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View Full Version : Gold stocks continue their stealth rise...


A9suited
06-25-2003, 12:43 PM
...and I've yet to hear a comment apart from the occasional aside in the financial press. Smart money is repositioning in anticipation of the inevitable problems all of the Greenspan liquidity will spawn.

A9s

Wildbill
06-26-2003, 03:41 AM
There is a replacement, an asset people have decided to hold instead of gold to hedge against inflation. Its call a home with a fat mortgage.

Demand for gold as an investment is plain silly. Why on earth would you get too serious about this asset? It was a possible good idea back when countries lived by the gold standard, but if there was a major crisis now that roiled the financial world I think gold wouldn't hold its value half as well as people think. A key factor is that while some gurus treat it like its a finite asset, something like an all-world currency supply, fact is that it gets cheaper and cheaper to produce and supply. New mining techniques have made it possible that there will be a big fat glut of it in the coming years. Further complicating the issue is that a lot of it is mined from dubious sources in Africa and elsewhere in the world. They don't have an OPEC for gold so these dubious sources are flooding the market taking as much as they can out of the ground to pay for their causes and there just is no certain supply and a hard to gauge demand. Just remember at its heart that its really now just a natural resource, since the gold standard has been broken it lacks it natural value source tie it used to have.

If you were certain about the mess of too much liquidity or inflation becoming an issue why not just bet on that? Why bet on something that has other uses and is subject to the vagaries of supply and demand into an uncertain future? You can bet on any financial scenario you want, that would be much more efficient and your return would be very well correlated with the accuracy of your prediction. With gold who knows what will determine your return in a given time span?

A9suited
06-26-2003, 08:29 AM
Your response is exactly my point. No one cares.

A9s

GeorgeF
06-26-2003, 11:01 PM
I doubt much new gold supply will come on line. Gold is not really needed, my guess is that the worlds exploration efforts are in energy not minerals.

I agree that gold is not money but it is a store of value you can keep in your home (try keeping $10,000 if zinc or flax in your home). If the dollar keeps sliding you might be surprised at how people will start buying gold, particularly in third world nations. There isn't much gold, starting a panic will not be hard. If interest rates go to zero then holding dollars or gold is the same as far as income is concerned.

As to buying a house with 90%+ mortgage it will work if You can make the payments, the prices in your market do in fact go up, and you bought the house at a reasonable price to begin with. You only win the realestate game if you can make the payments.

I believe in Japan when they dropped intrest rates people started buying interest rates. At some point inflation did not come along to save them so they were screwed.

Wildbill
06-27-2003, 02:36 AM
If inflation goes up drastically then home mortgages with 5-6% fixed rates are as good as gold. Yes you have to make payments, but if necessary you should rent the place out because the mortgage alone is a huge bargain and rents will go up real fast while your payments will become, in real terms, cheaper and cheaper. That is the mistake that people make much of the time, they put so much sentimental value in their house, but its has to be treated as an asset much like anything else. If you can't make the payment but stand to lose a lot of equity in foreclosure you better either get a line of credit or rent the place out and move somewhere cheaper. If its not worth much over the loan then you can let it go, but I see a lot of people that put their faith in whatever higher power they have and stop making payments on their home like morons. They get the attitude of "well if I can't stay in my house I don't care what money I am left, I might as well be poor as hell". Whatever. Homes and real estate sometimes make people just act really stupid, but at least they aren't alone! This irrationality is creeping into the housing market right now and I am afraid a whole lot of people are going to either get hurt or be sorely disappointed in their total returns over the next decade. But I do grant its a pretty decent inflation hedge.

I don't question the value of gold, I question the value of using it as an investment. If you have the money to buy a significant amount of it then you probably could just as easily get into a myriad of futures which will pay off your prediction with near perfect correlation. Buying and storing gold and then hoping other factors don't enter into the equation just isn't efficient or wise. That is what makes me laugh, all these doomsday guys when they make their nasty prediction always start talking about gold. Go open an account with a futures broker and sell any of a number of interest rate contracts, I guarantee the commissions will be a lot cheaper than buying up a lot of gold or even investing in a gold fund and like I said you don't get other unrelated effects in your results. The way futures works people could put 5% of their wealth and sell contracts and if inflation blows up they will make a killing and higher prices for everything will be the least of their worries. Of course if rates go against them they will lose, but this is only a strategy for the most hardened bears.

GeorgeF
06-27-2003, 09:40 AM
As far as renting goes, rents do not seem to be holding up for REITs:
http://quote.bloomberg.com/apps/news?pid=10000103&sid=aYRUsv6e.Mpk&refer=us

If the pros can't make money on large multifamilly buildings I do not see any way ma/pa are going to with a run down house they over paid for. Renting is a business, I do not believe the typical person can do it.

My problem with realestate is that it seems that people are paying $500,000 for a $400,000 home thinking lower interest rates and inflation will save them. I think alot of people would be better off renting.

As to gold most people on earth live in third world countries where banks ect are unstable. They actually will hold dollars, euros, yen in the form of currency. If you noticed news stories about Iraqies buying satellite dishes, I bet they paid cash in hard currency. There is nothing to stop them from adding gold to the mix. It may seem that a bunch of third worlders don't matter much but as I see it prices are determined by the most desparate buyers and sellers. People in the third world are desparate.

Wildbill
06-27-2003, 03:37 PM
Come on, gold buying by third world countries isn't going to change its value. And I am not referrring to third world readers either. I am talking about investing gurus that say buy gold. That was it. Yeah if I was in a third world country and had some cash I probably would look into keeping some or most of it in dollars or gold, but that is clearly not our audience here.

As for renting, I don't know where you got that idea about what I said. I was talking merely of people that lost a job or couldn't make their payments, had nothing to do with getting into a rental business. I think rental businesses are good for those that have the time and day to day money for them, but for the most part that doesn't cover most people. I don't condone buying a house merely for inflationary gain purposes and have agreed in other articles on here that in many areas a bubble definitely exists. Fact is though that most people don't think in terms of what a house costs, just in what their payments are and that is driving a lot of the increases just as surely as it will kill off much of the demand once rates go up. People don't necessarily buy for inflation hedging purposes, its just that houses are great for that purpose and for 99.9% of the population they are their only protection against a rapid rise in inflation. I still am not sold that liquidity is going to drive up a high rate of inflation. I think competition is too strong worldwide for inflation to become a big issue, unless the dollar has something happen that absolutely kills its value. That is not likely to happen either because the world as a whole has clearly made its vote as to what currency they would choose to hold in addition to theirs or at times instead of their own, and that huge demand and level of holdings will keep the dollar from ever having the type of plunge seen in Argentina or a handful of other countries in the last few years.

AceHigh
06-28-2003, 12:27 PM
"There is nothing to stop them from adding gold to the mix."

Yes there is, it's a pain in the ass. Gold is heavy and you have to know about quality, weight, etc. With Dollars and Euro's any street vendor knows what they look like and will take them in a heart beat.

GeorgeF
06-28-2003, 06:52 PM
" With Dollars and Euro's any street vendor knows what they look like and will take them in a heart beat."

I was in Morroco once when the dollar was under pressure. Walking around Marrakesh I was confronted with a black market currency trader (It is illeagal to convert money except at a bank). He asked me for D-Marks until he realized I was American at which time he asked me if I had any malboro cigarettes. He was not interested in dollars.

As to weight if all major central banks decide to flood the world with bank notes the value of paper currency vs gold (oil, flax, potatoes, ect) will decline. Given a choice amoungst things appreciating against the dollar gold is an obvious choice in terms of weight, spoilage, ease of trading.

As to borrowing money in hopes of paying the loan back in the future with less valuable dollars I agree it is tempting. This did not however work in Japan. I also think you should not buy real estate unless you know what you are doing. Unlike the stock market realestate diversification is very difficult. Buying one house in one market with a large mortgage violates basic risk management advice. For example you can buy houses in Buffalo NY on ebay. Needless to say previous owners were thinking inflation would take care of them too, somehow it did not work out for them.

http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=2331178657&category=12 605

adios
06-28-2003, 09:24 PM
"Buying one house in one market with a large mortgage violates basic risk management advice."

And what advice might that be? I guess the criteria for what constitutes a large mortgage would be helpful.

"For example you can buy houses in Buffalo NY on ebay."

If I'm not mistaken that house is selling for $15,900 and the owner will to let out a 10% real estate contract. No wonder 10% is very by today's standards. I guess what you're trying to say is that the house at one time was worth a lot more money. It probably was but we don't really know very much about this particular house. The seller is emphasizing the point that the home is in disrepair and the buyer accepts it as is. We have no idea as to the nature of the problems with the house. You may have a valid point but one house being sold on Ebay that is in disrepair doesn't prove anything.

"Needless to say previous owners were thinking inflation would take care of them too, somehow it did not work out for them."

Why should we dray that conclusion necessarily? I can think of many plausible scenarios besides that one.

adios
06-28-2003, 09:25 PM

A9suited
06-29-2003, 09:29 AM
It is down a few percent from January. But the stocks continue to rally. The point I was making is that there has been little fanfare about this, I was not making any statement as to the pro's and con's of gold ownership.

Gold is historically a value storehouse, however, and given the large US trade imbalance and the recent dollar weakness, a dollar 'crisis' is not far-fetched, but still a longshot. (European investors who purchased 10 year US govt bons in February have already lost 7 years of interest in exchange rate changes)

The value of gold-related investments is that they will hold value in terms of purchasing power vis-a-vis a basket of world currencies, if the US dollar continues to weaken.

However, as long as the world continues to ship us valuable items in exchange for our paper, and the US dollar is the international currency of choice, gold is minimally attractive to a US investor.

A9s

BigSlick
06-29-2003, 10:35 AM
Gold is a great investment. Everyone should have gold in their port ~10%. Gold should slow down for the next few months (india stops buying as an example). In the fall it should pick up. The demand is there. It would not be surprising if gold breaks 400 this year.

Check out www.tfnn.com (http://www.tfnn.com) The owner is really big on gold. you can listen to his radio show over the internet.

GeorgeF
07-01-2003, 04:56 AM
1) There is not enough gold + goldmining stocks for everyone to have 10% of their assets in it. I would suggest natural resources stcks in general rather than just one metal.

2) Gold will only do 'great' if something very bad happens with the US dollar. For example if we don't get the Iraqi oil pumping and the deaths of out soldiers continue the Iraq war will start getting expensive. This coupled with tax cuts and an increase in the size of the US government and deficits will cause a devaluation if the dollar.

3) I do not own any gold myself but am experimenting with a mutual fund BEARX which has mining stocks in it's mix. I would prefer if they were not so concentrated on gold. www.prudentbear.com. (http://www.prudentbear.com.)