Three Items You Must Know About Gold: independent financial advice
Posted by Don Martin on Tue, Aug 09, 2011 @ 01:41 PM
Various metrics show that gold should be worth between $700 to $1,000. The current run-up is a parabolic panic buying move which is impossible to forecast. It is dangerous to do momentum investing in gold at any time because as it gets higher an investor will become emotionally influenced by the price rally and refuse to sell at the top. Then when the correction occurs, the investor will be so in love with his gold that he won’t sell until the parabolic move has collapsed and he has lost all of his gains. It is not safe to buy in this situation. It is like a high altitude mountain climber who becomes confused by altitude sickness and can’t think clearly.
Gold could go to $2,500 if it matches the (inflation adjusted) January, 1980 movement to $880. But the precedent set in 1980 was a once in a generation panic price and is very unreliable benchmark. I don’t feel comfortable assuming that simply because a high water mark existed 30 years ago that therefor it is somehow guaranteed to repeat on an inflation adjusted basis. An event like the 1980 parabolic move happened only once in history before the current run-up so that precedent is not reliable because it is not something that has happened consistently that can be tested statistically.
Investing in gold is a Keynesian beauty contest where you must vote for the winner based on who you suspect others will vote for rather than voting for the person you believe in. This is a very risky momentum trade.
Gary Shilling said he is agnostic about gold because as a deflationist he feels commodities will go down. My opinion is that during a deflationary crash some investors will need to sell assets to pay their debts or buy investments that are on sale, so they will need to sell gold to raise cash.
The other risks of owning gold
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Gold could be outlawed and Congress could enact a windfall profits tax on it. Owning physical gold buried in one’s backyard is very dangerous as criminals have followed people home from coin stores and beat and robbed them of their life’s savings. Gold mining is a very risky, expensive inefficient business and mining shares do not appreciate as well as bullion.
Gold cost money to store; for example a gold ETF might charge 0.4% a year. By contrast a foreign currency bond actually pays some interest.
Gold storage is risky
A devaluation of the dollar against other currencies is unlikely because other countries would immediately retaliate so that there would be no net devaluation.
I have written “Evaluating gold” and “gold mining stocks risky”.
Investors should seek independent financial advice.
