Explain gold investment to me

I remember back in the 80’s when gold was $400/oz an no one wanted it then it got up to $800/oz and everyone wanted to buy it. What ever happened to buy low and sell high?

I admit I had some 1oz silver rounds in highschool @$6-$8/oz. Sure I can beat myself up for dumping it when I got to college now that it is at about $17/oz, because even paying the premium for the rounds and not getting full bullion price, the return would have been about 10% per year. Not bad.

So the question is why should people invest in precious metals. Is it really a hedge against inflation? If so, why is gold above $1000/oz during a worldwide recession? Will it really go up to $1500 or $2000/oz once the economic crisis is over or is a recreation of the buy high/sell low frenzy of the 80’s.

Also, is it possible to short gold/silver/platinum? Suppose I believe the metal bubble will collapse in say a year. How do I make $ off that.

I’m not looking for investment advice (I have my ING advisor for that) but rather an understanding how metals fit into the whole stock/bond long term vs. short term picture.

Right-wing radio marketing of gold…start with this recent thread and see if it answers your question.

I did read that but I’m more interested in the investment end of metals not right wing and gold selling conspiracies. I’m especially interested in how to benefit from a drop in metal prices (are the puts in the COMEX futures?) and where they fit in a well-rounded investment portfolio (or even if they do) or if its a gamble sort of investment like junk bonds were.

Because gold is actually worth something.

In the Great Depression, people who had paper money in their mattresses retained their wealth. Those with money in the banks (numbers on a bank book) lost those.

You do buy low, sell high, but the question is: How HIGH is it going to go?

It may seems stupid not to buy gold when it’s $400 as you think (Maybe rightfully so) it’s not worth that. But then it goes up to $800. Then you start to think. I should’ve bought it at $400. But what if it goes up even higher. If it doubled in price why can’t it triple?

Metals have real worth because they have use. They’re not numbers on paper.

This is one of the problems we have in today’s service economy.

If you look at Ford Motors. They make cars. This has worth. Even if tomorrow everyone at Ford, from CEO down, lost their job, there is still a way of estimating cost. Cars have value as scrap metal. Office furniture can be sold to thrift shops etc.

Then look at Google? What is Google? It’s an idea that sells ads? How can you put a value on that? But people do, but there is no real to tell. There’s no bottom final line with a service product unlike a manufactured product.

side from which, gold is a traditional hedge against inflation. IN the U.S., and in many other countries around the world, people are really afraid that future inflation will wipe out their savings and investments. The huge amoutns of cash pumped into the economy have already weakened the dollar against foreign currency. You can buy gold, however, which will partly protect you against that since the the gold can later be sold. This may not be a good idea, but the goldbugs can and sometimes do make money at it.

but something else to keep in mind about gold is that gold is in some ways “stigmatized” as a vehicle for saving money for the real crisis (depression and similar) if you happen to live in a country whose government is willing to rob its people. Gold is pretty high on the list of things that the government could try to expropriate or forcibly purchase at fiat prices. Which, as you may recall, is exactly what happened in 1933 AD in the reign of Roosevelt II. And even if you actually hide it away in your mattress, selling it on black market can be difficult if the purchaser can hand you over for government persecution for the horrendous crime of illegal ownership of gold.

Which is why if those right wing people had a bit more sense, they would have invested their money into things that are not in any way stigmatized, that have an inherent worth and are not in a bubble. Like they say, a fool and his money are soon parted.

Sure, you can short gold. You can short shares of the GLD etf.

If you’ve got options approval in a brokerage account, there are some option strategies you can use. Buy puts on GLD or do various bearish spread strategies.

If you’ve got a futures account, you can go short on gold by selling futures contracts. There are also various options strategies available on futures contracts.

incidentally, I think South African rand might be to some extent correlated to gold. A fall of gold price might affect the exchange rate both directly (worsening their balance of trade) and indirectly (reducing confidence of foreign investors). After all, there are many reasons why South Africa’s economic future is dubious long term, but high gold prices serve to buoy them, much like high oil prices have historically buoyed some notoriously economically inefficient oil exporters. That being said, they do export other useful commodities and are not as dependent on gold earnings as the typical oil exporter is on oil ones.

Of course, every possible argument in favor of building gold (“It’s real, not just fiat money from a government!”, “It has actual uses!”, “It’s a diversification away from the stock market!”, etc) could also apply just as well to ANY metal. Not just gold and silver, but also aluminum, tungsten, copper, manganese, germanium, zinc, etc. Some of those metals are actually rarer than silver and some of them have far far more uses. So why did gold and silver skyrocket in value but no other metal kept pace (and most even fell)?

Why invest in gold? Because people have always invested in gold. It’s really that simple – it’s completely arbitrary that we picked gold instead of germanium or tungsten. You may hear someone say to invest in aluminum or copper as a commodity play, but no one ever advertises on fox news that aluminum and copper are “hedges against inflation in these uncertain times” like they do with gold. But what’s the difference? Honestly, I’ve never seen any reason to buy gold (as opposed to any other metal) other than “it’s valuable because people have always thought it was valuable”.

But that could be said of anything. Without people who value it, nothing has value.

Sure, and that’s my point. I’m just saying there is nothing special about gold. In the modern world, there’s no economic reason that gold should be a better investment than rare seashells or pearls or germanium. There’s a type of petrified wood from Africa that is about as rare as gold but nobody invests in that. Diamonds are considered valuable (in the sense people pay a lot for them) but nobody thinks of them as a hedge against inflation. Other rare metals, such as platinum have increased over the past year, but not nearly as much as gold as.
So what makes gold special? I suggest absolutely nothing. I suggest any rational investor who thinks gold is a good buy ought to be equally willing to buy most other commodities (like steel and copper) too.

Historically, a great deal of high-denomination coinage has been made of gold, and high-denomination paper currency was redeemable as gold. So it’s not thought of as merely another commodity, but as actual money. In fact, it’s a symbol of wealth itself, far more than steel or copper of equal value.

Yes, there is - its because gold (up until very recently) has had little practical use in any application, was known to ancient history, and cannot be cultivated

Some do, actually. Not the stuff that has been reduced to jewelry, though.

No, because steel and copper are actually used commodities, where the industrial application (or non application) drives the price. Typically the price of gold depends on speculative/investment decisions, not on industrial decisions.

So it’s special not really because of “absolutely nothing” rather that there’s “nothing” else to do with gold in the quantities bought and sold for investment/cultural/store of value purposes

Huh? From geology.com:

Gold is considerably easier to find and refine than, say, aluminum. It doesn’t tarnish, which is an attractive feature, it has a low melting point, and is very malleable, which makes it very easy to work with.

Yes, because they had electricity in medieval times.

p.s. “usefulness” of a metal is extremely subjective and task-specific.

In ancient times, a gold nugget was just a pretty rock. People soon noticed that you could shape that pretty rock in all sorts of interesting ways–gold is malleable, ductile, etc, etc. So gold was used for jewelry because it could be shaped so easily.

Then people started using gold as a key good. In a pure barter system, if you have baskets but want chickens, you have to find a guy who has chickens but wants baskets. A tedious process. But what if you have baskes, and you trade them to someone for cowrie shells. Then you take the cowrie shells to the chicken farmer and trade him cowrie shells for chickens. Cowrie shells are therefore a key good. Yes, they can be used for decoration and such, but people accept trades of cowrie shells even when they don’t want cowrie shells, because they know they can trade the cowrie shells anytime for they goods they do want.

And these key goods are the first type of money. Everyone has heard of cigarettes being used as money in prisons. Other key goods used as money are cacao beans, cattle, cloth, whiskey, and so on.

And gold and silver turn out to be very useful key goods. They aren’t easily destroyed, they are divisible into any size wanted, they are portable, and so on.

So gold has an ancient connection with money, because it could be used as money across continents. You could take gold ingots, and walk all the from Venice to Beijing, and find people willing to trade you useful goods for those lumps of gold.

And you find during the Spanish conquest of the Americas vast amounts of gold were shipped from the conquered lands back to Europe, and the Spanish imagined they were literally importing money. But of course, gold isn’t money, it is just a good that can be used as money. So when you import vast amounts of a particular good, supply and demand should tell you that the price of that good will fall dramatically. And so the value of gold in Spain fell like a rock. Another way to look at it–if you take the notion that the value of gold is fixed–was that there was tremendous inflation, and the price of every good in Spain (except gold) rose dramatically. And so the importation of vast amounts of looted gold didn’t make Spain permanently rich, because the more gold they looted the less gold was worth.

So, back to the notion of “investing” in gold. Thing is, investing in gold is just like investing in pork bellies or frozen concentrated orange juice. You look at the price of the commodity, guess whether the price of the commodity will be higher or lower at some point in the future, and bet accordingly. Doesn’t anyone watch “Trading Places” anymore? So if gold is at $1000/oz, and you think the price of gold will increase, you can buy gold to sell at a later date. Or you can sell the gold now, and arrange to actually deliver it later, when you think you can buy it for less.

This is how people make money on commodities. But for every buyer who thinks the value will increase, there’s a seller who must think the value will decrease, otherwise why are they selling?

So if a company that sells gold is telling you that buying gold today from them at $1000 is such a good investment, why are they selling you the gold instead of keeping it and selling it later? Of course, there are plenty of people buying gold right now who don’t think gold is particularly more valuable today than yesterday, but they think that other people think gold is more valuable. So they buy gold even though they think the gold is priced very high, because they think the greter fool will buy gold tomorrow at very very very high prices.

And this is what is known as a speculative bubble. The price of the commodity rises and rises, and people buy in because there’s this dramatic rise in prices which leads them to think they can sell tomorrow at even higher prices. And eventually it all comes crashing down, and the people who bought at the top lose everything, depending on how the purchases were made. Lots of times these purchases are made with borrowed money. If you buy gold at $1000/oz, and tomorrow it crashes to $500/oz, you’ve lost half your money. But if you borrow money to buy the gold, then you could lose everything and more.

It seems to me that the current run up in gold prices is a classic speculative bubble, that will collapse at some point. That means if you buy gold today–as an investment–you have to plan on selling it before the collapse if you want to make money. But when will the collapse happen? No one knows, and it seems to me that the top of the bubble market is impossible to predict, even for insiders. Since we know (or think we know) the bubble will collapse at some point, that means that gold is not an investment but rather a gamble.

And if your strategy is to buy and hold the commodity, thinking that gold will just continue to rise and rise and rise forever, well, that doesn’t make much sense either. When are you planning on selling the gold? If you aren’t planning on buying low and selling high, then you aren’t investing. You’re collecting. Nothing wrong with collecting gold, but if you’re a gold collector you might not want to increase your collection at a time when gold prices are rising like crazy–you want to buy when gold prices are low.

Of course, all this depends on the notion that gold is in a bubble. If you disagree, if you think that the price of gold will permanently increase, then feel free to buy gold now while you still can.

But why would gold be worth so much more now than it was a year or two ago? The global financial crises? But that doesn’t mean that gold is more valuable, only that certain assets are worth less, like stocks of companies that are going to go bankrupt. Even if you think currencies like the dollar or the euro are going to worth much less in the future, that doesn’t mean exchanging your dollars for gold is a good idea, since there are any number of other goods that you can exchange your dollars for. You shouldn’t look at the expected value of gold compared to the 2011 dollar, you should look at the value of that gold compared to any other good you could buy today. Maybe gold will be priced at $10,000 an ounce, but another way to look at that is just that the value of the dollar collapsed by 90%. If gold increases price by a factor of 10, but other goods increase in price by a factor of 11 or 12 or 13, then the value of gold has actually fallen. In other words, if you expect inflation to wipe out the value of the dollar, don’t hold dollars. But that doesn’t mean holding gold is a good idea either.

Gold is one of the most useful of all metals due to a number of properties. It is the most malleable and the most ductile. It can be rolled into the thinnest sheets of foil and drawn into the finest wire. There is some in the computer you are using right now.

If you have ever watched any part of the space program you see gold foil used on the equipment. They don’t use it just because it is pretty.


OP back
so it seems like gold/silver is like any other commodity and is therefore speculative and not part of an investment portfolio per se (guess I won’t be getting that gold Roth IRA lol). I may now look at some put options for gold futures for when the bubble bursts.

Gold is very much a part of my portfolio. I’ve been putting $100/month into a gold mutual fund since the 80s. I’ve already redeemed more than I’ve put in, several times. I also have a collection of silver and gold coins that are now worth more than my house. And even if the bubble bursts tomorrow, I’ll still be ahead.

And no, I’m not a gold-crazed right-winger.