Comments on: Five Reasons to Avoid the Gold Rush http://www.ritholtz.com/blog/2009/09/five-reasons-to-avoid-the-gold-rush/ Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media Tue, 14 Feb 2012 21:38:31 +0000 hourly 1 http://wordpress.org/?v=3.0.5 By: huesos http://www.ritholtz.com/blog/2009/09/five-reasons-to-avoid-the-gold-rush/comment-page-1/#comment-213686 huesos Wed, 09 Sep 2009 23:26:47 +0000 http://www.ritholtz.com/blog/?p=37736#comment-213686 For many, a core holding of gold is seen as insurance. When purchasing insurance one doesn't dwell on the opportunity or holding cost. I don't go without health insurance because of opportunity cost. I buy health insurance because the possibility of a catastrophic loss however hard to define is always present. For many, a core holding of gold is seen as insurance. When purchasing insurance one doesn’t dwell on the opportunity or holding cost. I don’t go without health insurance because of opportunity cost. I buy health insurance because the possibility of a catastrophic loss however hard to define is always present.

]]> By: ellidc http://www.ritholtz.com/blog/2009/09/five-reasons-to-avoid-the-gold-rush/comment-page-1/#comment-213566 ellidc Wed, 09 Sep 2009 18:54:48 +0000 http://www.ritholtz.com/blog/?p=37736#comment-213566 1. I was at a conference where Jean Marie Eveillard was questioned on this very point. He said gold is not a value investment unless you view it as a monetary alternative. So it needs to be compared to the "intrinisic" value of yen, euro, dollars, etc. 2. I think this misunderstands how GLD works. The trust does not buy or sell bullion based on investors buying or selling GLD. In fact the trust does not buy or sell bullion, period, except regular very small sales to cover operating expenses. If people started selling GLD en masse, it is as liquid and as continuous as market as most any other NYSE listed security. GLD will exchange baskets of 100,000 shares of GLD for bullion or bullion for 100,000 shares of GLD, but the trust is under no pressure to sell bullion whatsoever if people start selling GLD. All that would be expected to happen is that arbitrageurs would buy GLD on the open market exchange it for bullion from the trust. 3. I agree with this, but gold still has some unique characteristics as compared with the other inflation and fear trade options, among these physical control, fungibility, zero counterparty risk. 4. The perception of what anything is worth can change dramatically. 5. Whether or not was a good investment over the last 200 years depends on your frame of reference. If you could transport yourself back to 1809 to a random country or even to America, but with a chance of being in the South or Spanish part of America, and you wanted to do something then to preserve wealth, such that it would be available in 2009, what strategy would have been most successful? Which "stocks" would you have bought? How many of those entities are still in existence? How could you be sure to have chosen the winners? Buying land would have been good, but without constant monitoring, payment of taxes, etc, it could well have been liquidated or converted to other uses before 200 years. Name something else you could have put in a steamer trunk for 200 years, thereby eliminating the risk of mismanagement or the need for hindsight guided active management, and done better with than a steamer trunk full of gold. Some collectibles or art might meet the test, but all those require hindsight compared to the robust, international and seemingly timeless appeal of gold. 1. I was at a conference where Jean Marie Eveillard was questioned on this very point. He said gold is not a value investment unless you view it as a monetary alternative. So it needs to be compared to the “intrinisic” value of yen, euro, dollars, etc.
2. I think this misunderstands how GLD works. The trust does not buy or sell bullion based on investors buying or selling GLD. In fact the trust does not buy or sell bullion, period, except regular very small sales to cover operating expenses. If people started selling GLD en masse, it is as liquid and as continuous as market as most any other NYSE listed security. GLD will exchange baskets of 100,000 shares of GLD for bullion or bullion for 100,000 shares of GLD, but the trust is under no pressure to sell bullion whatsoever if people start selling GLD. All that would be expected to happen is that arbitrageurs would buy GLD on the open market exchange it for bullion from the trust.
3. I agree with this, but gold still has some unique characteristics as compared with the other inflation and fear trade options, among these physical control, fungibility, zero counterparty risk.
4. The perception of what anything is worth can change dramatically.
5. Whether or not was a good investment over the last 200 years depends on your frame of reference. If you could transport yourself back to 1809 to a random country or even to America, but with a chance of being in the South or Spanish part of America, and you wanted to do something then to preserve wealth, such that it would be available in 2009, what strategy would have been most successful? Which “stocks” would you have bought? How many of those entities are still in existence? How could you be sure to have chosen the winners? Buying land would have been good, but without constant monitoring, payment of taxes, etc, it could well have been liquidated or converted to other uses before 200 years. Name something else you could have put in a steamer trunk for 200 years, thereby eliminating the risk of mismanagement or the need for hindsight guided active management, and done better with than a steamer trunk full of gold. Some collectibles or art might meet the test, but all those require hindsight compared to the robust, international and seemingly timeless appeal of gold.

]]> By: Kelja http://www.ritholtz.com/blog/2009/09/five-reasons-to-avoid-the-gold-rush/comment-page-1/#comment-213447 Kelja Wed, 09 Sep 2009 15:32:55 +0000 http://www.ritholtz.com/blog/?p=37736#comment-213447 The wild card mentioned - China - isn't so much a wild card but an ace in the hole. China is accumulating gold and quietly and not so quietly moving away from the dollar. Any softness in the price of gold will be met with renewed buying and mainly from Asia. We are entering the age of the 'China Put' on gold. For holders of gold, this means good upside potential and limited downside risk. The wild card mentioned – China – isn’t so much a wild card but an ace in the hole. China is accumulating gold and quietly and not so quietly moving away from the dollar. Any softness in the price of gold will be met with renewed buying and mainly from Asia. We are entering the age of the ‘China Put’ on gold. For holders of gold, this means good upside potential and limited downside risk.

]]> By: teraflop http://www.ritholtz.com/blog/2009/09/five-reasons-to-avoid-the-gold-rush/comment-page-1/#comment-213424 teraflop Wed, 09 Sep 2009 14:55:59 +0000 http://www.ritholtz.com/blog/?p=37736#comment-213424 Thanks, that being said, donyocham, I continue to hold some gold in a liquid account, having sold a rather large position (for me) this summer. I also think that the quoted prices available, whether we’re talking COMEX, spot, or in markets in Dubai or Mumbai to be representative of a particular basis with respect to another price, which some have calculated to be in multiples of what we consider to be gold’s current price. My concerns about holding gold are governments’ sensitivities to its use as a fiat currency alternative as well as the effect of hedging and Central Bank sales. Thanks, that being said, donyocham, I continue to hold some gold in a liquid account, having sold a rather large position (for me) this summer. I also think that the quoted prices available, whether we’re talking COMEX, spot, or in markets in Dubai or Mumbai to be representative of a particular basis with respect to another price, which some have calculated to be in multiples of what we consider to be gold’s current price. My concerns about holding gold are governments’ sensitivities to its use as a fiat currency alternative as well as the effect of hedging and Central Bank sales.

]]> By: donyocham http://www.ritholtz.com/blog/2009/09/five-reasons-to-avoid-the-gold-rush/comment-page-1/#comment-213417 donyocham Wed, 09 Sep 2009 14:42:33 +0000 http://www.ritholtz.com/blog/?p=37736#comment-213417 oops...typo. In the above post it meant to write "and still completely misses the fundamental context". oops…typo. In the above post it meant to write “and still completely misses the fundamental context”.

]]> By: donyocham http://www.ritholtz.com/blog/2009/09/five-reasons-to-avoid-the-gold-rush/comment-page-1/#comment-213415 donyocham Wed, 09 Sep 2009 14:40:38 +0000 http://www.ritholtz.com/blog/?p=37736#comment-213415 Thank you for your arguments. I was hoping to find some intelligently contrived counterpoints to my gold thesis and you have provided them. Alas, they aren't new arguments. As these are many of the same arguments raised over the last few months and still completely fundamental context defining today's economic environment, I am even more convinced that the case for gold is sound. This doesn't mean the price of gold expressed in U.S. Dollars will not decline over the near term from today's $1,000/oz, but gold's (and silver's) utility as a medium of exchange is likely to increase. I posted an article about this last week, which can be found at (http://www.harnessimg.com/blog/2009/09/store_of_value_myth/). What you refer to as logical in your first point is what I would call rational, (or more like rationalizing), which is not the same as reasoning. Thank you for your arguments. I was hoping to find some intelligently contrived counterpoints to my gold thesis and you have provided them. Alas, they aren’t new arguments. As these are many of the same arguments raised over the last few months and still completely fundamental context defining today’s economic environment, I am even more convinced that the case for gold is sound. This doesn’t mean the price of gold expressed in U.S. Dollars will not decline over the near term from today’s $1,000/oz, but gold’s (and silver’s) utility as a medium of exchange is likely to increase. I posted an article about this last week, which can be found at (http://www.harnessimg.com/blog/2009/09/store_of_value_myth/). What you refer to as logical in your first point is what I would call rational, (or more like rationalizing), which is not the same as reasoning.

]]> By: teraflop http://www.ritholtz.com/blog/2009/09/five-reasons-to-avoid-the-gold-rush/comment-page-1/#comment-213395 teraflop Wed, 09 Sep 2009 13:51:59 +0000 http://www.ritholtz.com/blog/?p=37736#comment-213395 I only have time to comment on the cost of carry argument. While true, gold's cost of carry is negative compared to a dividend/yield-providing asset, if your alternatives are "safe" vehicles like money markets, US government securities, then your cost of carry is extremely low. If you measure cost of carry in terms of opportunity cost, that is something else. However, opportunity cost is price you pay for *any* investment, not just one in gold. As long as you avoid seigniorage, which you'd pay if you were buying gold jewelry or beautifully-cased coins and gold bars, and you use accounts with high liquidity and ease of transactions then the cost of carry is negative, yes, but meaningless. A more important question, is what is your gold weighting in your portfolio? Asset allocation is key and even if we knew years ago when gold was $200/ounce that the "right price" down the road would be $1000/ounce, no adviser or rational investor would advocate going all-in in anticipation. I only have time to comment on the cost of carry argument. While true, gold’s cost of carry is negative compared to a dividend/yield-providing asset, if your alternatives are “safe” vehicles like money markets, US government securities, then your cost of carry is extremely low.

If you measure cost of carry in terms of opportunity cost, that is something else. However, opportunity cost is price you pay for *any* investment, not just one in gold.

As long as you avoid seigniorage, which you’d pay if you were buying gold jewelry or beautifully-cased coins and gold bars, and you use accounts with high liquidity and ease of transactions then the cost of carry is negative, yes, but meaningless.

A more important question, is what is your gold weighting in your portfolio? Asset allocation is key and even if we knew years ago when gold was $200/ounce that the “right price” down the road would be $1000/ounce, no adviser or rational investor would advocate going all-in in anticipation.

]]> By: ItalicBold http://www.ritholtz.com/blog/2009/09/five-reasons-to-avoid-the-gold-rush/comment-page-1/#comment-213384 ItalicBold Wed, 09 Sep 2009 13:36:05 +0000 http://www.ritholtz.com/blog/?p=37736#comment-213384 1.) Analysts fail to understand the allure of gold is that it is seen as prudent and not speculative. 2.) A valid point, one should note that the price of gold has gone up $600 since this ETF started trading in 04. However a look at GLD since its inception shows the bulk of volume is a) at a price point above $800 and b) occurs between the March high and now. 3.) The demand for these instruments relative to gold is a function of trust in these days of financial and accounting alchemy. 4.) If an investment fails to perform as expected then yes one will generally cut exposure to it. Gold has performed as expected over the past 200 years so I don't see much risk here. 5.) See point 4. 6.) There seems to be an assumption in this post that every person out there that owns gold or intends to own gold has sold every asset they have in order to do so. 1.) Analysts fail to understand the allure of gold is that it is seen as prudent and not speculative.

2.) A valid point, one should note that the price of gold has gone up $600 since this ETF started trading in 04. However a look at GLD since its inception shows the bulk of volume is a) at a price point above $800 and b) occurs between the March high and now.

3.) The demand for these instruments relative to gold is a function of trust in these days of financial and accounting alchemy.

4.) If an investment fails to perform as expected then yes one will generally cut exposure to it. Gold has performed as expected over the past 200 years so I don’t see much risk here.

5.) See point 4.

6.) There seems to be an assumption in this post that every person out there that owns gold or intends to own gold has sold every asset they have in order to do so.

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