My Austrian bond paid off on Dec. 31 and since then I am working out what to do. Bonds are risky these days, should I go for something linked to gold?
In the very long term, gold is the worst of all investments. If you bought $1 worth of gold in 1801, by 2001 you'd have $14 worth of gold. That's pretty pathetic for an investment of two centuries. If you had put that dollar into a U.S. government bond, you'd have $14,000 in 2001. If you had put it into stocks, you'd be worth $9 million.
So what is the rational of buying gold? It can be profitable as a short-term speculative move in times of intense economic drama like now. Inflation is a certainty. Governments are printing so much money that it cannot but reduce the value of all assets: money (inflation), real estate and bonds. An asset that can't just be created has an upside. Gold meets that criterion.
Gold doesn't generate returns, but in today's environment, forgoing interest payments on bank deposits or dividends on stocks has a rather low cost.
One interesting point in historical series is the silver/gold ratio (how many ounces of silver is equivalent to one ounce of gold). In times of peace and prosperity, one can buy 30 - 50 ounces of silver for one of gold. In times of war and anxiety, like during WWII, you need 70 and more ounces of silver to buy one ounce of gold. We are now, historically, in a period when gold is valued (ratio of 70). Rich people and rich nations are nervious and expect difficult times ahead. Bad omen.
Buying gold implies pessimism: the world we knew has ended and we are facing another cycle of misery and pain. I just cannot accept that. Illustration: Nazi gold.
6 comments:
Where are you getting "If you bought $1 worth of gold in 1801, by 2001 you'd have $14 worth of gold."? Gold was fixed by the US government at $20 something per ounce just before the Great Depression. I assume that it was worth the same in 1801, and it's now at over $1100/oz. That's a 55-fold gain, and furthermore most of that has been since 1973. It has quadrupled over the past decade.
Thanks for the comment. Around 1800 the price of gold was 18.39 $ per troy ounce. There is no doubt in my mind that worldwide inflation and increasing investor anxiety work toward higher gold prices. Could you please indicate the bonds or other instruments linked to gold you like? I think some of them may even be insured (up to 200,000 $?) by the American Government? Thanks in advance.
J, the only financial instruments linked to gold that I'm aware of are gold mining stocks, plus the ETFs based directly on the gold price, such as GLD. IMO, any gold that you decide to own should be physical, i.e. not a paper ETF. Also, if you're looking for something more volatile, mining stocks will shoot the moon if gold climbs a lot higher. I like the junior gold miner ETF: GDXJ. ETF for senior miner is GDX.
Silver looks to be another good bet, again IMO. Hope that helps.
PS: a couple of great gold resources:
http://truthingold.blogspot.com/
http://goldversuspaper.blogspot.com/
"If you had put it into stocks, you'd be worth $9 million. "
Where did you get that figure? I once saw a graph showing historical performance of stocks on the New York Stock Exchange going back to the middle of the 19th century. The inflation-adjusted return over that period was about 1.5% per year. With inflation, but without dividends you'd probably get less than $250 on your dollar. I'd be shocked if dividends pushed you over $9 thousand, let alone $9 million.
An anti-gold argument: the last time the US economy went to hell (1930s), the US government confiscated gold from its citizens:
http://en.wikipedia.org/wiki/Gold_confiscation
Buying gold implies pessimism: the world we knew has ended and we are facing another cycle of misery and pain. I just cannot accept that.
Don't think about it for too long.
By the time "most people" accept it, it will be too late to buy any, and the price will have gone through the roof.
I decided and did something. Before giving the order, I asked about costs and commissions, and I thought it will be reasonable. Today I check the statement and I was screwed by the bank, it appears they gave me a three day bridging loan with zero interest but commission (I didnt asked for it) and there was a difference in selling and buying prices, etc. It is a law of life that the banks will always screw us, no way to escape.
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