The Gold Frenzy: Why Investors Should Resist

Quote from KINGOFSHORTS:

The lemmings got lead to the slaughter last bear market when gold peaked (79-82), Those who shunned equity and went long gold ended up missing the entire 1980s equity boom, only to watch their gold positions bleed and crater. Even now gold on an inflation adjusted basis has not provided gains for the lemmings.

When the TV and Radio pundits tout gold, the short order cook is touting gold, and gold vending machines appear,soccer moms setting up gold parties. Then you know we reached the peaks and its all downhill in the next few years.
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That's what they said 3 years ago.
 
How come in 2001 for example I never heard the world "Gold" on the TV or radio or from joe six packs and soccer moms etc.. when gold was trading under 300s ?


Now you hear all the time "GOLD" on every corner.

Just like you heard "House,property" on every corner during the housing bubble.
 
Quote from KINGOFSHORTS:

How come in 2001 for example I never heard the world "Gold" on the TV or radio or from joe six packs and soccer moms etc.. when gold was trading under 300s ?


Now you hear all the time "GOLD" on every corner.

Just like you heard "House,property" on every corner during the housing bubble.
More...

George Soros on Bubbles:

'When I see a bubble forming I rush in to buy, adding fuel to the fire.'

http://blogs.ft.com/money-supply/2009/11/02/introducing-the-theory-of-reflexivity/
 
Quote from KINGOFSHORTS:

How come in 2001 for example I never heard the world "Gold" on the TV or radio or from joe six packs and soccer moms etc.. when gold was trading under 300s ?


Now you hear all the time "GOLD" on every corner.

Just like you heard "House,property" on every corner during the housing bubble.
More...

How come you dub yourself 'king of shorts' and you don't realize the importance of the gold investment now? One does not call himself 'king of shorts' for nothing.
 
Quote from KINGOFSHORTS:

The lemmings got lead to the slaughter last bear market when gold peaked (79-82), Those who shunned equity and went long gold ended up missing the entire 1980s equity boom, only to watch their gold positions bleed and crater. Even now gold on an inflation adjusted basis has not provided gains for the lemmings.

When the TV and Radio pundits tout gold, the short order cook is touting gold, and gold vending machines appear,soccer moms setting up gold parties. Then you know we reached the peaks and its all downhill in the next few years.

Those who bought high quality dividend paying stock and built a proper diversified portfolio are doing well today and getting checks in the mail.
More...


Are you a broker or something? Gold hasn't even given the parabolic signal yet and public participation is still miniscule. What about the dashed hopes of investors since 2000? A repeat of 1980s and 1990s look like a pipe dream at this juncture.
 
people are buying gold to preserve wealth or capital..gold is as good as cash. people would take gold coins for payment if you want to buy a new car with gold.

Quote from Debaser82:

The price of gold hit record highs over the week of May 10-14, attracting the attention of many retail investors. But this precious metal is no safe haven.

As an investment, gold has never been more popular. And, for individual investors, that's part of the problem.

Encouraged by TV and radio ads touting the virtues of gold, retail investors are buying it up. One leading gold dealer, Goldline International, estimates it has added 50,000 clients in the past three years. The gold frenzy is worldwide: On May 13, a vending machine that dispenses gold bars was unveiled at Abu Dhabi's Emirates Palace hotel.

Financial experts warn that all this enthusiasm for gold could be a warning sign -- that gold prices could be near their peak. "It's very in vogue right now, which is usually a telltale sign [of] a bubble-like mentality," says James Miller, president of Woodward Financial Advisors in Chapel Hill, N.C.

Gold's advocates may be right that the metal could head higher still, driven by the fiscal crisis in Europe, high deficits in the U.S., and fears of inflation. "All we can do is put our money into real assets, because paper money everywhere is being debased," Jim Rogers, chairman of Rogers Holdings, told Bloomberg Television on May 12 as gold hit new highs.

Treacherous Field

But even if gold keeps rising -- a prospect very difficult to predict, given the metal's volatile track record -- there are several features of gold that make it treacherous for individual investors, financial advisers say.

Gold might have a reputation as a "safe haven," but nothing could be further from the truth, says Susan C. Elser, of Elser Financial Planning in Indianapolis. Unlike other commodities, gold has few industrial uses. Unlike businesses owned through the stock market, gold earns no profits and doesn't pay out dividends. Unlike bonds, no one pays interest to holders of gold. And, unlike insured bank deposits, there is no guarantee of your principal investment.

"There is no downside protection on investing in gold," Elser says.

Gold used to be the backing for currencies, but no longer. Now "it really is only a store of value because people say it's a store of value," says Ken Eaton, principal at Stepp & Rothwell, a financial planning firm in Overland Park, Kan. That can lead to extreme volatility, which financial planners cite as one of gold's biggest downsides.

Gold may be up 84 percent in three years, but it has taken a wild path to get there. Most recently, gold fell 12.6 percent from Dec. 2 to Feb. 8, then rebounded 16 percent in the next three months.

Much of gold's appeal is built on its use as protection against inflation, which some -- but not all -- investors see as a potential threat.

"We're in very unusual times," says Barbara Camaglia, head of Legacy Financial Advisors in Beachwood, Ohio. "Everyone is debasing their currencies, so I think having some gold is not a bad idea."

Portfolio Allocation

Gold is just one part of a diverse portfolio, she says, with a portfolio allocation often kept to 5 percent, though "you could argue for a higher percentage." A small gold holding is typically recommended even by financial planners, like Eaton, who are skeptical of buying gold now. Gold is one sliver of commodity holdings that make up 2.5 percent to 5 percent of his clients' portfolios, Eaton says.

It's true that gold kept pace with inflation in the 1970s. The annual increase in the consumer price index averaged 9.3 percent from 1973 through 1981. The market price of gold at the end of 1972 was $63.91, rising to $456.90 by the end of 1982. That's a 615 percent increase, compared to cumulative inflation from 1972 to 1983 of 138 percent.

However, gold's record as an inflation hedge is more mixed over the long term. Because gold fell from 1980 to 2001, the metal's total appreciation from 1972 to 2001 was just 336.5 percent. That barely beats inflation over those 29 years of 323.7 percent, and is way behind the 2,466 percent return of the broad Standard & Poor's 500-stock index if dividends are included.

"There are [short] periods of time -- like now and the 1970s -- when there is really a lot of uncertainty out there, and people flock to [gold] for safety," says Miller of Woodward Financial Advisors. But gold's long-term record is weak, he adds. "It's a short-term trading vehicle rather than a long-term investment."

There are practical problems with owning gold, as well. It's heavy, and not easy for the average investor to buy, sell, ship, and store. "You're dealing with a lot more transactional costs," says David Lamp, a financial planner at BBJS Financial Advisors in Seattle. He keeps no more than 1 percent or 2 percent of client portfolios in gold.

Goldline's Profile

One easier way to get exposure to gold is through exchange-traded funds. For example, the SPDR Gold Trust (NYSE: GLD - News) holds actual gold bullion. The PowerShares DB Gold Fund (NYSE: DGL - News) holds futures contracts linked to the price of gold, and the Market Vectors Gold Miners ETF (NYSE: GDX - News) holds stock in gold mining companies.

Many gold investors, however, don't trust funds to hold their gold. The vast majority of Goldline customers want their gold physically delivered to their homes, says Goldline Executive Vice-President Scott Carter.

The company, which nets about $500 million in revenue each year, touts the endorsements of conservative pundits Glenn Beck, Laura Ingraham, and Mark Levin, as well as former Arkansas governor and Republican Presidential candidate Mike Huckabee. The average initial customer at Goldline invests $15,000 to $25,000, and Carter says Goldline discourages "the speculator," recommending holding gold for three to five years and only as 5 percent to 15 percent of a diversified investment strategy.

The transaction costs of gold are reflected in Goldline's prices. To buy from Goldline, gold bullion sells for about 5 percent above the current market price, while special gold coins can get markups of up to 35 percent. Selling back to Goldline, customers typically pay 2 percent below the market price, Carter says.

For many investors, however, the appeal of gold, especially in its physical form, remains strong.

"They don't want a piece of paper," Carter says. "You're buying something you can see and touch. There is a large group of investors who like to buy physical, tangible assets."

http://www.businessweek.com/investor/content/may2010/pi20100513_844554.htm
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Quote from KINGOFSHORTS:

The lemmings got lead to the slaughter last bear market when gold peaked (79-82), Those who shunned equity and went long gold ended up missing the entire 1980s equity boom, only to watch their gold positions bleed and crater. Even now gold on an inflation adjusted basis has not provided gains for the lemmings.

When the TV and Radio pundits tout gold, the short order cook is touting gold, and gold vending machines appear,soccer moms setting up gold parties. Then you know we reached the peaks and its all downhill in the next few years.

Those who bought high quality dividend paying stock and built a proper diversified portfolio are doing well today and getting checks in the mail.
More...

Even if you were the 1 guy that bought gold at $850 in 1980 and you sold at the absolute lowest price gold hit the very next year, you only lost about 50% of your investment. In reality, those people who bought in the first half of 1979 (when gold was trading under $300 per oz) most were still sitting pretty by the end of 1982 when gold was trading at $450 per oz.) 50% return over 3 years is hardly losing your shirt.

Yeah, in the 1980s might have been a good time to invest in those safe companies, like WorldCom/MCI, Enron, Global Crossing, Adelphia, Tyco, Bear Sterns, GM, Washinton Mutual, Refco, Delta airlines...you know...the big, SAFE, diversified investments. How much those guys paying today?

Also...there are not many average people buying gold. They are SELLING old gold jewelry to these "We buy Gold" corporations.

But even if they are buying gold, you know when else people were buying gold? During the fall of the wiemer republic. Those few people that bought gold did pretty good. Another time gold came in handy was during Vietnam. I met a woman who had to pay in gold to get herself smuggled out of the country. Same in cambodia. If you wanted out of there when the SHTF, you had better have some gold. Same with the Jews. The ones that had some gold were spared from the death camps as they could pay to get themselves smuggled out. There are many other examples, but you get the point.

I'm not saying dump your whole portfolio in gold & silver (unless you only have under $10k or so), but its better to have the gold and not need it, than to need it and not have it.

If you have $100k to invest, whats wrong with buying $25k in physical PMs and $75k in stocks? I mean if the worst happens with gold and we have a repeat of 1980, you lost what? $10-15k total? You still have your $75k in stocks so you only lost 10-15%. If the worst happens and its total collapse, you at least have a way to survive, get out of the country, hire people to protect you, get food, start a business in your new country, ect.
 
Possible scenario. Gold continues higher,
much higher. Joe 6 pack joins the buying
frenzy.
Geo political uncertainty, the specter
of rampant inflation,Piigs, major
municipal failures, fill-in-the-blank
disasters that hardly anyone
realized at the time but seem eerily
obvious in hindsight, throw in a spot
of international - and home grown -
terrorism. The list goes on.
Rumors of a serious International
collaboration to incorporate Gold
into some sort of Global monetary
mechanism makes headroads.
Gold heads higher...and higher.
It's now a bona fida bubble but,as with
the RE implosion, it seems that
everyone is too busyraking it in to
notice. The bubble
continues to expand. Gold hits $2k
Hollywood stars demand payment
in gold bullion.
The rumors of a new World currency
standard are given further impetus
through planned leaks which are hastily
denied.
Eventually a lesser head of State blurts
out that there is some validity to the
rumors. Then a European leader
goes on record stating that a
World currency is inevitable.
A few months later all the G8 ministers
gather in Switzerland and the plan
is unveiled with great pomp.
B.O. waxes lyrical about this
being a truly defining moment in
history, that a new era of transparency
has dawned.
His re-election assured, the details
eventually dribble out.The free markets of the
World will determine the benchmark
price of Gold.
B.O.is nominated for a Nobel peace prize
and is re elected in a landslide.
All is going so well and then the
inexplicable happens.
The price of Gold drops sharply and
unexpectedly.
Market experts, pundits and
assorted talking heads are quick
to reassure the good old general
public that this is no cause for alarm.
In actual fact this is clearly the buying
opportunity of a lifetime.
Sure enough price spikes up again
but only makes a lower high.
Still the concensus is overwhelmingly
bullish.
However, price starts to crater.
The Central banks,after having
significantly reduced their
inventory of bullion at artificially
inflated prices
are now set on another major kill.
Obviously they (we might say the
House) have absolutely no need
for Gold over $2k. The decline is
horrific. Only the most well capitalized
of the players survive the fearful
swings in price. A fortunate few make
a fortune but at the expense
of the many.
A year later Gold is trading at less than
$500 per ounce.
Another burst bubble.....and the
show goes on.
JMO
 
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