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Is Gold Still a Buy?

August 19, 2011 | About:
10qk

The Daily Reckoning

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The price of gold (GLD) jumped above $1,800 yesterday. We can imagine $2,000 by the end of the year.

Meanwhile, Wells Fargo (WFC), among others, is warning of a ‘bubble’ in gold.

Is there a bubble in the gold market? An AP report explains why people are buying gold:

In October 2007, it sold for about $740 an ounce. A little over a year later, it rose above $1,000 for the first time. This past March, it began rocketing up. On Wednesday, it traded above $1,793 an ounce, just shy of last week’s record of $1,801.

Meanwhile, stocks, despite rising sharply in the last two and a half years, are only slightly higher in price than they were a decade ago. Since hitting a record high in October 2007, the Standard & Poor’s 500 index is down 23 percent.

Gold hits a sweet spot among the elements: It’s rare, but not too rare. It’s chemically stable; all the gold ever mined is still around. And it can be divided into small amounts without losing its properties.

Ultimately, though, gold is valuable because we all agree it is. It was used around the world as a currency for thousands of years, and then it gave value to paper currencies for a couple of hundred more.

Now, in a time of turmoil, from the credit downgrade and debate over raising the debt limit in the US to the growing financial crisis in Europe to worries of slow growth across the globe, gold is dazzling investors.

But wait….there’s more to the AP story:

Sharlett Wilkinson Buckner, of Humble, Texas, recently took an old bracelet, ring and necklace to her local jeweler and walked out with $1,070.

“I couldn’t wait for my husband to come home,” she said. “I fanned my money in front of him and said, ‘Look what I got for my gold.’“

The next day, he sold an old gold necklace for $650.

Do you see what we see? The average person is still ‘out to lunch.’ He has no idea what is happening. Desperate for cash, he sells gold in order to load up on – paper!

Of course, it may turn out to be a good move. At least, in the near term. The whole world is drowning in a tub of debt. As debt drains away – we are in a Great Correction, remember, a period of debt-reduction – ‘money’ goes down the drain too.

In an expansion, the banking system turns on the taps. It magnifies purchasing power…by making loans. In a contraction, purchasing power goes down…as loans are repaid or written off. A $100,000 loan that is repaid reduces the ‘money’ supply by $100,000 (unless it is lent out to someone else). In a fractional reserve banking system, a loan that can’t be repaid…reduces the money supply by as much as $1 million. It wipes out the bank’s lending capital, forcing it to reduce its loans outstanding.

This de-leveraging process should help support the value of the dollar and reduce the demand for gold as a refuge. But so far, gold is still going up. And in the long run…after the feds have intervened…it should soar.

Here’s our old friend Doug Casey on the subject:

I hate encouraging people to buy gold at $1,800 an ounce, because that level is already more than 700% above the bottom in 2001, and I’m a bottom fisher. I like bargains, and I can’t call gold a bargain today. But it’s plain as day that gold is going to go higher. There’s simply no other place for people to try to safeguard their wealth as the dollar, euro, and other currencies plummet toward their intrinsic values. What else could people buy as they get more and more afraid of paper currencies losing acceptance? What are corporations going to do with the billions of dollars in their treasuries when their management gets frightened? Where else can they go when they need to get rid of dollars, euro, yen, and yuan? Central banks, too – what will they do when they need to dump dollars in favor of something that will hold value?

This is why I see a bubble in gold still ahead. It has nothing to do with the supply and demand for gold in the jewelry trade, or whatever – it’s going to be a result of there being no viable alternatives when the paper-money con game is over. Gold is the ultimate cash, and that’s where people will go when there’s a global, total, panic to cash.

Gold is fundamentally a bet that the financial authorities are losers…that the world’s paper-based monetary system is headed for destruction, and they can’t stop it. It is a good bet.

Regards,

Bill Bonner

for The Daily Reckoning

About the author:

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Comments

ranjitsudan
Ranjitsudan - 2 years ago
It's an asset which is very hard to value. It is difficult call for any investor to buy gold at $1800 level, but my gut feel is that it will continue to go higher because its a best currency on the planet because it's finite and you can't create it out of thin air.

I bought physical gold bar at $1200 level last year, I will continue to hold it for atleast next year or so.
hschacht
Hschacht - 2 years ago
As long as a greater fool exists, gold will go higher.
superguru
Superguru - 2 years ago
It is not greater fool theory here but that people have lost confidence in USD and economy in general.

Most people, as far as I know, do not buy Gold for returns but as hedge against currency devaluation and inflation. Gold is for protection. It is a defensive position. Any returns above that is an extra bonus.

Many nations have come and disappeared in history but Gold has stayed through thousands of years.

There is a very good possibility that part of current price rise of Gold is due to speculative trading by Hedge funds and Wall street traders (greater fools???). But that is true with any and all asset classes, nowadays.

Confidence crises is different than greed.
hschacht
Hschacht - 2 years ago
Not sure how your argument refutes mine. People can buy anything out of fear. The reasons are immaterial. I remember people buying 5 or 6 houses because they were safe compared to stocks. Oops. And gold is a hedge against currencies? Fine. Does that mean it isn't risky? No. Or its rise isn't due to the greater fool theory? Hardly.

I've heard all the radio ads... seen all the signs... my father is a gold bug. We're going to be able to barter gold in exchange for getting out of the country when everything goes to hell! Yeah right.

I'm no fan of paper currencies but give me an earning asset with an intrinsic value over an element on the periodic table any day.

Justify it however you want... gold is nuts and the fools are giddy.
ranjitsudan
Ranjitsudan - 2 years ago
hhmm... you mean central banks are fool to own gold to back up their currency?

I think to call it asset owned by fool is bit naive.

The whole valuation of international currencies are dependant on gold reserves, so can't ignore gold as an asset class esp when it is a basis of valuing a paper currency. How to value it is other question and depends upon individual judgement. I come from India where gold is an asset class that every Indian owns because they know its finite resource and demand of jewelery will always be there. They are happy to hold it forever!! No doubt, they have become richer by holding an asset in last decade.

More gold is bought by central banks in last decade than ever before. That's one of the reason why price has risen so much. Also there are demand and supply fundamentals - its finite resource and demand for gold has risen dramatically esp. demand from central banks who can't trust US dollar (which to be honest is as good as toilet paper). China will float yuan and needs gold as a reserve to back up its currency. Gold will continue to rise in forseeable future.

batbeer2
Batbeer2 premium member - 2 years ago
>> as the dollar, euro, and other currencies plummet toward their intrinsic values.

This implies the IV of these currencies is lower than their current price. Care to share a rough estimate of the IV of a dollar bill ?
superguru
Superguru - 2 years ago
"Murthy co-founded Infosys in 1981 along with six other software code writers as co-founders at Pune with just Rs.10,000 as seed capital by borrowing from Sudha (his wife) who raised the money by mortgaging her gold jewellery." (NDTV)

Gold performed the function in India which I heard Wall street some time does in USA.

May be Gold (when cheaper) is better investment than Goldman Sachs.


hschacht
Hschacht - 2 years ago
Wow. I would have thought the people on this site would know the definition of intrinsic value. A paper currency has no intrinsic value. That value is derived from outside. Same with gold.

And btw... The central banks that own gold are not using it to "back up their currency"! Come on... unfortunately the gold standard is not in force (read some James Grant)

Coca-Cola has a value outside of its market value... Market value of Coca Cola could be $1 a share, but the intrinsic value is much higher... gold is worth what the next guy says it is worth. No cash flows to discount. If opinion changes, look out below.

At this level, you are absolutely relying on the greater fool to propel the price higher. And yes, that greater fool may be (in fact, is likely to be) a central bank. Since when did we look to central banks for good sense?
LwC
LwC - 2 years ago
Hey Ranjitsudan,

"I come from India where gold is an asset class that every Indian owns because they know its finite resource and demand of jewelery will always be there."

Gold may be considered an asset class by many people, especially in countries where the banking systems and business environments are relatively undeveloped, and where corruption is rampant, but how does that shed light on the investment value of gold? Well rarely does an assertion present an opportunity for an experiment like this one does.

Please go down to your local gold jewelry seller and buy a nice piece, and then take it up the street to the local gold buyer and sell it. Please report back to us how much you paid for the piece, including taxes, and how much received for the sale. Then you will have actual data to use to make your case for gold jewelry investment value.

"… US dollar (which to be honest is as good as toilet paper)"

Well I have a deal for you which should be irresistible: I have here on my desk a roll of toilet paper. Now this is the premium stuff, 3 ply, extra soft and absorbent, and in pristine unused condition. It consists of 49.5 square meters of paper. I will trade it to you for 25 square meters of US dollar "toilet paper", even if the paper has been used many times, and I will accept the paper in any denomination you like. I will even pay the cost of shipping the roll of premium toilet paper to you and the cost for you to ship the US dollar toilet paper to me.

Maybe we can even make this a regular trade; after all that roll of premium toilet paper won't last forever.

ranjitsudan
Ranjitsudan - 2 years ago
Hey Hschact:

Wow. I would have thought the people on this site would know the definition of intrinsic value. A paper currency has no intrinsic value. That value is derived from outside. Same with gold.

- Well It sound frogish but Intrinsic value is one of the way to value an asset, not the only one. unfortunately, people are stuck with intrinsic value as only valuation, forgetting million are made in other asset classes which uses other method of valuation. It's judgement on how much you are paying for an asset at the end that matters.

And btw... The central banks that own gold are not using it to "back up their currency"! Come on... unfortunately the gold standard is not in force (read some James Grant)

- HHMMM... well you should look at Swiss Franc; why it is so strong against other currencies and considered safe haven. Because they have more gold reserves to back up their paper currency in circulation. The basis of all paper currency is gold reserves, you might change the standard but world will look at the fundamental of currency at the time of crisis.



Coca-Cola has a value outside of its market value... Market value of Coca Cola could be $1 a share, but the intrinsic value is much higher... gold is worth what the next guy says it is worth. No cash flows to discount. If opinion changes, look out below.
- Well you can't compare Coca Cola with Gold because they are different asset classes as I said intrinsic valuation is not the only way to valuing an asset. It is same as valuing Coca Cola with residential real estate; which are different asset class, hence different valuation method. At the end its your judgement/rationale which asset you wanna choose.[/i]

[i]At this level, you are absolutely relying on the greater fool to propel the price higher. And yes, that greater fool may be (in fact, is likely to be) a central bank. Since when did we look to central banks for good sense?


- I agree with you here esp. when US is loaded with debt because of actions of central bankers. The same bankers forcefully look gold from Americans in 1920-30 (if I recollect it was law passed by Rossevelt for americans to surrender all their gold to govt for $10-20 per unce). Since then US dollar has lost its value and gold has increased in value.

Gold is not in bubble. Have a look at holding of hedge fund manager, not many of them hold gold. Gold still has long way to go up, fundamental of world have changed, paper currency is not to be trusted, hence gold is the only currency that is considered safe.

ranjitsudan
Ranjitsudan - 2 years ago


Hey Ranjitsudan,

"I come from India where gold is an asset class that every Indian owns because they know its finite resource and demand of jewelery will always be there."

Gold may be considered an asset class by many people, especially in countries where the banking systems and business environments are relatively undeveloped, and where corruption is rampant, but how does that shed light on the investment value of gold? Well rarely does an assertion present an opportunity for an experiment like this one does.

Please go down to your local gold jewelry seller and buy a nice piece, and then take it up the street to the local gold buyer and sell it. Please report back to us how much you paid for the piece, including taxes, and how much received for the sale. Then you will have actual data to use to make your case for gold jewelry investment value.

- Ranjit: If you are long term investor that will pay off nicely. My mom bought jewellery in 1998 when gold was $90-100 an ounce, she paid 5% premium for design and manufacturing. She throughly enjoyed wearing it as of now. Gold is now $1800 per ounce. She can go to same jeweler, can exchange new jewelery with latest design, without having to pay anything. The money she invested in 1998 has multiplied 18 times plus she has enjoyed an asset as well. Now tell me where is an issue? You don't considered banking system to be developed if banks don't know how to lend properly. India has first class banking system; if you consider their asset quality. They don;t make jombie loan; in this financial crisis they have come out very strong. They have all the facilities that is offered by bank in developed countries - internet banking,ATM so forth. Infact, I yet to find RTGS (Real Time Money Tranfer) service in developed world which is offered in India, money can be transfered from one bank account to account in other bank in 15-30 minutes, without any fee. I think its naive to consider gold as an investment for country where banking system is undeveloped. Traditionally, Americans used to love holding gold as an asset until 1920-30 when FD Roosevelt passed law for all americans to surrender their gold for $10-20 an ounce, otherwise they will be prosecuted. Since then US dollar has lost its value and gold has risen in value. Other reason for you guys to scold your politicians!!



"… US dollar (which to be honest is as good as toilet paper)"

Well I have a deal for you which should be irresistible: I have here on my desk a roll of toilet paper. Now this is the premium stuff, 3 ply, extra soft and absorbent, and in pristine unused condition. It consists of 49.5 square meters of paper. I will trade it to you for 25 square meters of US dollar "toilet paper", even if the paper has been used many times, and I will accept the paper in any denomination you like. I will even pay the cost of shipping the roll of premium toilet paper to you and the cost for you to ship the US dollar toilet paper to me.

Maybe we can even make this a regular trade; after all that roll of premium toilet paper won't last forever.

- Ranjit: It's an analogy, don't take literally. I might take your offer if US continues to print money for next 10 year.

hschacht
Hschacht - 2 years ago
Intrinsic value is one of the way to value an asset, not the only one?????

Really?

Please enlighten me. When you "value" a company, what value are you trying to identify if NOT intrinsic value?

Sorry I'm quite done with this absurd discussion.

ranjitsudan
Ranjitsudan - 2 years ago
Let me put it in a simple words: Gold is an asset class which cannot be valued using intrinsic value.

But to discard the asset class, categorizing as a fools play because it doesn't fit intrinsic valuation is bit naive and extreme.

Please read Warren buffet 2011 notes from his annual general meeting, where he is explaining different way to look at investment and asset class. A wise investor like him will never disregard any of those method (He used to trade copper future for number of years!) even though he is a value investor.

LwC
LwC - 2 years ago
"… US dollar (which to be honest is as good as toilet paper)"

"- Ranjit: It's an analogy, don't take literally. I might take your offer if US continues to print money for next 10 year."

Well then, does that mean you weren't being honest, as you stated above? I mean, IMHO your statement was not obviously intended to be analogous, but rather appears to have been intentionally offensive and intended to imply your and your country's superiority in some way. Or maybe you just use words as a convenience without any regard to the fact that they must have a real and common meaning in order to communicate effectively. And BTW I'm confident my offer will be profitable in ten years too, but anyway it was my offer that was obviously an analogy to show how ludicrous your not so obvious "analogy" is.

As for your story about your mother's gold, unless you actually take the gold jewelry to the gold buyer and sell it, you have not established the real cash value of the gold jewelry, but I suspect you already know that if you do that you will receive only some fraction of the "price" of the gold jewelry. If you insist otherwise, well like I stated above there's nothing like a real world experiment to prove your point.

"My mom bought jewellery in 1998 when gold was $90-100 an ounce…"

Please look at the gold prices for 1998 as shown in this link:

http://www.usagold.com/reference/prices/1998.html

No matter how many times and different ways I look at it I just can't find how the price of gold in 1998 was $90-100 per ounce. Will you change your assumptions about this when confronted with the reality, or will you insist on maintaining your fiction? And why did you believe that gold was priced $90-100 per ounce? After all, you could have easily confirmed or corrected your assumption before you entered the public square of this forum and revealed your ignorance. If this and other of your statements are known to be incorrect, why shouldn't I be skeptical of your other statements and assumptions?

I've read your response to Hschact above and I will leave it to him to respond if he wishes since I am confident that he is fully capable of pointing out your errors. You are of course entitled to your own opinions, but you are not entitled to your own facts. I'm sorry to disappoint you but many of us have the ability to see and accept reality for what it is, and it's not so easy for bullshitters to fool us. When you step out of your little pond where you might think you are a big fish, you risk getting eaten by a bigger fish that you didn't see coming. And IMO your arrogance in presuming to lecture others who you don't know about history and investments and then call them naive simply because they don't buy your line in fact shows your own naivety. Many of us have actual real world experience in investments over many years and we don't have to rely on our mothers' jewelry shopping experience to form the basis of our investing decisions.

Well good luck.

PS: I just read Hschact's short and sweet response to you and I see he shares my sentiment about you.

ranjitsudan
Ranjitsudan - 2 years ago
In regards to suggesting US dollar as a toilet paper, please travel outside US and see what you can buy with it. You will understand where it stands as of today and future doesn't look rosy either. Mistakes of one country has caused turmoil in whole world, I don't know how you can escape that fact and try to justify it! It will prudent to understand your mistake and acknowledge it!!

Well you got me here with my facts with gold price. But gist of the matter doesn't change, so called value investor have missed on the opportunity of buying gold cheap ignoring macro understanding of the world economy.

Wake up and look at the world around you - compare S&P returns to return from gold in last 10 years. You will understand which part of the world is better off. At last, the stop calling gold investor fools play when you have microscopic view of so called " intrinsic value" only.

Please note: as a long term investor I don't sell my asset unless I need cash; same is true for shares. Traditionally, in India no one sell gold. My mom shopping spree is a crude example of how simple people in so called "undeveloped" world has made money by just holding on the long term asset and hoping for so called "developed" world to keep on making mistakes.

marta_zgill93
Marta_zgill93 - 3 weeks ago

Yes as an investor i must say Gold is never ever go to hell and its always a profitable deal to buy gold.1800$ is not much high as rate of gold coming in future so to buy gold now and earn profit in future.

marta_zgill93
Marta_zgill93 - 3 weeks ago

Yes as an investor i must say Gold is never ever go to hell and its always a profitable deal to buy gold.1800$ is not much high as rate of gold coming in future so to buy gold now and earn profit in future.

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