My First Gold Coin

November 13, 2008

gold-coin1For 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!


Craziness in the Gold Market

August 27, 2008

Gold prices have fallen from $1,000 to under $800 per ounce just in the last month. As prices fell below $800, demand for physical gold rose to the point that many dealers – including the US Mint! – ran out of supply.

Bill Fleckenstein offers a great explanation for the strange recent action. Notable excerpt:

There are huge amounts of money being managed according to mechanical or mathematical trend-following systems. When those systems kick in, gold and silver can drop in price even on days when inflation is reported to be high, as happened Aug. 14. That’s because when a major liquidation is under way, the economic fundamentals have no bearing on market action. The quantitative systems take control.

Except for the dollar’s huge rally, virtually nothing has changed in the case for owning gold, though the price recently tanked by more than 20%. However, in the short run, fundamentals do not make any difference when powerful tailwinds or headwinds push prices around.

In the stock market, price action often reflects underlying events in businesses, industries and the economy. With commodities, price is just a reflection of the market’s attempt to help balance supply and demand, as the cost of production and other variables have only long-term relevance.

A closer look at the gold market reveals shortages driven by price declines and a subsequent explosion in retail demand, and many dealers have run out of assorted forms of gold coins, bars, etc. If you click here, for example, you can see that Tulving is out of gobs of products. Kitco.com has been warning about delivery delays.

These shortages likely have something to do with the fact that last week the U.S. Mint suspended sales of gold coins — a reflection of the surging demand. The fall in price also triggered an outpouring of buying in India and the Middle East. In addition, the exchange-traded funds, or ETFs, that hold gold and silver showed an amazing resilience in the face of plunging prices.

Thus we witnessed an unusual dichotomy: Physical buying (and here I’m kind of including the ETFs, though they aren’t purely physical) was ratcheting up even as the selling of futures contracts was driving the market lower. When the price was rallying, the futures market had a big hand in that, so we can’t ignore it when it seems to be at the epicenter of lower prices.

In any case, if we saw (as it appeared) heavy selling or short-selling in the futures market while demand for gold in the physical world was rising, that historically would be a very bullish development.


MB Changes His Mind on Gold

July 18, 2008

Back in September 2007, Miserly Bastard wrote a post — My Thoughts on Gold — in which he outlined reasons why he thought gold was a bad investment. I responded here with my thoughts on why gold is a good investment.

Now, MB has changed his position and is buying physical gold. Notable excerpt:

A lot of people advocating the purchase of physical gold are anti-federal government, to one degree or another. Maybe not full-on Timothy McVeigh types, but at least suspicious of most federal government actions. I count myself in the latter camp. This is another reason I like physical gold to synthetic gold–you can touch physical gold, and so long as the government doesnt know where you keep it, it’s yours.


Is Gold a Foolish Investment?

February 13, 2008

Interesting and cheeky article about gold by Tim Middleton: Fool’s Gold for your Valentine:

Gold enjoys a perverse and self-reinforcing advantage over every other product in the known universe. When the price of anything goes up, demand for it goes down — except for gold. Investment demand for gold actually rises in line with the price.

For that reason alone, I know you want to buy it, because the big collective “you” is already buying it. Plus, it’s your romantic duty. Gold does not tarnish; it does not break; nobody ever throws it out. It is indestructible, too: Some of your wedding ring could have come from a coin that Socrates gave as a token of love.

So go ahead. Buy gold. I own a bit of it myself. It’s not much of an investment: In inflation-adjusted terms, today’s price is less than half of what it was at its peak. But seen through that lens, last week’s price of $904 per ounce is a bargain. The old record of $850 in January 1980 would be $2,143 in today’s dollars.

I agree with Middleton’s main points here except that I have never considered gold to be an investment. Sure its price goes up and down, but throughout history, gold has always held its purchasing power. It doesn’t make or lose you money because it is money.


Gift to Wall Street

September 19, 2007

Today’s 50 bps rate cut in the Fed Funds and Discount Rate has set everybody into a frenzy, and for good reason.  It’s hard not to feel great – my accounts were up 2.72% today. 

For the inflation-obsessed, today was a great chance to prove the point that Fed policy continues to be inflationary.  The Dollar fell hard today against foreign currencies, gold, oil, and agriculture commodities.

 

Was the rate cut appropriate?

There are well-reasoned arguments on both sides of this debate but something has me feeling uneasy about this rate cut.

Bernanke promised not to bail out the banks and hedge funds that lent recklessly during the boom.  If the rate cut isn’t a bailout, then why is everybody on Wall Street so damned excited today?  The rate cut has instantly helped to “reflate” asset prices.  This is hugely helpful to banks, brokerages, and the people that work there – bonuses are being saved by the Fed.

Practically speaking, the Fed really didn’t have much of a choice today — everybody expected at least 25bps and the bond market expected 50.  Without this rate cut we would have had a resumption of the crazy volatility and almost certainly a worsening of the credit crunch.

By cutting rates today, the Fed is sending the message that they are more concerned with preventing a recession than they are about protecting the value of the Dollar.  I won’t be selling my gold any time soon!


My Thoughts on Gold

September 14, 2007

One of my favorite bloggers, Miserly Bastard, has posted recently on why he thinks gold is a bad investment. His post has inspired me to write about why I think gold is a good investment.

Readers of my old blog know that I am somewhat of a gold bug. I have been playing around in gold stocks, options, and futures (with disastrous results) for at least three years. By no means am I a doom and gloom guy, but I think that the arguments for owning some gold are very compelling. To frame my thinking on gold, I like to think of it as both a currency and an investment:

As a currency gold is

  • The world’s oldest currency and store of value
  • Impossible to create without digging it out of the ground – unlike Diamonds, real gold cannot be made in a chem lab
  • Hedge against a falling USD and fiat currencies in general
  • Hedge against inflation
  • Gold pays an attractive and tax-defered yield (this is a leap of faith but I consider it to be true because of the contango in gold futures)


As an investment:

  • Very strong demand for gold jewelry in India and China
  • Asian central banks hold a tiny percentage of their reserves in gold. Any meaningful change in this policy will present a huge upward force to the gold price
  • Gold bugs have a somewhat religious fervor for gold. If gold prices decline, there are lots of eager buyers

MB argues that the main reason he would own gold would be to protect against extremely unlikely economic situations “namely high inflation and/or rapidly weakening fiat currency.”

I don’t think either of these situations is extremely unlikely, in fact I think we’re experiencing them now and will continue to for some time. The government claims that inflation is 2% on an annualized basis. In my opinion, this number is a joke – the government cooks up the lowest possible number that they can reasonably get away with. Also, it’s in the government’s interest to have real inflation running at a much higher rate than reported inflation: it minimizes inflation-linked payments (Social Security & TIPS for example) and shrinks the real size of the outstanding debt.

As for MB’s second point, fiat currencies (especially the USD) have been weakening against hard assets for years. The forces causing this are secular in nature.

5-year-gold-chart.jpg

 

How I own gold:

In my medium-term cash management account, I keep about 20% invested in GLD. GLD is an ETF which holds a pile of gold in a warehouse somewhere.

As an investment/speculation I own gold stocks: GDX and AAUK. Gold mining companies can do really well when the price of gold rises but it’s not a guarantee. Lately, the cost of mining gold has risen, causing profit margins to fall.

My total exposure to gold is less than 10% of my networth.