Thursday, November 1, 2012

All That's Gold Does Not Glitter

     Have you seen them? The old men with long white hair and beards, dressed in dirty robes and holding signs that say, "The end is near." Well, they're out there, only now they have nationally syndicated radio talk shows, cable channels and news web sites. Today's purveyors of doom and gloom have learned how to profit handsomely from convincing the gullible that soon they will need to hunker down in their root cellars, clutching an over-priced freeze dried lasagna in one hand and a bar of gold in the other. The former is a loss of several hundred dollars, but the latter could mean risking a significant percentage of one's life savings.
     The gold pushers are always touting how much gold has increased in value over the last ten years. Which is true, but most retirement investment strategies occupy a much longer span of time, somewhere closer to thirty years. And over that time period gold has not fared so well, just ask those individuals who invested in gold at its height during the early 1980s and are still holding on to it. For these folks to break even on their investment, when you factor in inflation, gold would have to rise to $2400 an ounce. The value of gold over thirty years has not even kept pace with inflation, conversely, the Dow Jones Industrial Average has returned an average of ten percent a year, after adjusting for inflation. Put another way, thirty years ago you would have been much better off investing your money in blue chip DOW stocks than in gold.
     One can certainly make money on gold, but by trading it, not investing in it. Gold is, after all, a commodity and as such is very volatile. The other problem with gold is that contrary to the gold hucksters on the radio, gold doesn't have intrinsic value, it's value is entirely perceived. Besides being used in the making of trinkets and bobbles, gold has very few real uses. Prior to the development of silicon, it was used in the manufacturing of electronics, but there is very little gold in electronic components today. Furthermore, in a world gone wrong scenario, I would want energy, guns and ammo, not gold. You're not going to power a generator with gold or defend yourself and your family with it, unless you threw the gold like rocks. Those, indeed, would be expensive rocks considering the $1720 an ounce gold is trading at today.
     I heard an investment manager once say that buying gold is an act of desperation. No matter how bad things may appear, I refuse to allow myself to lose faith in man's ability to self-correct and right the ship. If you buy gold on the advice of a radio personality, you better hope the radio personality also tells you when to sell that gold, hopefully before the bottom drops out. Because, as with all commodities, the price of gold fluctuates wildly over time. You don't want to wake up one day and find you have been fluctuated out of your life savings.

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