I quote myself:
The author also debunked the notion that gold is a particularly good hedge against inflation: it isn’t.
Previous threads:
Is there a GQ response to the right-wing marketing of gold?
Why do ultra-right-wingers flip out over gold?
I predict: One year after the Fed funds rate hits 3.75%, gold will be worth less than it is worth now ($1561 on April 11). (Also the Fed funds rate will hit 3.75% some time in the next 10 years, possibly as soon as late 2016 or more likely 2017.)
Well, at the moment it appears that the people who believed they had to invest in gold because the world economy was about to collapse were RIGHT about the problems, but absurdly wrong about the solution.
The prices of gold and silver have dropped dramatically of late! This is the equivalent of a 1929 stock market crash for gold holders.
Many of the people who invested in gold did so because they ASSUMED gold would only get more valuable as nations around the world went broke. What most never considered was that nations going broke might have to start selling off their own stores of gold, leading to a severe DROP in gold’s value.
Market Vectors Gold Miners ETF - GDX might be close to what you’re looking for. It holds a portfolio of gold mining companies from around the world. Over the past ~7 years gold mining companies have drastically underperformed relative to gold prices.
Here’s a quick chart I threw together showing the relative underperformance of GDX vs. GLD.
Glenn Beck’s audience must be livid at socialist Europe right now. All the better to distract them with. I do feel sorry for all the elderly people who jumped on the precious metals bandwagon near the end and probably lost a mint.
I’m almost kicking myself for not buying put futures in gold when it was up in the $1900-2000 range. Thankfully, I would have taken out a 2 year contract, but I would have been buying the future at $1700 so I would barely be in the money now after the price and fees. I’m just hoping it doesn’t continue to plummet or I will definitely feel regret.
Thank you – at least someone understood my question. 
If I could nitpick, the graph would be much more informative if GDX and Gold were both shown – not just their ratio – and more than seven years shown.
BTW, one reason my question asked about stocks and stock derivatives rather than commodity derivatives is that the latter often requires a separate broker – inconvenient for low-activity little guys. In hindsight my aversion to commodity trading may have been a big mistake: In the 1990’s I had a strong feeling the dollar/euro ratio would fall, scoured mutual funds looking for an appropriate bond fund, ended up with an investment which would have been hugely outperformed by Euro banknotes under the mattress ! :smack:
why not just buy put options on something like GLD?
Here’s a chart of the gold miners index that GDX tracks (red line, right scale) and the continuous front month gold futures contract (blue line, left scale). It appears that the gold miners index was only created around 2005 (or at least my provider only has data back that far).
Interesting. GDX seemed to do a fair job of tracking Gold until the 2012-13 plunge. Any explanation? Noting also the plunge and recovery 2008-09, GDX almost seems to leverage on the pessimistic side. Stated differently, shorting Gold and buying GDX might be a good move now, if the pattern continues. (Let’s be clear: I’m not going to do that, and the “advice” here, if you want to call it that, is worth no more than than I’m charging for it. 
)
You lost me. GDX plunged right along with gold over the past week.
edit: or am I not understanding you again?
Safety and return on investments are opposites. See the efficient frontier on the capital asset pricing model.
You don’t have to get that complicated. The efficient frontier is really just a measure of optimal diversification for a given level of risk and therefore return or beta. The idea of risk varying inversely with return is much more basic. I actually took Harry Markowitz’s course on portfolio theory, but honestly, reviewing the wiki entry, not much looks familiar.
Wow, Gold is certainly going down the toilet awful fast for 'an investment that never loses it’s value".:dubious:
I didn’t consider the last week – I looked only at the graph Trom posted, which AFAICT has no clear end date. The “move” I suggested was a hedge – buy one of a pair of correlatees and sell the other. In 2008 both Gold and GDX fell temporarily, but GDX fell much more – I’ve no idea if there was any causal relationship. Assuming the pattern continues (an assumption I do NOT make, I was just commenting on the graph) one might predict that either (1) Gold and GDX will continue to fall, or (2) Gold will recover, and GDX recover more sharply.
I’m sure it was clear from my post that I did not claim the past predicts the future, nor that the causal relationship between Gold and GDX is clear. Given that, and that I’m certain you understand the elementary concept of hedge, Yes, you seem to be misunderstanding me.
It had a similar drop in 2011 although from a much higher high of near $1900 and still rebounded, but not to its previous highs.
Oddly enough, a lot of people are looking at this as a buying opportunity.
There are any number of confounding factors that may have contributed to a divergence 5 years ago. If you don’t understand the rational behind it, it’s not a hedge.
Financier Barry Ritholtz: “What are Gold’s Fundamentals?”
What Are Gold's Fundamentals ? - The Big Picture
Now actually gold has some minor industrial uses and some larger cosmetic ones. But the lion’s share is as a fairly dubious store of value as well as hundreds of tons owned by governments and subject to their whims.
Yet gold retains its allure among the nutters and the rubes. Mr. Ritholtz elaborates on their thought patterns:
**The 12 Rules of Goldbuggery **
…2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of Central Bankers and politicians. Its a conspiracy, and we know who the guilty parties are.
… 8. Never admit that Gold is essentially a sucker’s bet: Never discuss how in the last century, gold has run up only be to trounced in repeated massive sell offs (always blame rule #2 for this). Do not discuss how this has happened in 1915-20, 1941, 1947, 1951-66, 1974-76 1981, 1983-85, 1987-2000 and 2008.
That’s all true, but let’s put it into perspective. Take a look at the CPI for the US from 1950. You’ll see that 1982 is the baseline and =100 or 1 dollar. So 1950 is about 20% of that.
In 1982, the average price of gold was $375. In 1950 it was about $35 or about 10% rather 20%. Projecting forward, a “dollar” today should be about 240% of 1982 so gold should be $900 per ounce.
Obviously we’re off by quite a bit on both ends, but the market isn’t pulling the value of gold completely out of its ass.
After looking at the FRED chart a second time, it seems that the baseline is actually 1982-84 but since the average price of gold swung from 375 to 424 to 360, it should still work out more or less the same for our purposes.
At the risk of being tedious, I feel obliged to critique my own critique. If you compare the CPI graph to the Kitco graph, you’ll note that the while CPI prices increase fairly steadily throughout the period, gold prices do not. Rather they are stagnant and in fact drop in late 90’s and early 2000’s.
They only spike once you get into the vicinity of the financial meltdown - around 2008-9. This is certainly one argument in favor of the idea of gold not having an intrinsic value however one would also have to look at supply and demand factors to be sure and I suspect there might be some interesting history there.
So why the spike in the the 08-9 time frame? One look at a chart I’ve often referenced tells that story - the fed’s rapid expansion of the monetary base. People bid up the price of gold in anticipation of inflation.
