Terrific article in Portfolio by Michael Lewis of Liar’s Poker fame. Notable Excerpt:
But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.
For as long as I’ve been writing this blog, and for at least two years before that, I’ve been interested in gold. Over this period I’ve maintained a roughly 10% allocation to gold in my portfolio – I’ve done this through two ETFs: GDX and GLD.
Even though I’m not a hardcore gold bug, I’ve recently come to believe that “paper” gold is not really gold. Unless you hold physical gold, you miss out on several advantages of gold ownership. In addition to its properties as an investment, gold also provides some protection against really nasty things like hyperinflation, confiscatory governments, and major counterparty failure for COMEX gold. Not to mention that it’s a completely untraceable form of wealth (unless you blog about it).
And the final reason: there is a growing disconnect between the physical and paper gold markets. Many coin shops and even the US Mint have completely sold out of physical gold. And there is a growing spread between what you pay for gold and the spot price.
So today, partly because of my investment thesis and partly out of curiosity, I purchased my first gold coin. I called all of the coin dealers in the Raleigh/Durham area and eventually found two that had gold coins. One shop had two coins – an American Eagle and a Canadian Maple Leaf – but wanted $140 over spot! Eventually I found a dealer who had a single American Eagle for sale at $80 over spot. I bought the coin and also had an interesting conversation with the owner of the store. In the end, it was a fun experience…. I’m hoping for a continued decline in gold prices so I can buy more!