Precious Metals Investment Thesis Without Emotion (Is It Possible?)

Great Debates
1

I’m not sure how good an investor I am. I’ve lost money on some investments, made it on others.

So far, though, I have stayed largely away from gold and silver, and the reason is that I can’t seem to cut through the polarizing, emotional, often angry divisive nature of the various camps (as evidenced on websites, financial press, newsletters).

In case you don’t know, people tend to be either strongly bullish or strongly bearish on precious metals, and the markets tend to be very cyclical.

Very generally, there is a perma-bull community on precious metals, who’ll tell you “gold is the only real money, gold never decays, gold is the one asset that can’t be printed into existence.”

The precious metal skeptics say: “Gold doesn’t pay interest or premiums, the fact it never decays means it can never be too scarce, it’s no more real money than any other store of value.”

The two camps are generally (very big overstatement/inexact comparison) on different sides of the political aisle. Certainly conservatives, anti-government types, etc. tend to like gold a lot. Liberals, Keynesians, internationalists, think of it as a barbarous relic (and are not hesitant to invoke its popularity among the black helicopter crows as a reason in itself for doubting the pro-gold thesis).

I’ve got people telling me to put half my net worth in gold and silver, and others saying we’re headed for the latest in a long line of massive speculative bust outs.

Is there any way to separate the investment analysis from the emotion/partisanship, or is there something intrinsic in precious metals that brings out the abolutist, emotional reaction in everyone (in which case, I think I’ll stay on the sidelines)?

2

The big advantage of gold is as a hedge, because it’s countercyclical. So if you think the economy is getting worse, buy gold. If you think it’s getting better, sell gold. I don’t know if I’d buy gold right now, just because it’s pretty high (although it’s currently dropped $9 an ounce today), but there’s nothing wrong itself in buying gold. Just realize it isn’t a miracle investment.

3

Investment advice aside, um… no. Liberals see gold as a commodity, just like any other.

4

Sort of – but people who like gold tend also to like the gold standard, and the gold standard isn’t readily compatible with a large interventionist government.

BTW I don’t mean to imply the Left is obsessed with gold, fairer to say the Left would be sort of turned off by that significant portion of the Right that believes leaving the gold standard was the first step on the road to Hell.

5

Okay, I’m with you there.

6

Right. I honestly can’t recall anyone with a countervailing politically based opinion on gold. There are people who believe gold is a good because it fits their political point of view and people who offer sound financial advice. Sound financial advice generally ranges from “the ultra pro gold people are wrong” to “the ultra pro gold people are really exaggerating what a good investment it is”.

I’m sure one could find an example of a politically motivated anti-gold point of view but there’s just so many non-poltiical opinions on gold. It seems wildly incorrect to set up a dichotomy, when the amped up opinionated investing is really just coming from one side.

7

I don’t see anything in your post about the merits of investing in gold from a strictly financial point of view. It all seems to be based on various opinions you have gathered from message boards.

I wouldn’t invest more than 10% of your assets into any one investment.

8

That’s kind of my whole point. It’s hard to get strictly financial analysis.

The partisan (not politically so) viewpoints contain a quasi analysis to the extent that gold skeptics point out that there’s lots of gold out there, it’s not going anywhere, and the most common thing people can think of to do with it (other than jewelry) is, as Warren Buffet says, put it in a big hole in the ground in Kentucky, which doesn’t seem very useful from some angles.

9

You saw the part of my OP that said –

If you want, I can make my dichotomy thusly – IME most passionate gold bugs are distinctly on the right, and leave it at that. BTW, I’m mostly on the right, and one of my reasons for posting is – I’m just not sure I buy it.

10

Now, if by gold you mean that immortal metal, impervious to corrosion or devaluation, praised by poets, Kings and paupers, with incomparable ductility, conductivity, density and worth, which makes ladies swoon and businessmen take joy, then I say hurrah for it and encourage you to buy and hoard as much as you can.

However, if by gold you mean that overvalued element touted on the TV and Internet which delivers no dividends, but rather requires constant vigilance to protect from thieves, for which economical substitutes exist, and which may lose its artificial price at any time, then I say fie on it and encourage you to sell your holdings before this mad market comes to its senses.

11

As it happens, this month’s Kiplinger’s magazine had a piece in which two of their editors, on opposite sides of this issue, explained the pros and cons of investing in gold. As far as I can see, it was entirely from the financial perspective.

12

It’s a fact that the value of gold sometimes goes down. In the early 1980’s it topped $800 an ounce for a time. Three years after that it was well below $300. So keep that in mind if anyone ever has you leaning towards investing a large part of your net worth in gold. For sure, putting a small amount of money into prescious metals isn’t a bad idea. I currently have about $3,000 in a gold ETF. However, I understand that it’s there was a hedge against economic disaster, not as a profit-making strategy.

13

One aspect to consider, the gold-bugs are suffering from a heavy case of confirmation bias. They attribute a great deal of mystical political properties to gold, and since it has been going up they (wrongly) assume that all of their mystical political beliefs are confirmed.

You are correct to want to hack through the thicket of mystical political talk and focus on the financial investment aspects. That said, there is money to be made in foolishness - and I suspect a lot of people have made a lot of money out of the recent gold bug foolishness. If that is your strategy (making money from foolishness) the trick is to know when to get in and when to get out.

If, however, your strategy is prudent investment…IMHO it’s kinda late, the market on gold is rather played out.

14

There you go. A perfect balanced sample.

15

Investment in gold only makes sense if you’re a jeweler, or in some other position to turn the raw material into something more valuable. When you invest in land, you increase the value of the land by building something on it, or growing crops on it, or living on it, or renting it out to someone. When you invest in a stock, you’re trusting other people to increase the value, by building infrastructure to sell more of whatever it is they sell. When you invest in gold, though, you’re not increasing the value at all: You’re just burying your talent for fear that you’ll lose it and the master of the house will be angry with you. Which means that it’s not really an investment at all.

16

There have been a number of gold threads in the past. Here is one:
http://boards.straightdope.com/sdmb/showthread.php?t=539805&highlight=gold
I quote myself:

Here’s some investment advice:

  1. Try to avoid cranks.

  2. Get thee to Vanguard.

  3. Bogleheads is a good investment message board.
    Gold can be a serious investment: gold is a lot like a foreign currency that doesn’t pay any interest. It’s a mediocre inflation hedge, at least when compared with inflation-protected bonds. If you understand all that, and are familiar with the investment concept of “Beta”, there’s no reason why you couldn’t allocate part of your portfolio to such exotic investments as Malaysian currency, porkbelly options, orange juice futures and gold. Me, I’ll stick with stocks and bonds, mostly via index funds with low expense ratios.

17

Economic collapse does tend to take out the government along with everything else, true.

18

I’m not familiar with that term (though I might know of the concept). Explain?

19

Well my point is that gold is a specialist investment, with worryingly widespread appeal. Hey that’s fine if you’re a hobbyist, but you might want to take Investments 101.

[hijack] A skilled risk-averse investor won’t necessarily avoid high variance investments. What a risk-averse investor desires is a low-variance portfolio. And he can build that from high-variance investments if those investments are negatively correlated. So emerging market stocks, however volatile, can be sound choices to the extent that they go up when other parts of your portfolio go down.

Unfortunately, it’s tricky to find investments with positive expected returns that are negatively correlated with the stock market (though a portfolio of short sales might qualify). So in practice, one looks for low correlation investments.

Say you are considering a small addition to your portfolio: say it will constitute 5% or less of it. To a first approximation, the “Beta” will tell you how much it adds to the risk of your portfolio a lot better than the variance of the security itself. The Beta is calculated by a simple regression:

Return of Security(i) = “alpha” + “beta” * Return of The Market + epsilon

Since historical data is used, there’s a problem with data-mining. So typically beta is adjusted to be somewhat closer to 1 than implied by the regression. (And alpha is a measure of risk-adjusted returns.)

Anyway, gold has a lousy expected return, is highly volatile… but might it at least have a low beta? Or a high one? Or maybe the historical beta isn’t so hot, but you think things will be different moving forward. My point was that you should at least be comfortable with these basics before moving into precious metals and other exotics.
Beta (finance) - Wikipedia [/hijack]

Back to the OP:
Gold is often sold at a high markup, in the form of gold coins. Goldline is notorious for this. From an article in Politico, quoted from the old thread:

So let’s just keep things simple. Forget about beta: if you buy something with a 50% commission, it might take a while to recoup your investment.

20

I approach gold this way:
What are the chances the price will go up?
What’s the downside?

I couldn’t give a rat’s butt about political or social arguments. I do think it’s stupid to think of gold as “just another commodity.” It obviously is not. Commodity prices rise and fall based on the utility of the commodity. Gold prices rise and fall based on sentiment. They are currently far in excess of production costs, unlike typical commodities.

As a rule of thumb, liberals (who tend to have a strong belief that governments are sound) dislike the idea that gold might be sounder than government-backed currency. Some conservatives (who tend to be suspicious of the idea that governments are sound) dislike the idea that currency might be sounder than gold.

Over the very long term, gold has won this debate. Few government-backed currencies that I know of from 500 years ago have the buying power of gold from 500 years ago, (except perhaps as collector’s items).

In the near term–your investing horizon–maybe currency will win. Or maybe we will actually collectively decide that gold is “just another commodity.” Or maybe currency itself will end up being the bubble and governments will crap out on their commitment to their currencies.

In any case, I suggest you make decisions based on what you think the sentiment will be, and not what it should be if the public was rational. They aren’t. That’s why a liberal like Soros bet on gold while simultaneously admitting it was a “bubble.” Maybe Picassos are a bubble, but whether or not something is an edible or durable good commodity or not isn’t the only decision point about whether or not its price is going to increase.

Don’t fall into the trap of letting your politics decide your investment decisions, either way. You don’t get to be a rich liberal by paying more personal tax even if you are for more taxes in general, nor do you get to be a rich conservative by automatically betting against all government.