Why don’t you vacation in California and keep all of the gold that you can pan in a safety deposit box or buried sock? You’re only out the cost of the vacation and you could use a vacation anyway, so it’d essentially be free gold.
(Yes, I know. Other states have gold. And the odds of finding more than a few flakes are low.)
I guess I thought an “investment” (in the ordinary sense of the term) was any vehicle with a hoped-for positive return, be it a Tiffiny lamp, stock in Apple Computer, or gold. I did not realize that to be an “investment” the vehicle had to be making the world a better place. Perhaps part of the Liberal confusion over gold as an investment is a result of some sort of high-falutin’ A True Investment Must Make the World a Better Place ideal with which I am unfamiliar. I just want to make money, though.
I think it was Warren Buffet who ridiculed gold as the one thing we dig up so we can bury it again. I heartily agree with that sentiment, but as an investment, I only focus on whether or not the next sucker over might pay more for it later–not whether the bullion itself is buried in a vault somewhere or is busy creating a better world.
I will heartily agree that investing in gold is nerve-wracking because the price is so artificial and it has such limited industrial use. Still, the population is growing and the amount of gold mined is not…and I don’t see that the population which is growing is the high-IQ end. I’ve dumped a bunch of mine and every time I do I get seller’s remorse when the price keeps rising.
Here’s a longer term comparison:
Price of Gold
1871: $18.93
2008: 875
return: 46.2x
S&P composite stock index, 1871: 4.44
S&P composite stock index, 2008: 877.56
197.6x
197.6 >> 46.2
And remember, I picked an endpoint that was great for gold and terrible for stocks. Hey, gold has a narrow set of attractive characteristics. But long run return isn’t among them.
Well, but see the problem is that you hand-picked your index against which to compare gold, didn’t you? Not everyone would have even bet on the United States in 1871.
Out of curiosity, which specific stocks are in your putatative stock index from 1871, and how were they chosen?
In any case, it’s easy NOW to bet on a “S&P composite stock index in 1871” (assuming such an index was a purchasable item on the part of an average man back then, which I do not think it was).
But suppose, in 1871, you had put all your moolah into the newly-formed Austria-Hungary coalition, say, under the assumption they were the ones who were gonna really kick butt.
The historical simplicity and performance of gold is that it has, on average, beat all comers. It’s not that it has beaten any single investment vehicle, especially when you get to choose those investments retrospectively.
Hey, if I get to choose retrospectively, I know which governments are going to crap out, which stocks are going to soar and which land is worth a fortune instead of staying swampland. That’s the point the gold bugs are making and that the gold-mockers constantly miss. A lot of your buddies who might have bought the (fictitious) “S&P composite stock index in 1871” would have long since bailed when it looked like the market was crapping out, no?
Unless you are pretty rich, I see a problem here.
Lets assume you buy gold as a hedge against a serious economic disaster. If its only a fraction of your total portfolio and economic disaster happens, that fraction that kept its relative value will be nice, but will it be a lifesaver?
On the other hand, if you do make it a significant portion of your portfolio it will save your butt when the shit hits the fan. But if the shit doesnt hit the fan, your portfolio will likely suffer because typically other investments do significantly better. And, if you aint rich, you really can’t afford to have your portfolio doing poorly.
Now, if your rich, you invest some fraction into gold. It will most likely not make you as rich as you could have been because that money spent on gold could have been invested on something with a better return (but if your not greedy who cares?). But, if the shit hits the fan, you’ll still be fairly well off because you have a decent sized pile of gold.
To me gold almost appears to be very expensive insurance. The working poor can’t afford to buy it.
I know a couple guys who are big into gold. They’re friends from the survivalist fringe. They don’t invest in gold so much as hoard it. The dogma is that when all goes to smash economically, the gold will always have value. I’m unconvinced of its utility in such an extreme situation. If I have a loaf of bread and you have a one ounce gold coin, I’ll give you one guess what I’ll be charging for bread.
You first need to accept that no amount of message board reading will give you the right answer. There is no evidence whatsoever that you know whether gold will rise or fall in comparison with other investments over the short, medium or long term. The price of gold today is the consensus opinion of millions of investors as to its current worth.
The question is a purely financial one. Is gold an attractive asset to own as a part of my portfolio? Go to www.bogleheads.org. They are interested in non-political fact based evidence of how different portfolio constructions behave. The consensus would seem to be that it should be a small part of your portfolio if at all. For most investors a broad based commodity option would seem to make more sense. The only major proponent is the Harry Browne Permanent Portfolio, which seems to have some success designing a conservative allocation with gold as a significant holding.
The way you are approaching this seems backwards though. First the question is how much risk you need and want to take? The next step is the portfolio allocation from a long term perspective based on evidence of what gives you your desired long term return with the minimum of risk. Then you fill that allocation with low cost investment choices that give you exposure to the areas you need. The last thing an investor should be worried about is if they can figure out whether gold is going up or down.
This was satire, right?
Quoth Chief Pedant:
By that standard, a quarter dropped into a slot machine is an investment. Sure, there’s a house edge, but just think of that as a brokerage fee (and it’s a lot lower fee than the guys hawking gold on TV).
Currency isn’t an investment, either. And even if it were, who’s investing for a span of 500 years?
To me the fundamental truth is that gold is pretty much static. You buy an ounce of gold and hold it for fifty years and you have exactly what you started with - an ounce of gold. So you get out of your gold portfolio what you put into it. You can’t improve gold or add value to it or make it more efficient.
If the rest of the economy is growing during the period when your wealth was in gold, you’ll fall behind. If the rest of the economy is declining during that period, you’ll come out of ahead.
Exactly so, even given your exaggeration. The point is, there is no requirement for a given “investment” to be some sort of vehicle which creates anything but a (potential) return for the investor.
You’re kidding me, right? Or do you own research on “how to invest in currencies.” Maybe that’s why you are so confused about what an investment is.
The point about a 500-year span is simply that, over time, gold has outdone other vehicles. I’m not pushing gold, particularly, but it seems like there is a great deal of naivety about the general notion of investing here, and that gums up the debate about gold as a vehicle.
False. I did not cherry pick. (ETA: See below for cross-country comparisons & survivalism.)
More generally, Chief, I’ve outlined a few circumstances where an investment in gold might be defensible. I’ll outline another below. But the big divide I see is not between liberals and conservatives: it’s between the informed and the rubes.
Seriously, Chief, most spans of time in the US will show the superiority of stocks. The first beginning point (1978) I got from the internet. The second (1871) is from Shiller’s long run dataset, which has nothing to do with gold. It takes the S&P 500, and extends it backwards (he calls the long series, the S&P composite). S&P does a similar exercise, though I’m not sure how far back Shiller extended it.
I actually slanted the analysis in favor of gold, since the S&P index doesn’t include dividends which make up over 40% of the total return.
I am not aware of evidence for this. I’ll also note that gold prices tend to be pretty volatile: it’s not a particularly reliable store of value in practice.
Ok, but what if your government collapses? Gold might have a place in a survivalist situation. But so might Swiss bonds or better yet bonds of a range of foreign governments with strong governments but currencies currently trading under their purchasing power parity. The point being is that there are a range of investment portfolios that can meet even certain extreme scenarios. Automatically plonking for gold without serious analysis is ill-advised.
Precisely. If you want to be a survivalist, you need to think rigorously about it, as opposed to pursuing a false sense of security. I’ll note that precious metals might have a use when crossing thinly-guarded and reasonably secure borders. But foreign bank accounts might be better.
There’s another speculative reason to buy gold. Take a serious look at the investment choices of your average Chinese or Indian citizen. I suspect that this explains a lot of the run up in gold prices over the last decade.
Of course it wasn’t. Glenn Beck’s followers are nothing if not credulous. They trust the guy.
Careful. I think Chronos was talking about “Cash”, as in pieces of paper issued by governments. You are referring to short-term deposits or money market instruments in various currencies. The latter is a little different: if you have a comparison of gold prices and bank account deposits, it would be interesting to look at. I suspect that the former is more volatile, but with a somewhat higher long run return than bank accounts. Stocks, bonds or real estate would have a superior risk/return trade-off to gold.
Drain the swamp
Of course from a liberal perspective, I would recommend Goldline and other high-commission, high pressure vendors of gold coins for staunch conservatives and conventional asset management for everyone else.
First of all, what exaggeration? The house edge in slots is, in fact, significantly smaller than the brokerage fees of most goldmongers. Second, if we’re going to expand the definition of “investment” so far that it includes pure gambling, then we have to re-examine the question of why it’s a good idea to invest. Surely, you wouldn’t advise anyone to take a significant chunk of their paycheck down to the casino to invest in the slot machines. Would you, then, advise that they instead invest it in gold? If so, why? Clearly, just saying “it’s an investment” isn’t a good enough reason, if the slots are also an investment.
I was referring to your use of a slot machine as an exaggeration. In general, almost every investment is a gamble to some degree, with pure gambling being the most extremely exaggerated case. Don’t forget this part of the conversation was begun when you stated gold was not “really an investment at all.” I disagree with that. There is no constraint that a given investment must somehow have something done to increase its intrinsic value. I might buy a plot of land or a Picasso as an investment with no intention to do anything other than wait for the market to offer me more…it’s not as if I have to plan to paint a mustache on the figure to increase its value in order for the painting as is to be considered an investment.
I give no advice on investing. At least, none worth taking. There have been folks who have decided to invest part of their paycheck in all sorts of wagers, in the hope that they will get lucky. And, of course, some have gotten lucky. Others have invested in Florida swampland. That an investment has a poor return or is outright foolish does not mean it’s not an investment.
We had this conversation on the definition of investment in the old thread. I fear that Chronos lacks a strong background in finance, though he seems to be aware of this. This latter aspect is what separates him from some of his critics. Much of the financial press dances around some fundamental principles of investing: focus on expense ratios and diversification. You can’t build a subscription base around, “Get thee to Vanguard”: there’s not enough to talk about. So a lot of the chit-chat implicitly revolves around asset returns of the recent past. Ironically, that tends to produce a bias towards purchases of overvalued assets – which are thus likely to perform poorly. A good background in finance involves exposure to the proper texts: Money Magazine and the financial pages of the business press can be misleading.
Anyway, here’s what I said a year ago:
Got all that? Gold isn’t emphasized in mainstream Investment texts: sometimes it’s not mentioned at all. I consider that an oversight, given the very human fascination that pretty metals attract. Precious metals deserve 2 pages of text.
http://boards.straightdope.com/sdmb/showthread.php?t=539805&highlight=gold
Along traditional lines, the Britanica Concise Encyclopedia defines investment as, “Process of exchanging income for an asset that is expected to produce earnings at a later time.” That would rule out gold, though I think that such a framework is misconceived. Investopedia has a more modern take that does not exclude speculation: “An asset or item that is purchased with the hope that it will generate income or appreciate in the future.”
As a small-time investor, mostly stocks and a little gold, I obviously agree. The OP is asking for an emotion-free analysis of gold as a vehicle. As a vehicle, it’s done pretty well over the last couple decades (which is about when I started investing). While it may not have beaten “stocks” historically, which specific stocks would you have bought without the retrospective knowledge of how that particular stock has performed? Which investors from 20 years ago bought and held “the S&P index” for those 20 years? The thing the stock-pushers don’t tell you is that most investors buy a portfolio of specific stocks, and in fact brokers usually push portfolios of specific stocks. They only bring out the “index” notion when they want to show how “stocks” do over time. Think of gold as one stock. Pick a real stock that you think will outperform it over whatever your investment horizon. Check both prices at the end of your time horizon. That’s a fair comparison when you are using gold as one mechanism to diversify a portfolio.
The second question is: “Where is gold headed?” and that one is much more interesting, in my opinion. I notice you are careful to choose “spans of time in the US” and of course, retrospectively, we know the US has done well. Other nations have crapped out, and part of the sentiment driving up gold price is a sentiment that the US will not do well from here on in. So right now, even for the guy who is going to buy and hold an S&P 500 index fund (FUSEX, e.g.) the question is not past performance, but future performance. It’s my personal opinion that gold is a reasonable portion of that portfolio along with FUSEX, and the reason is that I don’t think the US financial health is going to look all that good over the timespan of the next 10 or 15 years. That’s going to drive up gold sentiment (I think). Let us both hope stocks do even better than gold despite any diminution in our overall financial health as a nation.
Why would this rule out gold? If I buy for $500/oz and sell at a later time at $700/oz, has my investment in gold not produced earnings of $200/oz?
I’m pretty sure Chronos is capable of achieving a strong background in anything he wants–he’s certainly a good bit smarter than I. He’s just being pissy about gold because it’s his liberal calling to deride it. If he’s made the mistake some liberals make and actually practiced what he preaches, he may also be a bit bitter watching the right wing rubes count their extra gold-investment cash. 
Vanguard first offered the S&P index fund in ~1975 – 35 years ago. In 1990 it was already quite popular.
Cite?
So avoid high-commission brokers in favor of discount brokers and low-cost index funds.
Sure. If you’re buying an individual stock because it’s “Hot”, or because you think the company will do well in the future and you have no notion of valuation (i.e. there are many terrific companies whose stock nonetheless is overpriced) then you probably are a rube. I’m not ruling out the possibility of investment hobbyists doing well. I do think that amateur stock pickers need a theory of why their take is better than the pros. If they can’t provide a good reason, then they should choose a index fund with a low expense ratio.
Most assets in a balanced index fund will compromise well under 1% of the index. So if you’re thinking of allocating a 1/1000 portion of your portfolio to gold – hey why not? I say. It’s fun to talk about with friends, especially if you mention it after it’s gone up for the past year. Which it will. Sometimes. Investing in palladium is way cooler though.
As for US financial collapse, I suspect that a selection of certain foreign investments might make a better hedge.
ETA:
Capital appreciation of $200. At least I think that’s what they were getting at. There’s a traditional distinction between, “Investment” and “Speculation” which has fallen out of favor.
Certainly, but I do have a strong background in mathematics. And it doesn’t take all that much knowledge of mathematics to recognize a zero-sum game.