Behold The Power Of Gold – Part 3!

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I have talked about “investing” in gold before….

Behold The Power Of Gold 

Behold The Power Of Gold – Part 2 

I have said it before and I will repeat, “gold is not a good long term investment.”Take a look at this chart…This graph created by John C. Bogle and is in his book “Common Sense on Mutual Funds (2010).  It shows the returns for several investment classes from 1802 to 2008 in real dollars (real dollars are after an adjustment for inflation) (note2: The total return is a log scale).chart

Over 200 years the value of gold in relation to real dollars – has barely changed!  Notice the spike for gold around 1980?  In a few short years the price went from $200 to over $850.  The media went crazy and we were told that gold was a great investment, then the price fell to below $400.  Gold did not get back above $85o until 2008!  28 years to break even!

For years I have been saying that gold is in a new bubble!  In just a few years it has gone from $800 to $1,800!

Here is the opinion on John C. Bogle (Founder of Vanguard mutual fund company).

“  …gold is largely a rank speculation, for its price is based solely on market expectations.  Gold provides no internal rate of return.  Unlike stocks and bonds, gold provides none of the intrinsic value that is created for stocks by earnings growth and dividend yields, and for bonds by interest payments.  So in the two centuries plus shown in the chart, the initial $10,000 investment in gold grew to barely $26,000 in real terms.”  Common Sense on Mutual Funds(2010), Page 13.

Damn!  Note:  It the chart above Stocks went from $10,000 to almost $5,000,000,000!

Here is what Warren Buffett said….

“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobils and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”

There has now been a spark and the run is on!  What was that spark?  The small island nation of Cyprus!  As part of their bailout they are forced to sell… GOLD.  Lots of gold.

Cyprus is going to sell 400 million euros ($525-million) worth of gold reserves to finance part of its bailout…

At current prices it means that Cyprus will sell around 10.36 tonnes of gold…

That is a lot of gold and it has not even hit the market yet.  Gold prices have been falling for months but this was the last straw.  Gold fell by more than 9% – TODAY!  It is now down 28% from the high of $1,888.70.  Today the close was $1,361. 

If 1980 is our guide… gold could fall well below $900 in a few months.

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One Response to Behold The Power Of Gold – Part 3!

  1. Jim Newman says:

    Thanks Phil! When I followed the advice of Wealth Achievers that travelled the country giving seminars on how to make money I followed their recommendation to leverage debt to purchase capital; I sold my retirement to make more money quickly; I believed the BS that one could make much more than 10% a year; I had a plan with an exit strategy to retire by 53; the goal was passive income; the worst that could happen was hyperinflation and then my mortgages would be easier to support and I would still have the properties.

    When the real estate bubble burst and I had over a million dollars in property ripped from my hands and I had to start from scratch again like a college graduate, these same Wealth Achievers promised that gold was the sanctuary and I should invest all I had in it. When I laughed at them, still feeling their burn, they got mad and said I wasn’t listening. My question was and is how and when do you know when to sell? An exit strategy must have a prophetic vision to succeed and prophets don’t exist. Wealth achievement is a theology based on trust that somehow you will be saved.

    Yet, soon every Joe and Jill said to buy gold and I was reminded of what I had ignored before: when taxi drivers give advice on what to buy it’s too late to invest in it. Immense profit is only made in resource shortage or labor abuse; the first always disappears and the second is immoral.

    Yet, I was close. If the market had extended 6-12 months I might have retired on a small but manageable income after working very hard for a number of years–if I had discounted a desire to earn yet more and if I still am not deluding myself that I was close to save face. Who can know the mind of the public? Perhaps greed, cleverness, arrogance, or confidence propelled me to ignore market reality as we all look for a good deal. Diversity of investment, avoidance of fast money, and long range planning are the best bet for people to establish a portfolio and even that is fraught with dangers. There is a reason we have social insurance; it’s not just because we’re too stupid to save, invest wisely, or work hard.

    The gold bubble folks will say if I had invested at the beginning then even if it falls to 900 I’d have made money. Hindsight is so sure and foresight a crap shoot.

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