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.”
- 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.
- 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?
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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