – up to 30% in some cases.

I’ve found in general, however, that whenever someone says that things are different, that is about the time things change and revert back to the old rules.  During the dot com bubble I was hearing that the old valuation measures such as earnings no longer mattered.  It was just important “to get big fast.”  There were start-up companies with expansive offices in multiple states.  As we all saw, however, earnings did matter and when it was realized that many of these companies had little of substance, the whole deck of cards collapsed.

Likewise in 2007, we were told that the old rules in real estate did not matter.  No one put 20% down for a house.  The new norm was to put 0% down, and maybe even borrow more than the value of the house.  Real estate would go up by 10-15% or more per year forever.  And then it didn’t.

So, while I would be tempted to put some funds in index funds (it never hurts to match the market) I would not give up stock picking.  The truth is that when everything is going down – good stocks and bad – it is a great time to load up on the good stocks.  Mr. Market is offering you prime filet mignon at chuck steak prices.  Why wouldn’t you stock the freezer?  Even if the market stays in lockstep and never goes anywhere, if these companies are making more money than their peers, eventually they will start paying this out in bigger dividend yields or the companies will be bought out for larger sums of money.

Also, if things do continue to move in lockstep forever, it will not matter what you buy.  The natural tendency is for stocks to go up since companies expand and make more money over time, resulting in higher dividends.  If you match the market, that will be fine.  It is very difficult, however, to try to play the macro economic game, moving in and out of the market just in time.  Everyone knows what you do about the news and state of the economy.  As soon as news happens, the markets have already moved.  Making a successful bet — buying at just the right itme or selling right before the collapse —  is just luck.

Because of the risk discount, however, it is possible to find stocks that will stand a good chance of returning more than inflation over the long-term.  Look for stocks that have steadily growing earnings, a good management team, and room for growth.  Pick the best stocks in each industry.  If the old rules start to matter again, you’ll be in a great location to welcome the return.

Much as I enjoy writing about investing, it doesn’t make sense unless people are reading. If you’d like to keep the articles coming, please return often and refer a friendhttps://smallivy.wordpress.comComments are also greatly appreciated, as is lively and friendly debate.  Also feel free to link to or reference posts – all I ask for is fair credit.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

Economic Recessions and Investing


The recession and the anticipatory fall in stock prices that preceded it has scared a lot of investors away from the market.  This is unfortunate since it is during these times that the stock positions are built that result in the truly great returns.  Just like shopping at the supermarket, the time to stock up is when things is when they are on sale. 

Individuals tend to do just the opposite when it comes to investing, however, buying only after big run-ups and selling after prices have declined.  The result is so pervasive that there are strategies that actually try to follow the inflows and outflows of “the crowd” and do the opposite.  The more bullish the public is, the more stock one sells.  The more bearish, the more one buys.  This strategy has additional merit in that when everyone is bullish it probably means that they have already invested all of the money they have and there is little capital available to drive stocks higher.  (Note that with real estate, once home prices has risen to the point that individuals could not even afford the payments with no money-down, interest only loans, housing prices quickly went from straight up to straight down.)

The difficulty is that individuals tend to equate buying and seeing prices rise with “winning” and buying and seeing prices falling as “losing.”  One needs to get over this mindset to succeed at investing because it will cause one to miss out on great investing opportunities.  If one buys a stock in a falling market and sees the shares decline a bit, one should see it as an opportunity to buy more at lower prices.  If held long enough (and assuming that quality stocks are being purchased) the stock should be much higher than either price paid.  One should take advantage of the fact that a falling market causes all stocks – good and bad – to fall.  The difference is that the good stocks quickly recover while the bad languish.

Unfortunately, the style needed for successful investing runs counter to an individual’s normal psychology.  If a person buys a stock and it goes down, he may initially stay with his convictions and perhaps pick up a few shares (like doubling down in gambling), but if the stock continues to decline he will eventually sell out.  If he does not sell out, he may sell as soon as the price returns to the price paid, feeling that he “got his money back,” only to see the stock soar to new heights.

This can be avoided with a few simple strategies:

1.  When buying a stock, particularly in a down market, build up a larger position by buying only a portion at a time.  For example, build up a 500 share position by buying 100-200 shares at a time on dips.  One should have a targeted number of shares before starting, however, to avoid the other common mistake of averaging down in a losing stock.

2.  Plan to invest for the long-term.  If one is planning to be invested for 10-20 years in a stock, one will have a different perspective on 10-20% declines.

3.  Do not invest money that is needed in the near-term.  If a retirement is looming or college tuition bills are just around the corner, funds needed to pay for these expenses should not be invested in the stock market.  Because downturns can last for five to ten years, one should not have money invested in stocks that will be needed within the next five years or so.  While putting cash into a CD may seem like a waste, the psychological peace it will give will result in smarter investment decisions.

The other question that may be asked is “What types of stocks should one buy during a recession?”  As was previously stated, all stocks tend to go down during downturns in the market.  This means that the shares of the top companies in a sector will tend to fall along with those of the second and third-tier companies. 

Find the companies that are leaders in the industry, which probably had higher PE ratios than the industry average during the good times.  Other good signs are companies that have little if any debt, strong cash flows, and had consistent earnings growth.  These companies will tend to be stronger than their competitors and therefore better able to weather the recession.  They will pick up market share as their competitors fail, emerging from the recession stronger than ever.

Much as I enjoy writing about investing, it doesn’t make sense unless people are reading. If you’d like to keep the articles coming, please return often and refer a friendhttps://smallivy.wordpress.comComments are also greatly appreciated, as is lively and friendly debate.  Also feel free to link to or reference posts – all I ask for is fair credit.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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