Gold

Forgive my ignorance I know nothing about commodities and commodities trading, but can someone please explain why gold is such a good investment and an inflation hedge. There have been a lot of gold bulls like peter schiff and eric sprott that have said out in the open to buy gold, and a few people have mentioned being bullish about it in this forum.

From a practical standpoint I can't understand it's real purpose. What does it mean that it has purchasing power?
I read somewhere that only a fraction of gold produced is used in industry, the rest goes into reserves. To me that means that there is an abundant supply and very little demand - except that there is demand created by governments who buy bullion to back their currencies. My question is why would they do this? I can understand real estate having some store of value, but not gold.

Thanks

 

It's very simple, gold has value only because society believes and perceives it to be valuable.

It has very few industrial uses and every ounce made into jewellery can be melted down and recycled back, ie. it is not consumed. Combined with continued mining, this causes a perpetual increase in the supply of this commodity, until of course we mine the earth dry. This limit to total supply contrasts with the supply of fiat money, which governments can print as much as they feel like. Thus people will be bidding up gold when they are scared and don't trust their government's stability and economic policies. As the purchasing power of their worthless fiat cash dissolves, people will no longer exchange goods and services for it. However they will in exchange for a block of gold, as others perceive it to be valuable as well.

Although psychological, separate civilizations and societies emerging independently of each other have all turned to gold as a store of value. It's just too shiny and "rare".

 

It's rare, it doesn't rust or deteriorate, and widely seen as a refuge in times of crisis. Concerning the above comment, gold is used for industrial purposes in small quantity (e.g. computers). It can theoretically be melted but the recycling cost are huge given the tiny amount of gold (thus you have colossal computers cemeteries in South-East asia with kids extracting the valuable components all day long). Therefore even if theoretically the reserves of gold are perpetually increasing, you may have temporary shortages of material provoking pikes because of industrial demand and lack of supply.

 

Gold IS NOT a great investment to hedge against inflation or a stock market crash. It's not the worst investment either but here's a fin fact:

Until recent years with the collapse of mortgage and asset backed securities, more money was lost in gold buying and speculating in the 1970's than in any other industry ever. That includes the Great Depression. I believe this comes form a Jim Rogers book I read and he's an expert on commodity markets.

Anyway, a better hedge against is energy commodities. Regressions show that oil and natural gas follow inflation more closely than precious metals. The reasons are that these products are needed to produce and transport everything and there's no short or intermediate term alternative. Also, there a fixed supply at any given point of time. It takes months to drill new wells like we're seeing with BP in the Gulf.

There's too many speculators in precious metals like gold. There's a silver fund coming out that's going to trade like GLD and it's expected to push prices for silver dramatically higher just because it's going to require a huge physical amount of the metal to allow people to speculate on it. If the speculators disappear and chase junk bonds or pork bellies instead, the metal will drop in value substantially.

In all fairness a little gold can be a wise choice in any portfolio but energy commodities will offer a better hedge. I own a little of both, around 10% combined for my portfolio but I'm aware of the downside. You should be to.

 

Gold is essentially a currency. I would invest in gold right now because it is the best 'reserve' currency available. The future does not look too bright for the Euro or the Dollar or the Yen. Maybe the Swiss Frank but that couldn't be a reserve currency. Gold is a large, liquid market, and, as mentioned above, cannot be manipulated like a fiat currency. If the fiat system we have created is breaking apart, you want to own something that everyone will value.

http://www.numismaticnews.net/article/Paper_1_value_down_98_percent_sin…

looking for that pick-me-up to power through an all-nighter?
 

This may sound weird and out of our current experience, but at some point or another, we will start mining the Moon and the asteroids - it is just a question of when. There is far more gold (and many other precious metals) up there than we know what to do with. Even a rather small asteroid has an eye-popping amount of metals and could crash some metal markets all on its own.

Granted, we are a long way from extracting even a tiny amount from the riches above, but the point is that there is a whole universe out there, and once we get smart and ready, gold will be as abundant as aluminum is today. Aluminum, students of mineral history will recall, was once more valuable than gold. In the long run, it may be on it's way back to that status.

 
junkbondswap:
Ive been buying tulips. Bulbs and bulbs of tulips. You guys should get in before the big money.

I think a bubble is forming in find the next big bubble. I don't think bonds and gold are in a bubble as many others think. Gold in non-US dollar terms is much hotter than Gold priced in dollars. When the system begins to fall apart at the seams, gold is where you will want to be.

looking for that pick-me-up to power through an all-nighter?
 

If we enter another recession, gold prices aren't automatically going to go up like they have been for the past year. In fact, commodities in general (yes that includes gold) tend to decline during recessions. Gold has strong resistance at the 1250 level and every time it tried to pierce it, gold has declined. Central banks control over half the gold in the world, and they have set the precedent to sell gold if prices get too high. Since we aren't in danger of any inflation, gold is not a sure investment right now.

 
Best Response

I've been long gold and gold stocks for the past five years. It's definitely volatile, but in a regime of rising prices it's going to outperform just about everything else (except maybe oil/nat gas as someone mentioned). The problem is that basically all of the world's central banks are doing the same thing - "quantitative easing" - printing money. It is possible to have global inflation, where all currencies erode purchasing power. With rates at 0-1% everywhere, it's only a matter of time before this starts to occur. That's where gold has value. The supply is basically fixed in the short term and if we hit a hyperinflation, which I think we will in the next couple years, gold and other storable commodities will be the only thing that retains real purchasing power. Paper is not money, gold is money. This has been proven again and again over the past several millenia, and it's not likely to reverse now.

Also, I'm pretty much convinced that the GLD and SLV are a scam. They don't own any gold, they just lease it from parties who do. So it basically has the affect of drastically increasing the supply of investable gold, even though the amount of physical above-ground gold hasn't gone up much. If the ETFs had never been established, I bet gold prices would be closer to 2,000 right now. Buy physical or mining stocks... stay away from the ETFs.

 
EarTotheStreet:
As George Soros says...Gold is the ultimate bubble.

As I say, do the opposite of what George Soros says.

Not to mention, Soros' fund holds a lot of GLD, which is technically paper gold, but that is not for this thread.

 

Gold has been valued as a unit of exchange and as a store of wealth for thousands of years, far longer then the US dollar. Gold is a currency and unlike all other currencies it takes a ton of effort to find and produce more of it and this is why it is a hedge against the shenadigans of central banks. Gold may have no industrial use, but paper has none either and you are taking all other currencies on pure faith just like you are with gold. People can say what they want about whether gold is fairly valued at 1200 but saying that it is worthless just dosent jibe with history. I would also say that if there is a bubble it may not be in gold, but rather it could be in the US dollar which has increased massively in supply in the last few years and which every central bank and american citizen is massively long.

 

Anyone who buys gold because of some apocalyptic shit is a fool. You go spend thousands of dollars hording gold and I will drop a couple hundred on a shotgun and when it all hits the fan we will see who made the better investment. Plain and simple, the day when people are chipping off pieces of their gold bars to buy goats is the day when the world goes to shit and being well armed will be WAY more valuable than gold.

Investing in gold is typically an inflation hedge. Now gold is moving opposite the USD. I think it is fine to play gold like any other hot stock, but it has no yield and I think it is pretty run up. As mentioned above there is very little industrial use and gold is not in short supply. Personally, I like Silver and Palladium. There used to be a fixed Silver to Gold ratio ( I think 60-1 ) and there has been separation. Silver has plenty of industrial uses so it is a play on a rebounding economy as well as a precious metal play.

Palladium is even better. It is replacing Platinum in catalytic converters ( cash for clunkers pushed up the price as well as the increase in automobiles in China and India), it is important in solar cells, electric batteries and manufacturing. There is also few places producing it. I am long Pall .

 

I have both gold and shotguns. And I believe that it is foolish NOT to have some protection against a currency apocalypse given what central banks globally are doing right now. And before you go calling me a fool you should know that I am up over 50% on my first gold buy a few years ago and every purchase i have made since is in the money...how have your non-foolish investments done over this period? Protecting against tail risks is never foolish, especially with personal money.

And holding industrial commodities in a recession is a much different trade then gold...they trade like stocks, whereas gold trades like disaster protection. Just look at what happened in the last recession and its pretty obvious that palladium is a very different product then gold.

 

Besides catalytic converters, what is palladium used for? Won't demand plummet if electric cars (I don't think they have catalytic converters but I could be wrong) take off?

looking for that pick-me-up to power through an all-nighter?
 
<span class=keyword_link><a href=//www.wallstreetoasis.com/finance-dictionary/what-is-london-interbank-offer-rate-libor>LIBOR</a></span>:
Besides catalytic converters, what is palladium used for? Won't demand plummet if electric cars (I don't think they have catalytic converters but I could be wrong) take off?

Car demand is a driver for Pall, but it is part of the platinum group metals (PGM) so it gets run up along with other precious metals. Electric cars might be the future, but it is a long way away from replacing gas engines. Huge growth in developing nations demand for vehicles is a driver for price. It is also replacing platinum in catalytic converters so you have growth from that.

 

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