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Precious Metals With the current commodities bull market and gold reaching new highs, is the yellow metal a good opportunity today? Is gold the long-term, buy-and-hold security my friends in the real asset crowd make it out to be? Find out where to put your money for a long-term investment, as well as short-term, when it comes to gold investments. "Gold has reached a 17-year high, its highest level since 1988 overnight with the overall weakening of the dollar," one currency sage reported the other day. "That pushes gold's return this year to 9.1%. But my longtime friend, Doug Casey, believes that this is still just the tip of the iceberg with regards to the gold price increase!" That would indeed be great news, I thought to myself, were it not for the fact that Doug Casey has held this opinion almost unchanged since the days when Tom Selleck auditioned for his role in Magnum, PI: a stately quarter-century during which gold did... exactly what? Richness From the Yellow Metal Let's back up a bit. The other day, as I was trying to hack my way through the clutter that is our basement, I found a paperback novel I bought back in Berlin in 1985. John Updike's Rabbit is Rich, 429 pages of cultured reading pleasure, perfectly bound. A little blue sticker tells me that I paid 9.70 deutschmarks for it... So there we have it: Rabbit is rich. In 1979, with 15% inflation and an energy crisis cooking, he's selling fuel-efficient Toyotas into a market dominated by gas-guzzlers. He's rolling in dough. Heck, he even gets some wife-swapping action on the side. And what does he do with his wealth? He buys GOLD. Actually rolls of it, literally! Bullion coins. Krugerrands. In fact, his story, dated as it may be, sounds like the stuff you hear from very respectable analysts today: "Demise of the Dollar - Buy Gold!" And it works for Rabbit! From January 1979 to January 1980, Rabbit's gold rises from $235 to $860... that's $2,049.81 in 2005 dollars! Rabbit is RICH. Gold as a Long-term Investment Idle hands, they say, are the devil's workshop. Last Tuesday, I found myself sitting idly at my home office desk, brooding over reams of data. Gold prices, to be specific, all the way back to 1975, when I was a hopeful young lad entering fifth grade. My intent was heretical: Figure out if gold was indeed the long-term, buy-and-hold security-blanket-cum-safe-harbor my friends in the "real asset" crowd make it out to be. You see, in the currency analyst's quote above, there is a little tripwire. Five little words: "overall weakening of the dollar." What exactly does that do to an asset whose value is denominated in US dollars? |
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Calculating the Profit Potential of the Midas Metal I opened a spreadsheet and began typing: Annual high and low gold prices, plus cumulative averages based on the London PM Fix prices. For every year since 1975. Then I went to the Commerce Department's Consumer Price Index, opened its inflation calculator and applied it to ever year. I decided to ignore the highs and lows of every year and stick with the annual cumulative averages: This modifies the impression given by the data a bit as it irons out the extremes on the upside and downside. After all, who ever bought at the exact highs and sold at the exact lows...? The resulting graphs were interesting, but not exactly revolutionary. Until I tackled the question of whether this precious metal is a good long-term investment. I wanted to see what one ounce of bullion, bought every five years, would have done for me since 1975. Taking the cumulative average price for one ounce of gold for 1975, 1980, 1985 and so on until 2000, I got the following gains. By October 11, 2005:
Hmmm. That works out to average compound gains of just 16% per ounce over 30 years. Not quite the asset I thought it would turn out to be. But this, let me remind you, assumes that one dollar of 2005 mintage bought just as much as one of 1975. Re-assessing Gold's Real Power Unfortunately, it doesn't. Adjusted for the loss of the dollar's purchasing power for each and every year, the picture looks dramatically different. By October 11, 2005:
That's a compound average loss of close to -20% on each ounce you bought over the past 30 years! Now I understand my father who - like Rabbit - bought Krugerrands in the late 1970's and doesn't really want to talk about gold being "19% undervalued" right now, as some colleagues of mine insist on telling me. Because adjusting the recent high near $475 for inflation, we get $197.19 dollars in 1980 purchasing power, the year of gold's bubble high. The bullion our friend Rabbit bought in January 1980 thus lost him $1,190 per ounce in 2005 dollars. Even the bullion he bought a year earlier, before the bullion bubble inflated, cost him 50 bucks an ounce in clear losses... not counting that he would have bought retail and sold wholesale, and not counting storage and opportunity cost. Had Updike let Rabbit live for another couple of years, he could have titled the fifth sequel Rabbit Got Screwed. Inflation ate his gold profits and then chowed down on the principal. Because here's the uncomfortable truth: Buy-and-hold investing in gold over the past three decades has meant throwing purchasing power out the window! Turning the Demand for the Yellow Metal Of course, Rabbit could have turned a profit - in the short term. He could have made up to $1,500 an ounce had he bought at the bottom and sold at the top in 79/80. He missed out. As most investors did. Because they don't know that gold is an asset just like Internet stocks. It has no fixed intrinsic value. Because value is what someone is willing to pay for an asset at any given point in time. The only people making reliable profits in this game are those who focus on the short term: the traders. And they don't believe in intrinsic VALUE of the metal. They play the SCARCITY of select coins, and scarcity is just another way of saying high demand for small supply. Over the next few weeks, we'll be exploring the only profitable aspect of gold investing (besides short-term options trades on the precious metals indexes) right here in the 247profits e-Dispatch. You'll find out why 17 sheets of paper are several million times more valuable than 429 pages... where exactly to find value in an ounce of silver... and finally, the only way to turn wealth-eating inflation into a profit accelerant that will take your gold investments from a value-losing hoard to a dynamic legacy asset. |
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