Pretty interesting correlation here.

[Guest kawikaho]

This is an interesting correlation.  Only next few months will tell if the BDI was a leading indicator of the S&P:

 

http://www.tradersnarrative.com/baltic-dry-index-continues-leading-the-stock-market-2943.html

 

I love correlations.  By the way, the USD seems to be crashing, and gold is heading higher. 

[Josh4580]

I disagree with Buffett's assertion that gold is a waste of time.  Gold might seem to have no value, but its value is in its reputation as a solid store of value.  This store of value has held up pretty damn well and Buffett should reassess his viewpoint given that his reputation is so important to his investment performance.

 

At this point, anyone managing large amounts of capital should have GLD or GDX as a 5-10% inflation hedge. IMO

[Guest kawikaho]

Yeah, I agree.  I think GLD should compound along 4%, at the very least, for the next several years. 

[oldye]

I disagree with Buffett's assertion that gold is a waste of time.  Gold might seem to have no value, but its value is in its reputation as a solid store of value.  This store of value has held up pretty damn well and Buffett should reassess his viewpoint given that his reputation is so important to his investment performance.

 

At this point, anyone managing large amounts of capital should have GLD or GDX as a 5-10% inflation hedge. IMO

 

Whats it worth and why?  Why are you holding owning it when you don't know what someone will pay you for it in the future?  Why is 1 ounce of gold almost as valuable as 3 shares of Fairfax?  Its normal for people to rush to "safe harbors" after times of crisis because they anchor the experience, but there is a price point where gold won't protect your purchasing power.  How sure are you that at 1000 an ounce you haven't passed that point?

[watsa_is_a_randian_hero]

Gold might seem to have no value, but its value is in its reputation as a solid store of value.  This store of value has held up pretty damn well and Buffett should reassess his viewpoint given that his reputation is so important to his investment performance.

 

At this point, anyone managing large amounts of capital should have GLD or GDX as a 5-10% inflation hedge. IMO

 

I agree with Buffett.  Gold's traded value far exceeds its industrial value.  Gold is the classic Ponzi scheme.  You're paying $1000 today for an ounce of a mineral that has literally NO use to you, on hopes that you will be able to sell to someone tomorrow.  Like a ponzi scheme, you are paying a vastly overpriced entry point, and the only way you will be able to sell in the future is if someone else is willing to buy at an overpriced entry point also.

 

[scorpioncapital]

I disagree with Buffett's assertion that gold is a waste of time.  Gold might seem to have no value, but its value is in its reputation as a solid store of value.  This store of value has held up pretty damn well and Buffett should reassess his viewpoint given that his reputation is so important to his investment performance.

 

At this point, anyone managing large amounts of capital should have GLD or GDX as a 5-10% inflation hedge. IMO

 

Why is gold a better inflation hedge than a good business (stock)? Why hedge 5-10% against inflation with gold when you can hedge it with a good business - and potentially make even more money than breaking even after inflation?

 

 

[Guest Broxburnboy]

 

I agree with Buffett.  Gold's traded value far exceeds its industrial value.  Gold is the classic Ponzi scheme.  You're paying $1000 today for an ounce of a mineral that has literally NO use to you, on hopes that you will be able to sell to someone tomorrow.  Like a ponzi scheme, you are paying a vastly overpriced entry point, and the only way you will be able to sell in the future is if someone else is willing to buy at an overpriced entry point also.

 

 

Let's compare an ounce of gold to a 1000.00 bill (USD). The bill is virtuously worthless, a piece of paper, formerly a promise to redeem in gold at a fixed ratio, now a hot potato, as its redeemable value in every commodity will erode over short intervals. This devaluation is obviously accelerating.

 

The gold is money... real money and has been since the invention of money as a means of exchange. Of all the commodities on the planet gold has been chosen by humans because it alone has the necessary properties to act as a means of exchange. Most importantly it can not be inflated except by small amounts due to laborious mining, it is uniform in value throughout the world. It is universally accepted, easy to store, portable and valuable. It does not spoil or incur large storage charges. Some find it beautiful. Unlike the dollar, when compared to any other commodity, it has held its relative value over time.

 

Throughout history fiat money (some sovereign entity's promise to pay) has temporarily been used as a means of exchange, but in every instance the issuer has succumbed to the temptation to print more than they can redeem at a constant rate. We call this monetary inflation.

 

Such inflation destroys currencies as debts incurred are simply repaid by printing yet more money, in a self stoking downward cycle. Currently, the US is inflating their money to pay off debts incurred by a wealth destroying "war", to bail out private interests and to make up public budgetary shortfalls.

This is resulting in the US buck weakening against other, stronger currencies and the ultimate money..Gold. As long as the monetary and fiscal policies remain in force, the problem gets bigger, the US dollar will continue to weaken and the price of Gold will rise.

BTW, this denial of the monetary role of gold is almost entirely an American point of view, the rest of the world seems to be stocking up. The Federal Reserve, although publicly proclaiming the value of the buck, continues to hold the lion's share of the world's physical gold to back their currency.

[jegenolf]

That's just a strawman argument, Brox... Not many would argue that holding US currency is better than holding gold in the current environment. Holding gold is better than holding dog poop as a store of value, but that's not relevant either.

 

Any fiat currency is just a worse form of ponzi scheme relative to gold, but the wealth storage game is not simply a choice between currency and commodities.

 

The option put forth is to invest in productive assets versus acquiring non-productive wealth storage units. If the SHTF, I'd personally rather own production capacity of some sort than an asset with (almost) no intrinsic value, only perceived value.

 

I'm not saying the answer is cut and dry here, just that the interesting conversation to me is about productive assets vs. non-productive assets not fiat currency vs. non-productive assets.

 

And I admittedly get tired of the gold buggery... Gold is going to work as a store of value until it doesn't, and then it will be too late.

[watsa_is_a_randian_hero]

Brox-

as Jegenolf said, the fact gold has more value that fiat is irrelevant.  I was saying its been chronically overvalued through history (because of its self-perpetuating ponzi-type role as "precious metal"), and becomes even more overvalued during times of crisis.

 

My argument is that assets such as real estate and stocks are better stores of value over the long term.  Real estate is something that can be used; and its value typically is based off of the value created by the real estate in its highest and best used.  Contrast that to gold, which has some industrial uses; however, the value of gold far exceeds the value it creates in industrial uses.  It is valued at $1000/oz not because of its industrial uses.

[JAllen]

It seems more desirable to own a commodity that is being depleted not increasing in supply.

[ericd1]

It seems more desirable to own a commodity that is being depleted not increasing in supply.

 

Have we reached peak production of oil????

[Guest kawikaho]

In defense of gold, houses with a mortgage is not necessarily a good store of value.  The average home has compounded alongside inflation for the better part of the past 50 years, HOWEVER, those calculations do NOT take into account interest rates, and real estate taxes, most of which eat up any "store of value".  Also, houses depreciate in nominal terms.  A brand new house is usually worth twice as much as a 60 year old house.  Gold is gold.  Doesn't degrade or anything. 

 

[Guest Broxburnboy]

Brox-

 

My argument is that assets such as real estate and stocks are better stores of value over the long term.  Real estate is something that can be used; and its value typically is based off of the value created by the real estate in its highest and best used.  Contrast that to gold, which has some industrial uses; however, the value of gold far exceeds the value it creates in industrial uses.  It is valued at $1000/oz not because of its industrial uses.

 

Real estate improvements (buildings) depreciate at a fixed rate and requires income to offset the more or less fixed devaluation. This income is by no means assured, or similar to properties in different jurisdictions. Ask a homeowner in Michigan, California, Manhattan or Nevada about its use as a store of value over the long term. Going underwater on a piece of real estate continues to be the leading cause of bankruptcy in the Western world. Real estate remains a speculation, not a store of value.

 

Platinum is more costly than gold and does not have the range of industrial applications as gold, it's value is based on its scarcity and it has a ceiling on  value, because at a certain number, it is more cost efficient to use gold as a substitute in automotive catalysts. The point being that gold does have industrial applications.

 

At the end of the day, the argument is what constitutes money, the US buck or physical gold (beware derivatives such as GLD, which are subject to counterparty risk). History and the mathematics of monetary inflation would seem to favour the latter.

 

[Cardboard]

"The Federal Reserve, although publicly proclaiming the value of the buck, continues to hold the lion's share of the world's physical gold to back their currency."

 

Hmmm. Are you sure about that? Not a single independent audit has been conducted at Fort Knox since the Eisenhower administration despite many requests from various parties. Why is that? The Canadian Royal Mint admitted to have been stolen recently despite very high security measures. Even GLD conducts regular independent audits and often finds errors such as bar numbers being mis-typed in the log or found in a different vault location.

 

Also of interest, the U.S. government changed its description of Fort Knox gold in official documents from "gold reserves" to "deep-storage gold" then now to "gold and gold-swaps". What is going on here? A swap is a derivative for starters.

 

I know that I will sound like a mad gold bug, but the above is disconcerting to me. If there is nothing wrong with Fort Knox, then why creating such confusion? Transparency should be more than just for corporations. How was it called? Sarbanes-Oxley? We can't audit the Fed either. Although, the idea seems to be gaining traction at Congress with a lot of supporters, I will be surprised if that happens.

 

 

Relative to gold as an investment. I think that right now is a great time based on its fundamentals: cost of production, reserves, supply/demand. The Chinese government is even putting up adds on TV telling their citizens to buy precious metals and silver in particular since they think it is more undervalued.  

 

Realistically, who cares if it is not permanently "destroyed" by someone like oil or lead? There is a demand for it and no matter what you say, there will always be a small portion of the population hoarding it because they fear other currencies. It is just a fact of life and has to be part of the equation. The people from Mars may find it bizarre, but that is just how it is. Don't fight it! Gold is like any other commodity and I will be happy to dump it when the price makes the supply and demand equation less attractive.

 

For those who prefer corporations, gold outperformed Berkshire Hathaway during the 70's. So forget about a match of inflation. When it goes it really goes.

 

Cardboard

[hyten1]

here is my order of preference from the most prefer to least prefer not only as storage of value but something that can create additional value.  I agree with Buffett gold is definitely not the most desirable.

 

1. well run biz that can increase price greater than inflation (purchase at a huge discount to IV)

2. well run biz that can increase price greater than inflation (purchase at a medium discount to IV)

3. well run biz that can increase price greater than inflation (purchase at IV)

4. Real estate purchase at a price where you can generate good positive cash flow

5. fixed income/bonds/TIPS/

6. commodities (like gold)

7. fiat money

 

i dont quite understand the desire to hold gold, other than a short term trade.

[rranjan]

Most of the gold in the world has basically no practical use. In my opinion, Gold is not an investment its pure speculation. By speculating people can still make money if they get lucky ( find another speculator willing to pay higher price) but its not an investment.

 

Over very long term like 100-200 years gold might hold its inflation adjusted value but its impractical for individual investor to take 100 year of time span. It might ok for some trust or foundation to hold gold for 100-200 years if their aim is to protect the value but for individual investor with much less time span it might not work consistently.

 

[Guest kawikaho]

Anyways, I didn't mean to start another gold debate.  I just made an observation that the USD seems to be crashing.  I'm by no means a gold bug, but I do see intrinsic value in a precious commodity.  It's a cultural thing too.  No one in the world is going to wake up the next day and say, "LET'S USE ALUMINUM FOR JEWELRY!  YAH!!"  Not going to happen.  I got gold on my ring finger, and not tin foil.

 

 

[watsa_is_a_randian_hero]

here is my order of preference from the most prefer to least prefer not only as storage of value but something that can create additional value.  I agree with Buffett gold is definitely not the most desirable.

 

1. well run biz that can increase price greater than inflation (purchase at a huge discount to IV)

2. well run biz that can increase price greater than inflation (purchase at a medium discount to IV)

3. well run biz that can increase price greater than inflation (purchase at IV)

4. Real estate purchase at a price where you can generate good positive cash flow

5. fixed income/bonds/TIPS/

6. commodities (like gold)

7. fiat money

 

i dont quite understand the desire to hold gold, other than a short term trade.

 

I totally agree with this.  However, I would separate commodities to precious metals and industrial/energy commodities. I would rather own industrial/energy commodities, like oil or copper, than gold. 

[20ppy]

People place trust in gold due to back view mirror effect and their faith of it doing the same going forward. This so far works for reasons such as the fact that gold incidentally posseses many desirable and conveinient features as an investment vehicle. Value investors find it too fluid to evaluate gold, I am one of them. However gold will continue to be gold this way indefinitely, until and unless one of its nice features is broken some how. For example, if someone discovers some cheap process to produce too much gold then gold will stop being an investment vehicle in the current form. We all know the odds of that happening. So, gold at this point looks better than USD or some other fiat monies because no government is behind gold, it stands on its own merits.

[oldye]

Under the Obama white house, M3 money supply is currently growing at a nudge under 4% the lowest rate since 2004.  For comparison sake m3 growth was about 17% in the beginning of 2008.  Anyone else think Gold bugs sound exactly like real estate bugs did in 08?  The asset class is up 300% since 2003 vs a U.S dollar that has relatively the same buying power relative to other assets.  Far more buying power with respect to enterprises.  We live in a post financial trauma world, lots of people experience just enough stress that their investment psyches were damaged beyond rational though so they rush into safe haven investments such as gold. Even if you don't know the intrinsic value, is it so hard to imagine that inflation is already baked into this cake...

 

[benhacker]

Totally agree with Oldye on this one.

 

I think that Gold does have an intrinsic value... it grows slowly with inflation... and like many things that are heavily psychologically oriented, Gold trades WIDELY around it's center valuation.  @ $1000, it is tough to argue the merits of gold value. 

 

Silver is another story, and those who are looking for protection should be looking there.  I have continued to toy with my GLD/SLV pair trade but I'm too chicken.

 

Ben

[cheapguy]

What could be a list of recommended books to learn about History of Gold, specifically as an investment.

 

Just like Dow Jones index or S& P indexes history, I want to know about as much as possible about the historic prices of gold.

What factors helped gold retain its value, what periods gold prices went down (of course relatively) different manias and gold bubbles,,,...

 

what period gold was intrinsically low (if i can use that term) and was under valued...

 

 

Since gold as an investment has been there for much much longer than any currency, stock or stock market, I would be fascinated to read about it's investment  ups & downs.

 

 

So please recommend any books or multiple books (even if they cover a specific period, that is fine).

 

 

[Josh4580]

Gold by Nathan Lewis.  Best book on history of gold as store of value.

 

http://books.google.com/books?id=m82jozV3Qw4C&dq=gold+nathan+lewis&printsec=frontcover&source=bn&hl=en&ei=YVWnSoDVLdGDnQfLl9ywBw&sa=X&oi=book_result&ct=result&resnum=4#v=onepage&q=&f=false

[Guest Broxburnboy]

"The Federal Reserve, although publicly proclaiming the value of the buck, continues to hold the lion's share of the world's physical gold to back their currency."

 

Hmmm. Are you sure about that? Not a single independent audit has been conducted at Fort Knox since the Eisenhower administration despite many requests from various parties.

 

Cardboard

 

Yes there is reason to doubt how much gold the US actually has in Fort Knox. Gold is leased to several major banks (notably JP Morgan) to supply the deposits to back their gold derivative business. It is a good source of trading commissions for the bank and returns a small interest to the Fed. Like all bank deposits, the derivatives are levered and one bar of gold may be actually backing more than one derivative.

This should be a  major concern to all holders of derivative gold (like GLD, which does not  settle in gold, but US dollars).. like other forms of money, it is subject to a run on the bank, and thus counterparty risk.

Obviously JP Morgan and the Federal reserve believe that Gold is money and is appreciating against the buck (or should we say the buck is depreciating against Gold).

I have been adding to my own gold and silver stock portfolio for the last couple of years since return on T-Bills has dropped below the  rate of real inflation (see shadowstats.com for realistic calculations of CPI). Those who purchase bonds and stocks at the top of the market will suffer as the real economic depression (in the US) worsens over the next while and generate negative real returns.

 

"Gold is money, and nothing else"

  J.P. Morgan

 

[JAllen]

It seems more desirable to own a commodity that is being depleted not increasing in supply.

 

Have we reached peak production of oil????

 

I wasn't really referring to production more the fact that there are fixed quantities of both Gold and Oil on our planet.  Gold has an increasing supply (as in the hands of humans or proved reserves in the ground) whereas as the supply of oil(human or unknown/undiscovered) is fixed but we are slowly exploding 80M barrels per day of it.(although we might not have reached the peak yet of production or human supply).  In 30 years the Gold supply will be much greater and the supply of oil will be greatly reduced. 

 

I would also rather own assets that are required by a greater percentage of the population.  I've never desired/required any memorable quantity of Gold and us Americans don't pump Gold in to our gas tanks everyday to get to work. 

 

Of course you can't smuggle a barrel of oil out of Nazi Germany but we don't live in Nazi Germany.

 

These are just my thoughts and I don't think Gold is worth zero, of course, it's just never been very attractive to me and I would never own it for capital appreciation, maybe diversification though and even then <5% of NW.

 

Land seems much more desirable also to gold.  Most of it can produce cash albeit in small amounts but provide 5%+ real returns from timber (at least in the American South this is true).

 

As far as houses not being a good store of value right now one could argue the same thing for Gold in the 80s.