Golden Opportunity?
by Richard
The big dogs are starting to pile into gold…
….as the world’s welfare democracies continue to trash their paper currencies by running their printing presses overtime.
This includes some of the smartest investors who had the foresight to bet against the sub-prime bubble. See the Wall Street Journal’s, “Bearish Big Investors Catch Gold Bug“(3/9/09, page CI).
So why am I hesitant to jump on the bandwagon?
In no particular order….
1. Gold’s price is setting records…but not if you adjust for inflation.
Going back to the last gold rush in 1980, it should be priced at over $2,000 an ounce, vs bouncing around the $1,000 level.
Never confuse nominal pricing (today’s stated price) with its inflation-adjusted twin. When both such prices are at record levels, you will have confirmation.
2. I prefer inflation hedges that pay rents or dividends or interest.
Which is why I’m a big fan of inflation protected government bonds (both TIPS and I-Bonds) and income producing real estate.
Gold has no yield, and is further burdened by costs of transportation, storage and insurance.
3. Anyone reading this post who owes money, or borrows new money, will automatically be a beneficiary of ramped up inflation.
Inflation is a boon to debtors, just as it is a bane to creditors.
4. This is my biggest concern: In a world scared witless by the miscues of the new administration policies…gold should be setting new record highs on virtually a daily basis…if it is the panacea it is alleged to be.
Over 4 trillion dollars is idling in money market funds, yielding well under a half percent in yield. This pool of capital will eventually pour over into the equity markets when the market turns….and is conspicuously not being parked in gold.
5. Due to the global downturn, demand for gold in industrial processes and fabricated jewelry is down.
The major demand is for the gold ETF’s that must buy physical gold in proportion for each outstanding share.
So, if demand is driven by speculation rather than consumption, then there will be indiscriminate selling when gold is dumped in favor of traditional investments such as securities and real estate with a cash yield.
The public does not seem to comprehend the whipsaw effect of these commodity ETFs. Whether it is gold, oil, or any pool of commodities…a speculation driven market can be driven down as fast as it was pushed up.
That makes these ETFs a useful tool for short term hedge fund trading, but a potential catastrophe to the languid buy and hold investor who has crossed over to this innovative financial product.
Our vehicle of choice to park short term money?
FDIC-insured Internet money market funds…paying 2.5% more or less…a heroic return when compared with the rates paid by the brick and mortar banks.
