Actually, you probably lost more than everyone else in holding real estate, since the property taxes on all that land over the past 500 years, added up to more than 100X what it was originally worth.
You not only are broke, but you are in the deepest hole because you still owe the government back property taxes, PLUS interest and penalties, compounded, for the past 499 years.
YOu are probably trillions in debt.
Quoth Susanann:
Your own example proves that this is absolutely not true. Are you even paying attention to what you’re typing?
Yeah, you are right. I keep forgetting that everyone who has ever sold gold also paid an income tax on it.
I also keep forgetting that all the people who buy and sell on ebay have to either pay an income tax or a state sales tax.
No, most of that time I was part of the nobility and thus exempt from taxation.
Anyway, the idea that you shouldn’t buy gold or you shouldn’t buy stock are both bad ideas. You don’t buy gold because it’ll be valuable 200 years from now for the same reason you aren’t afraid to buy stock because it might be worthless 200 years from now. You invest based on your overall financial goals, for most investors it’s simply amassing enough wealth to be able to retire happily at a certain age. Obviously for the top 1% of the population, well, they’re playing a totally different game but that’s not relevant for most people or most people on the SDMB.
Like I said, you should have some exposure to gold in your portfolio, but not much.
Even if gold had doubled in value from 1980 to 2000, there are far greater gains I could have made by investing in stocks. Microsoft did far more than double in value from 1980 to 2000, I’d be probably be worth tens of millions if I had saved that $400,000 and put it into Microsoft at their 1986 IPO. Of course, for every Microsoft there are hundreds of failed businesses. In the real world you never put all your eggs in one pot, and you don’t put $400,000 into one investment unless your personal fortune is already vast. Andy Bechtolsheim put $100,000 into Google when they were just barely in existence (I believe Google’s founders didn’t even have a checking account yet to put his investment into when he made it) and that investment alone is now worth something like $1bn. Of course, Bechtolsheim was already a billionaire or close to it, he was a founder of Sun Microsystems, for him $100,000 on a promising little company wasn’t crazy. For most people it would have been.
The best that small time investors can hope for is that you either get crazy lucky and buy up shares in a future Microsoft or Google, or you play it smart and you have a well diversified portfolio that has consistent gains over your lifetime. If you aren’t even at the point where you are putting the full amount allowed into IRAs then that’s probably a better move than most anything else.
Quoth Susanann:
On the other hand, an ounce of gold from 1929, has the same purchasing power today as it did back in 1929.
Boo. Sorry.
But it is YOU who is mistaken.
The fact is, that the purchasing power of a dollar bill has declined since 1929.
The purchasing power of an ounce of gold has not declined.
Are you a stay-at-home? Havent you been out shopping in the past 90 years?
Chances are, you would be broke if you put all your money into an IPO.
Chances are, you would have picked one of the thousands of OTHER companies, and not Microsoft.
Almost all IPO’s from the 1980’s went bankrupt. The chances of picking a Microsoft are less than winning the lottery.
I am willing to guess that, in fact, you did NOT!!! invest 400,000 into the Microsoft IPO back in 1986. So…am I right?..or am I right?
You’re making an argument for diversification, not gold.
30% inflation/price increases might just be the tip of the iceberg. What if the tens of trillions of dollars in debt gives us hyperinflation?
What if the dollar is revalued 10 - 1?
That means that your real estate holdings, your stocks, are now priced at 10X what they were last week…which means that you now, unavoidably, owe the IRS a ton of money.
The IRS knows you “made” all this money. You cant sell the stocks or real estate without paying the federal and state governments half of its new computed value in 90% depreciated dollars.
How many investors from 200 years ago are still around? Seriously, do you know anyone who considers “long-term” in financial planning to mean a century or two? I specified ten years which is a realistic figure.
Obviously some companies will go broke. But many won’t. The difficult part is foreseeing which particular companies will develop the new ideas that will succeed.
But predicting that some new companies will develop new ideas? That’s easy. New ideas have been developed for the last thousand years - that’s a long term pattern.
Of course some people don’t see that. They think centuries of progress has been a fluke and civilization is due to collapse at any moment. These apocalyptics are the ones who are out buying gold. Of course their prudent investment portfolio also includes lots of guns and canned goods.
What if it’s illegal to own gold? Unlike your hypothetical, mine has actually happened. If you were forced to sell it, assuming the government will let you sell to them at market prices, it means you’ll be REALIZING a gain which you would not with real estate.
Dueling hypotheticals is fun!
I recommend a longer-than-10-minute evaluation.
Here’s a chart with a better perspective.
The one you link to starts in 1980, the year of the Crazy Gold Spike. Using that (and ending back when gold was $950/oz–it’s currently about $1300/oz) is a deceptively artificial choice of start and end points. It’s like starting a stock return chart right before a major crash. Start that chart in 1970 and end it today, for example, and you get a multiple of about 6x, adjusted for inflation. Not as good as some stocks, but not LOL material either.
A portfolio well-balanced for inflation should, in my opinion, contain some gold, but your mileage may vary. It should not vary, however, based on 10 minutes of consideration around a poor chart. Right now the gold bubble is being driven by long-term inflation fears. Gold costs about 3-400 dollars/oz (in round numbers) to produce, so it’s definitely priced completely artificially. However right now it’s pretty tough to see more than 80 or 90 million ounces/year being produced. The big nuggets just lying around have been swiped already. Its winning attraction is the limited supply if demand rises.
What might drive the price even higher? Why inflation, of course. Right or wrong; fair or unfair; smart or dumb; prescient or short-sighted–with gold it’s all about inflation. If inflation doesn’t happen, or if currencies stay strong, the gold bubble is going to burst and prices will fall to reflect production costs.
But if currencies crap out or if inflation actually does occur, then gold prices will stay strong.
Note the OP is not asking if gold is a good investment. The OP wants to know, “What is the best way to protect yourself from inflation?” I submit that gold is exactly such a protection (I would not make all my eggs gold ones), and the downside is that if inflation does not occur, gold will crap out big time. But if inflation does occur, I am betting the golden eggs will shine. And of course, like any other bet (including real estate, which I consider another good inflation hedge), it’s just that–a bet.
There have been several occasions in the past where a few countries unsuccessfully tried to do that. It did not work.
What happened was, that the people did not turn in their gold. In the United States, the only gold turned in and melted down, was gold held by banks or gold held by the U.S. Mint. Private citizens held onto their gold,which is why pre-1933 American gold coins are sooooooo plentiful. Meanwhile, gold buyers in every other country in the world happily bought any gold, from anybody, regardless of where it came from.
Gold is gold. You cant change it, you cant destroy it, it does not corrode nor rust nor evaporate, it does not go out of business, it lasts forever. Everybody wants gold. Everybody always wanted gold. Nobody cares where it came from. A man who has plenty of gold will not go hungry.
I totally agree that one has to diversify among several different kinds of assets going into the dark days ahead, but diversification necessarily requires that a portion of ones wealth to be in gold. A wise man will have his wealth spread out among several different kind of assets, but one of the assets of a wise man is gold.
Only a fool would have all of his wealth in stocks/bonds/CD’s/paper U.S. dollar denominated/US government controlled assets.
Fair enough, I was pretty loaded when I made that table. I spent a few more minutes on it and added a bunch of date ranges to eliminate start-date issues. It’s hard to find a range that doesn’t include the government dumping gold in the 70s, the early 80s spike, or the recent spike.
Gotta say, gold still looks like a terrible hedge against inflation.
I’m not positive you understand what my chart is though, based on that last line there.
Actually, I’m not sure what your chart is, either. What is it that you’re correlating?
Palooka, I guess I’m confused why you keep selecting a specific range of years instead of just showing say, the last 50 years as in the chart I linked…in any case, at issue for most gold bugs is the expectation that inflation may go nuts with the rise in our borrowing–and the world’s borrowing, for that matter.
And IF it goes nuts (and rather than argue the IF, I’d like to point out again that that IF is, in fact, pre-supposed by the OP), THEN gold prices will rise (in my opinion).
The rate of change of the value of gold and the rate of inflation. If gold was the perfect hedge for inflation, it’d have a correlation of +1 (or -1 against the devaluation of your money.) Since my half-assed analysis is getting negative numbers closer to zero, it’s a terrible hedge.
Because I don’t care about the overall return of gold. I care about how it moves compared to inflation, which is hard to see on your graph and gold prices didn’t move “fairly” in other ranges.
IMO gold isn’t a great inflation hedge unless you’re a millionaire.
As others have shown, since it returns exactly zero over the long run, your money isn’t making anything for you on average, whereas everything else does (albeit very little.)
Let’s say you don’t have a million (or more!) already to invest, you can either invest in non-gold or invest in gold.
– If you invest in non-gold and inflation skyrockets, you might be screwed if your investment does poorly w/r/t inflation.
– If you invest in gold and inflation doesn’t skyrocket, you’ll be screwed when the gold market crashes.
– If you invest in non-gold and inflation doesn’t skyrocket, you’ll make much more money on average than with gold.
– Now, here’s the kicker. If you invest in gold and inflation skyrockets, you’ll most likely ALREADY BE SCREWED because the economy will be in the crapper already. So the measly $10,000 or so you’ll have invested in gold will mean you’ll survive for a whole nother year at most! Big whoop!
On the other hand, if you have a million, and invest 5-10% in gold, and inflation skyrockets, you’ll still have enough to get by for a long time.
I think that it’s way, way, way too easy to talk oneself into a particular position once it has appealed to you on some other level. In the case of gold I think the attraction arises mainly out of severe risk aversion.
Given the serial destruction of every safe haven over the course of the boomers’ generation, that fear is warranted to some degree. But it’s the same type of fear that contributed to the housing bubble. People who had gotten beat up in the dot com bubble thought that residential real estate would be safe and partly as a result of that mindset were willing to bid prices up beyond any rational level. I can see something similar happening with gold.
There are a lot of arguments in favor of holding gold. One of the biggest in my mind is the phenomenal growth likely in the middle class of countries like India and China. As I understand it, there are cultural biases in favor of owning gold - mostly as jewelry that is worn - in those countries. There is also a history of instability that makes people willing to pay a premium for something that can help insure their future well-being.
But unlike other metals, gold has no significant industrial uses. NOTE - I’m not saying that there are none but only that taken together they do not account for most of the demand. So you can’t really look at the forecast for industry X or Y and extrapolate what the demand for gold will be.
The point is that while there are good reasons for the increase in the price of gold, a)there will be a point past which the price will no longer be justified and b) by it’s very nature, gold’s fair market price is difficult to determine.
That is a legitimate argument. The value of gold may rise and fall but gold is virtually certain to retain some value. You probably won’t get rich investing in gold but you won’t go broke either.
