Author Topic: Why buy gold?  (Read 15376 times)

stahleyp

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Why buy gold?
« on: August 27, 2010, 10:01:07 AM »
I don't know why gold is so popular.

Over the past decade or so, gold has gone up something like 25% annually, from what I understand. I would think there would be a reversion to the mean.

Gold doesn't have an IRR. It doesn't produce anything. It just sits there and you can make stuff out of it. To be far one of the reason people are so so bullish is the best that emerging markets will consume more of it.

If we go through a deflationary period, gold's ability will be a drawback and the price could drop drastically.

If we go through an inflationary period, the economy probably (hopefully) isn't that bad off, and the price of gold could also drop.

The only reasons I could see to be bullish are the following:

As I stated above emerging markets will want to purchase more gold.

or if we go through some type of stagflation environment where we have negative growth and rising prices, like the 70s, of which case it might be "cheap" on an inflation adjusted basis.

Is the market pricing gold so high because of the last two things then?



Paul


watsa_is_a_randian_hero

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Re: Why buy gold?
« Reply #1 on: August 27, 2010, 11:24:47 AM »
I am short gold.

Gold is just as much of a fiat currency as the US Dollar or any other currency.  Nothing backs gold, it pays no interest, pays no dividends, produces nothing, and selling it at a higher price is dependent up a "greater fool."

If you want inflation protection, a much better bet is leveraged hard assets.  Oil tanker companies, crane equipment companies, mining equipment companies.  Another great bet for inflation is shorting futures on the 30 year swap.  If you have access to an account with futures the ticker is I3. 

oec2000

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Re: Why buy gold?
« Reply #2 on: August 27, 2010, 12:18:27 PM »
The argument being made by the "gold bugs" is not so much inflation but that it might become the default reserve currency if people lose confidence in the USD. You can't create gold out of thin air like you can fiat money which perhaps explains why gold has risen in value against the USD over the long run. I don't know what gold has returned in real terms or how its performance compares with T-bills with income reinvested. (It's not exactly true that gold does not provide any income - you can get some income by lending it out as many central banks used to do.)

We've seen how central banks offloaded their gold holdings when gold was in the doldrums in the 1990s. It would not be surprising to see some central banks jump on the gold bandwagon because of its rise in value (some central bankers look through the rearview mirrors too).

I have a tough time buying gold because I can't figure out its intrinsic value (if anybody can at all!). But, there are some smart people (Soros, Einhorn, Klarman (maybe?)) who have taken positions in gold - as insurance, I suppose. That should give us some food for thought.

Maybe those of you who are economists can explain whether there is an argument for the value of the total stock of gold to have some kind of relationship with global GDP or money supply (for as long as gold is accepted as a reserve currency).

It does feel like gold is in a bubble yet it seems still far from the euphoric last stages when every man and his dog is clamoring to buy the stuff. It might be a good idea to short it then but for now Keynes' advice about markets staying irrational for longer than we can stay solvent should be heeded. Or, if you are like Soros, you may want to buy into the developing bubble to profit from when the bubble becomes fully developed. Of course, none of these has anything to do with value investing! :)

bargainman

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Re: Why buy gold?
« Reply #3 on: August 27, 2010, 12:24:21 PM »
Gold is just as much of a fiat currency as the US Dollar or any other currency.  Nothing backs gold, it pays no interest, pays no dividends, produces nothing, and selling it at a higher price is dependent up a "greater fool."

I agree with the rest of what you said.. but..  Gold is not as much of a fiat currency.  There is currently a limited supply of gold in the world.  Pretty much all the gold that's ever been mined in the history of humanity is around, and according to wikipedia:

"A total of 165,000 tonnes of gold have been mined in human history, as of 2009.[1] This is roughly equivalent to 5.3 billion troy ounces or, in terms of volume, about 8,500 cubic meters, or a 20.4m cube."

So we're talking a 20.4 m cube vs all the printing presses in the world :-)


stahleyp

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Re: Why buy gold?
« Reply #4 on: August 27, 2010, 12:37:31 PM »


I have a tough time buying gold because I can't figure out its intrinsic value (if anybody can at all!). But, there are some smart people (Soros, Einhorn, Klarman (maybe?)) who have taken positions in gold - as insurance, I suppose. That should give us some food for thought.


Einhorn and Soro are betting on it. In the WSJ article is accurate, Klarman is not bullish on gold.

"All the obvious hedges”—commodities and foreign currencies, for example—”are already extremely expensive,” he warned.

Especially gold. “Near its all-time high, it’s a very hard moment to recommend gold,” said Mr. Klarman."

http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704167704575258442772338282.html
Paul

oec2000

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Re: Why buy gold?
« Reply #5 on: August 27, 2010, 12:50:27 PM »


I have a tough time buying gold because I can't figure out its intrinsic value (if anybody can at all!). But, there are some smart people (Soros, Einhorn, Klarman (maybe?)) who have taken positions in gold - as insurance, I suppose. That should give us some food for thought.


Einhorn and Soro are betting on it. In the WSJ article is accurate, Klarman is not bullish on gold.

"All the obvious hedges”—commodities and foreign currencies, for example—”are already extremely expensive,” he warned.

Especially gold. “Near its all-time high, it’s a very hard moment to recommend gold,” said Mr. Klarman."

http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704167704575258442772338282.html


Thanks for clarifying. I thought I may have read somewhere about him buying gold as insurance but could not find the article - hence the "?" in my earlier post. Maybe I was thinking of John Paulson - not sure I would put him in the same league as Klarman though.

SmallCap

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Re: Why buy gold?
« Reply #6 on: August 27, 2010, 01:07:35 PM »
Quote
Gold doesn't have an IRR. It doesn't produce anything.
Quote
I have a tough time buying gold because I can't figure out its intrinsic value

These has always been my two arguments about why I have never even been interested in investing in gold. I see all the supposed benifits of gold being also available in other basic metals but they have more to offer in my opinion. I also much prefer the idea of investing in real estate (they're not making any more of it these days) over gold (they are always finding more of it) and RE has the advantage of producing something and an income stream while you wait.

I have been amazed at how home values around me are so good that they cash flow positively so easily. I really like the idea of investing more in RE.
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stahleyp

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Re: Why buy gold?
« Reply #7 on: August 27, 2010, 01:10:44 PM »


I have a tough time buying gold because I can't figure out its intrinsic value (if anybody can at all!). But, there are some smart people (Soros, Einhorn, Klarman (maybe?)) who have taken positions in gold - as insurance, I suppose. That should give us some food for thought.


Einhorn and Soro are betting on it. In the WSJ article is accurate, Klarman is not bullish on gold.

"All the obvious hedges”—commodities and foreign currencies, for example—”are already extremely expensive,” he warned.

Especially gold. “Near its all-time high, it’s a very hard moment to recommend gold,” said Mr. Klarman."

http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704167704575258442772338282.html


Thanks for clarifying. I thought I may have read somewhere about him buying gold as insurance but could not find the article - hence the "?" in my earlier post. Maybe I was thinking of John Paulson - not sure I would put him in the same league as Klarman though.

No problem. Paulson and Klarman are both great managers, but I wouldn't say Paulson is on Klarman's level. From the research I've done on Paulson, it seems like his fund did okay, but not great, before 2007. He made his fortune betting against the housing market. Klarman has been doing very, very well since around 1982, I believe. Although, to be fair, his fund did trail the S&P for several years during the 1990s.
Paul

SmallCap

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Re: Why buy gold?
« Reply #8 on: August 27, 2010, 01:14:40 PM »
Quote
"All the obvious hedges”—commodities and foreign currencies, for example—”are already extremely expensive,” he warned.

Would real estate qualify as a hedge in the same way that these other areas would qualify and if not why?

Love watching what people can accomplish through business.
www.sethgetz.com @sethgetz

stahleyp

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Re: Why buy gold?
« Reply #9 on: August 27, 2010, 01:20:20 PM »
Quote
"All the obvious hedges”—commodities and foreign currencies, for example—”are already extremely expensive,” he warned.

Would real estate qualify as a hedge in the same way that these other areas would qualify and if not why?




I know Klarman was talking about in some speech or interview that he was investing in some commercial real estate.

http://www.reuters.com/article/idUSN1815559420100518
Paul