Gold Holding Its Own…Or is It?

Standard

Gold has sunk quite a bit since I heard prognosticators expecting $5,000 per ounce prices a few years back. Remember the times? You couldn’t pick up a paper, read a magazine or website, watch a TV show, drive down the street or listen to the radio without hearing the virtues of this shiny metal. It reminded me of the fervor of the dot-com days of the late ’90s.

Recently, Bloomberg.com had an article about gold holding steady. It’s not that steady considering that this glimmering Siren was at over $1,800 an ounce a few years back. That’s a drop of about 33 percent.

I have a client whom I recommended selling his physical gold right about at this top. He chose to invest it in a diversified portfolio with me. His account was up a little over 50 percent. Adding the avoidance of gold’s drop (about 33%) with his gain (over 50%) gives him a relative out-performance of over 80 percent compared to a gold investment.

Is gold holding steady?

A lot of folks mistakenly think that gold tracks, or even hedges against, inflation. The first link I’m sharing with you is some personal research I did several years back. The research only goes to 2010 but the point remains the same: gold does not track inflation.

I was fed up of hearing this nonsense over and over so, on that arbitrary day, I decided to make a few charts. The first one shows the rate of inflation compared to the price performance of gold, on that random day I started my homework. I tried to get as near to that day as possible in each individual year but weekends and holidays threw me off a little. Still, it’s unbiased research. I was just seeking the answer to that question: Does gold track inflation?

I heard a good answer, too: “Gold tracks the expectation of inflation.” Good answer. Big difference.

Gold Tracks Inflation? Not really…

Gold reached a top near the middle of 2011. If you look at the second link you’ll see the downward price trend since this top. If you look at even longer gold charts you’ll see that the “miracle” metal has had flat price trends that last about two decades! That’s a long time for an investor who buys at the top and wants to hold on to their position. Besides losing opportunity to other growing sectors this investor receives zero income. This would result in a net loss when you consider the ravages of inflation.

Courtesy of BigCharts.com, take a look at the SPDR Gold Trust ETF. This is an exchange-traded fund that tracks, almost exactly, one-tenth the price of gold. To get the approximate spot price of gold you just multiply this investment times ten. The symbol of the fund is “GLD”.

Gold Mutual Fund Price Trend

Bonus link: I just can’t say it better than this…

Why Warren Buffet Hates Gold

Advertisements

Will a Dollar Crash Cause a “25 Year Depression”?

Standard

I was on a website last Friday and saw an ad. I rarely click on ads but I couldn’t resist. The headline mentioned something about a 25-year depression. That’s a pretty bold claim. And I know there’s about a million of these outrageous claims on the internet. But what if??

So I clicked on it and started watching a video by Jim Rickards. He sounded pretty qualified despite the puffed-up claims to expertise. And he mentioned something I had read about before that really could be catastrophic: the world going off of the U.S. dollar.

I had worried about this for my kids and future grand kids. But I didn’t think it would happen too soon. Yet it could happen and it wouldn’t be good for America.

To oversimplify the issue, when the world completely drops the U.S. dollar as a reserve currency it will make the price of what we consume at home hugely more expensive. So we can then either consume less or finally start selling more. Or both.

The consume less part would happen right away. We would be forced to do that. Our weak dollar simply wouldn’t buy as much imported stuff (apologies to my high school teacher for using ‘stuff’ as an actual noun).

And we are, thankfully, already starting to sell a little more. Mainly fuels due to the dynamic oil/energy sector.

So it’s a worrisome problem. And it got me thinking: would the world just drop our currency overnight? Unlikely. It’s similar to the holding of our Treasury bonds by foreign investors. They wouldn’t want to sell these bonds all at once, dumping us. That would be horrendous for the values of the bonds. They would all lose billions & billions of dollars. Similarly, dumping the U.S. dollar would hurt the countries importing to America, namely China and other low-cost producers. Not to mention all of the European importing countries and Japan.

Would you harm your biggest client? I don’t think they would either. Everyone sells to everyone in this global mix. So the international community has a vested interest in seeing a slow removal from the dollar. If there’s a removal at all.

What can an investor do? You can increase your international exposure. If you use mutual funds you can get many that are denominated in those foreign currencies. Not only would you be diversifying your portfolio you’d be creating some “currency insurance” within it, too.

Check out this article for another way to diversify out of the U.S. market and dollar: Investing In Stuff

Unemployment Goes Down to 5.9%…Defies “The New Normal”

Standard

The economy is chugging along. This drop in the unemployment rate is getting us back to a normalized economy. It was just a matter of time. I’ve been predicting this rate since 2010. In general, recovering from a harsh economy, the rate drops about 1% a year. So, not much of a prediction. More like a rule of thumb that most people didn’t believe any more.

Bill Gross, known as “The Bond King”, just left the company he co-founded, PIMCO. He and his company started this hogwash of a “new normal” economy. Basically, what they meant was the U.S. will be like Europe: regular high unemployment (e.g. 6-9% range) and slow GDP growth of, say, 1 percent annually. Before his departure, he and the company changed this idea to “new neutral”, a more optimistic view. I guess it was just a way of saying the economy is actually quite good and they may have been wrong.

So, yes, the labor participation rate hasn’t really moved. This rate could be considered a more accurate measure of unemployment. But there’s no denying we’ve catapulted out of the economic shed into our typical dynamic growth. When you look at GDP estimates and corporate profits estimates, we’ll hit new record highs for both as far into the future as there are estimates.

Bye bye New Normal.