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Old 07-22-2001, 06:48 PM
HeyHomie HeyHomie is offline
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I'm constantly hearing investment firms hawking gold. Mostly I hear it on AM talk radio, bastion of conservative thought that it is. Apparently, distrust of The Man and fear of economic ruin are hallmarks of conservative investing. To hear these investment firms tell it, the economy is going to collapse any minute now, and everyone who doesn't own gold is going to think that the Great Depression was the Good Old Days.

Anyway, I understand that an ounce of gold is currently worth less than what it costs to mine it, meaning that at current prices it's a bargain. However, just because it's a bargain doesn't mean that it's a good investment. I mean, gold could some day shoot up to $600 or so an ounce, but I'm not holding my breath. Those bamboo chopsticks that came with my meal at Sushi Yum-Yum today are worth less than what it cost to cut them, but that doesn't mean that I'm going to shift all my investments into bamboo because some day it might be worth something.

Also, this business of the economy tanking: I remember back in the early or mid 80's a man by the name of Larry Burkett had a book out entitled The Coming Economic Earthquake. In it, Mr. Burkett basically put forth the theory that by the year 2000 the world economies would collapse and people everywhere would be starving to death. However, in reality, for the U.S. economy to collapse a lot of things would have to go wrong at once, and aren't there mechanisms in place to prevent that from happening?

So, long-story short:
  • Is gold worthless, relative to its cost?
  • Is gold a good investment, all things considered?
  • Why is hawking gold such a big deal on conservative talk radio (my theory about paranoia notwithstanding)?
  • Is the economy going to tank?
  • If the economy does tank, will those who own gold be able to ride it out?

TIA
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  #2  
Old 07-22-2001, 07:36 PM
lucwarm lucwarm is offline
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This is probably headed off to GD, but I'm happy to throw my thoughts in.

First, the problem with gold as an investment, is that it doesn't throw off any income, such as a CD, or even stocks (through dividends and/or share repurchase plans).

So in many ways, gold is a speculative investment -- i.e., you're speculating that in the future, somebody will be willing to pay more than you did. Of course, this problem didn't stop people from investing in the "dot coms," which were (arguably) highly speculative investments.

The second problem is that over the past few decades, commodities, such as gold, have generally gone down in value. This came as a surprise to many, since commodities like gold exist in finite quantities. Nevertheless, extracting, mining, and refining technologies continue to improve (?) and from today's perspective, it would surprise few if gold went further down in price.

On the other hand, gold may be a useful hedge. For example, if next week the North Korean army decided to occupy Seoul, your shares in AT&T would go down, but your Krugerands would go up.

If the economy seriously went south, gold would be a useful thing to have invested in, but you'd have to have bought a good amount for it to make a difference.

As far as why certain right-wingers are so pro-gold, I would venture to guess that gold is heavily intertwined with ideas of individualism, tradition, and weaker government. In the olden days, many governments were on the "gold standard." Usually this meant that the government had to keep gold around in proportion to the amount of paper currency it printed. One effect was that the government was limited in its ability to monkey around with the money supply.

I daresay that most modern economists think that limited government interference in the money supply can be a Good Thing, but many of the right-wingers of course are against this sort of interference.

Finally, will the economy tank? Nobody knows for sure, which is odd since the economy is largely under our (collective) control. And yes, certain people have been predicting doom and gloom forever.

My guess is that the (U.S.) economy will get at least a little worse before it gets better. The reason I think so is that we've been through a fairly large stock-market "bubble" experience. It's very common for economies to slow down substantially in the wake of such "bubbles."
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Old 07-22-2001, 07:41 PM
samclem samclem is offline
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I am a coin dealer for a profession. Have been for 30 years or so. We sell lots of gold. Our customers buy it for many reasons. Here are some of them. Hope that some of my ramblin's answer your posted questions.

Gold is not worthless, relative to it's cost. YOu can currently buy an ounce of physical gold from us for $270 US. This is near a 20+ year low. At this point, it may not be a good investment, but it probably is close to a low point, especially relative to what it cost to mine, etc. So your downside is probably negligible.

Is gold a good investment. Probably not. Since most of the world's major powers have sold off their excess gold reserves over the last 5 years, what do these types who tout gold know that most people don't? And you'd better believe that major countries' holdings were a major factor in holding the price up.

Why conservative am radio? I love it! The conservative, often Christian, radio stations have an audience that believes implicitly everything that they hear on that program. So, if I was a heathen, bent on making a buck, I would advertise on their show in a heartbeat. I would advertise something that fits into the theme "shun the world, go back to old-time values, this modern world will collapse" , you get the idea. And gold is a miracle product for such an audience. YOu go back and tell them how the guv'mint confiscated gold in the 30's under that evil Rosenfeldt, and tell them it's gonna happen again. And you just happen to have some pre-1933 dated gold coins which can't be confiscated by the Feds. And you will practically give them away to the listeners of this particular station.

We deal with this kinda' crap each and every day.

[my typical day] Phone call. "hello. Q. Do you sell gold? A:yes. Q:how much is an MS63 $20 gold coin? A:We sell them for $425. [caller]Oh! Well, I am being offered them for $525. A: well, that's $100 too high. you get the idea. And I hear of much worse. They pick on Christian radio listeners.

TRhe cances of the US economy "tanking" is about 15%, IMHO. Oh, by the way, what would you define "tanking" as?

If the US economy tanks, gold will not save you. A paper dollar will buy just "that much more" than it does today. Remember, in the depression in the 30's, people that had paper dollars could purchase just as much as someone who had actual gold dollar-denominated coins. They never quit accepting paper US dollars.
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Old 07-22-2001, 07:59 PM
Dr. Lao Dr. Lao is offline
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Quote:
Originally posted by samclem
If the US economy tanks, gold will not save you. A paper dollar will buy just "that much more" than it does today. Remember, in the depression in the 30's, people that had paper dollars could purchase just as much as someone who had actual gold dollar-denominated coins. They never quit accepting paper US dollars.
Wasn't there a gold standard back then? Anyway what people are really worried about is paper money becoming worthless because people have lost faith in the government's ability to back it. So, we aren't talking about a mere depression but total collapse of our monetary system. It is believed that only gold will retain any value as currency.
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Old 07-22-2001, 08:16 PM
samclem samclem is offline
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Yes, there was a gold standard until 1933/34 in the US. After that date, your bills could not be exchanged for an equivalent amount of face value gold coins. If, in 1932 you put $500 in gold coins under your matress, and your twin put $500 in banknotes under his/her matress, in 1935 you each had the same amount of money. Of course, if your $500 was in a bank account, and that bank failed, well, you were SOL.

Thx, Dr. Lao I forgot my sales pitch. "Step right up. The US monetary system is gonna collapse any day now, and only gold will get you thru." And we just happen to have some gold to sell you......

Two years ago it was Y2K. We made big bucks off of the conservatives. Sold tons of gold, at a fair price by the way. Am now buying it back from conservatives who bought from some of those radio advertisers. "You paid how much" *Note: this is said to the folks who bought it off the radio, not from us.
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Old 07-24-2001, 05:26 PM
toadspittle toadspittle is offline
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Here's something I've always wondered:

Since coin dealers sell gold to you at a higher price than it's worth, and buy it at a lower price than what it's worth (so they can make profits), how much does the value of gold need to increase for you to break even? (exchanging cash for gold and then gold back for cash)

Seems to me that buying physical gold (not futures, etc.) would only be useful in a situation where the local currency goes straight to hell (i.e., we wake up one day and learn that, due to our crappy economy, a loaf of bread now costs US$100).
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Old 07-24-2001, 07:53 PM
MrDeath MrDeath is offline
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toadspittle: Given the usual markups on gold (not very high relative to other coins - after all, gold is a commodity), about a 20% rise should let you break even. Given that today's spot price is $269.50, you should break even if it were to rise to 310-ish constant July 24, 2001 dollars, i.e., $310 after adjusting for inflation. When will this happen? Wish I could tell you. But then, if I could, I wouldn't
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Old 07-24-2001, 09:00 PM
Qwertyasdfg Qwertyasdfg is offline
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If everyone else is starving, you can own Fort Knox and it won't mean anything. If the economy crashes, nobody will be buying gold, and its price will fall further. And you can't eat gold.

To prepare for a massive famine, it would be better to stock pile food that will keep for a while, and pleanty of water.
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Old 07-24-2001, 11:10 PM
samclem samclem is offline
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toad I can only give you our buy/sell spread in Northern OHio. I have reason to believe it would be similar in any decent size city.

A one ounce gold coin, on today's spot gold market of $269. we would sell you for $279. We would buy one from you at $259. This is less than a 10% markup, and involves two transactions. So, it is working close on a physical product buy/sell. Buying futures on paper, over the phone is something diff. and for the big boys.
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Old 07-25-2001, 02:17 AM
Tedster Tedster is offline
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Circle The Wagons

To be completely honest, the "you can't eat gold" mantra isn't fair, although paper may in fact have more nutritional value, but not much. Still, "you can't eat dollar bills" doesn't have the same ring to it. (No pun intended.)

As a coin collector since I was a kid, I've heard all the reasons to own the stuff. It's considered *tactical*; I don't know how else to put it. It's value is intrinsic, rather than being forced upon us by rule of law. Why should a piece of paper that says "20" be worth more than one that says "10" on it? It's the same size, color, etc. The government says so. ("Fiat") (That's the line of thought, not mine) Even if you don't think it's a good investment, the old gold coins are beautiful- a $20 gold piece has a heft and lustre that is unique.

Long term analysis of financial investments have consistently shown that Stocks are the best long term place for your money, easily outstripping gold, precious gems, art, real estate, etc etc.. Gold has been recommended as a hedge against economic calamity, but it hasn't performed up to par as of late. The Gulf war is one example where gold languished. It's been my experience that whenever I buy a specific commodity or stock, it's time to sell, and vice-versa.

I'd argue that the US dollar has replaced gold as the world wide standard of value. Fully 70 per cent of the cash extant is outside the country. Third world countries love US greenbacks because they can count on the dollar holding at least some of its value. Gold would come in a distant third or fourth compared to stable currencies like the Yen, D-mark, Swiss franc, etc. .

Still, gold is relatively cheap and it's nice to have a few pieces of "real" money around in this age of electronic bytes and virtual money. The old Morgan dollars, walking liberty halves and gold coinage are gorgeous mini works of art. Coin collecting is a good hobby and is worth your consideration. Whatever you do *Don't* buy off the radio, or from magazines that aren't strictly coin related. Do it because you enjoy old coins as a hobby, not because the world may or may not end tomorrow.
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Old 07-25-2001, 12:52 PM
The Hamster King The Hamster King is offline
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As I understand it, the Gold Standard is actually a crude form of governmental fiscal discipline. Tying the money supply to the amount of a particular commodity that the government holds in a vault somewhere is strong protection against currency devaluation and hyperinflation. If every dollar must be backed by a few grams of gold the government can't decide on a whim to print lots of money and wreck the economy. So if you're an ultraconservative who's highly suspicious of the federal government, you might be pushing for a return to the Gold Standard in order to reduce the power of the government to mess with the economy.

Unfortunately, there are a variety of problems with this approach:

1. Sometimes it's a Good Thing to have the government mess with the economy. You'll notice that the U.S. went off the Gold Standard at the height of the Depression. If an economy is stagnating one way to get it going again is to increase the money supply. A little bit of inflation makes people feel better off in the short term and is a good spur to the economy by getting them to spend more money.

2. The amount of physical money in circulation isn't as important as it used to be. These days when the government wants to boost the economy they do it by dropping interest rates, which has the effect of increasing the *virtual* money supply (i.e. credit). (You'll notice that the Federal Reserve was also a product of the Depression.) Tight controls on the physical money supply might have worked in the 19th Century when the use of credit was miniscule, but it's not clear that it would work today.

3. Having lots of people investing in gold (or tulip bulbs) is bad for society because, as other posters have pointed out, gold (or tulip bulbs) does no work. Money invested in gold is money taken out of circulation -- it's very much like burying your money in a coffee can in the back yard. It's far better for society as a whole to have that money in a bank or the stock market where it's financing the labors of others. One of the other reforms of the 1930s was the federal government's purchase of vast quantities of gold to get it out of private hands in order to force that wealth back into the economy.
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Old 07-25-2001, 01:21 PM
Sofa King Sofa King is offline
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I can't help thinking that there is some curly-maned, hairy chest exposed, bell-bottom and oversized rose-colored glasses wearing guy who is still waiting to make a killing on the two hundred pounds he got hold of at $525 an ounce back in 1979. That's the last time I remember where gold was a good deal--to those who already owned it.
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Old 07-25-2001, 06:22 PM
Duck Duck Goose Duck Duck Goose is offline
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Dang!! Sofa King beat me to it. Hey, remember the guy who said that we should all stock up on silver coins (real silver, not sandwich coins) because when the economy tanked, you'd need them to "barter" for food, because obviously you wouldn't want to use your gold for small purchases like food. But silver coins would be perfect. I particularly recall that he confidently predicted that a head of lettuce would probably go for a dime.

Ah, those were the good old days. The Seventies. What a world. Things haven't been the same since the BeeGees broke up.
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Old 07-26-2001, 12:49 AM
Tedster Tedster is offline
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Depression Era

Pochacco, that's not entirely correct. All gold coins and notes redeemable in gold, contracts and so on were recalled by the government in 1933. As a nation, we didn't go off the gold "standard" as such, it was merely illegal for US citizens to have in their possession (technically)

The pegged price of gold was then revalued upward from around $20 paper dollars to the ounce to $35 paper dollars to the ounce. Our international obligations were still payable in gold (not citizens, but foreign central banks) and several nations after the Bretton Woods conference in 1944 pegged their currencies directly to the US dollar, and indirectly to gold.

This arrangement worked fairly well until the late 1960's, where over the years, the federally mandated "backing" of gold was reduced to 25 per cent, and then severed entirely by President Nixon in 1972 or thereabouts. He didn't have much choice, as central banks, particularly the French, were adamant about exchanging their dollar holdings for physical, delivered gold. There was a net outflow of our stockpile which could not be defended. The arrangement was supposed to be a two way street- Treasury stood ready to buy and sell gold at $35 an ounce, but no one wanted any dollars at that price. There arose a "secondary" gold market higher than $35/oz and President Nixon closed the "gold window" to other nations, declaring a US dollar was exchangeable for a US dollar, period.
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