Author Topic: Why buy gold?  (Read 15321 times)

Zorrofan

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Re: Why buy gold?
« Reply #10 on: August 27, 2010, 01:38:40 PM »
You need to stop thinking about gold as an investment - its not. Gold is simply a hedge against economic collapse. If you think the Euro will self-destruct or the US government will default, you buy gold. Sanj's good buddy Eric Sprott thinks that the global economy is headed for the mother of all downturns, so he holds gold.

My $0.02

cheers
Zorro


rick_v

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Re: Why buy gold?
« Reply #11 on: August 27, 2010, 02:36:11 PM »
I am going to give you all my thoughts on Gold and hopefully this can spark another good debate for the weekend.

First let me start by quoting James Grant:

What is a dollar?

It's a testament to the world's abiding faith in the United States currency. We know what the dollar used to be: It was a legally defined weight of gold. And we know that that is not what it is today. The fact is that, today, the dollar is undefined and, like every other currency, uncollateralized. It is whatever Mr. Market says it is. That this piece of paper, or electronic impulse, of no intrinsic value is accepted the world over as a means of payment and a store of value must stand as one of the greatest and most improbable, monetary achievements of all time.

What is the Gold Standard?

The essence of the gold standard is the idea that in monetary affairs, too, the rule of law should apply. Money should be lawfully defined. The government that issues it should protect and defend that statutory value. A gold-standard country should balance its external accounts. No nation, however powerful, should be permitted to consume much more than it produces for years, or even decades, on end, as the United States has been privileged to do under the post 1971 non gold standard.


Now Here are my thoughts about Gold.

Gold is the ULTIMATE Store of value it backs itself. Why? Because we as human beings have been using it as a means of exchange for thousands of years. Why did we humans did decide to do that? Because Gold is one of the rarest natural resources in the world yet is also one of the heaviest and is mallable.

Lets discuss the fundamentals of gold as a natural resource (precious metal).

90% of the above ground gold has been mined since 1900
Annual Gold Demand has been steady at 3,500 tons a year yet supply from mines is only 2,500 tons a year which means that about 1,000 tons each year come from central bank sales and scrap recycling (sell your gold to me.com's).
A mine which is considered "rich" will yield one ounce of gold from two truckloads of ore. *again this is a rich ore body.
Since 1998, as price of gold has quadrupled, annual expenditures of public companies for new mine discoveries has gone up from $800m each year to $3.8B last year. Yet the amount of gold discovered (annual mine discoveries in ounces) has decreased by 74%!!! In 1998 public companies discovered 70m ounces of gold and in 2009 about 15m had been delineated.
Cash costs for producing gold have been going up and up and up.
In the last 2 years the largest buyers of gold in  he world have been China and India as their central banks look to build up their relatively tiny stocks of gold reserve.
If you take all the gold in the world that has ever been mined (24K .999 gold) it would fit into a cube which would stretch 18 meters across and 18 meters high. Such cube would easily fit underneath the Eiffel Tower.
Annual Gold production at 2,500 tons would fit in a living room of a normal sized house.
There are many more facts which you can read up online.

So the fundamentals of Gold are VERY bullish. They are more bullish than anything else I can think of in the world today. The question is how to profit from this trend and how to do it using principles of value investing.

I personally feel that buying bullion or Gold ETF's is not the way to go and have not deployed my capital that way. I also dislike Gold futures as they require the investor to anticipate the precise timing as to when gold will rise.

That being said there are ways to gain leverage to the price of gold while also demanding a margin of safety.

Without describing how I do it, I will just say that accounting laws are VERY favorable for investors in this industry. If a mining company spends $25m delineating an ore body that ore body will be carried on its books at $25M. There is no revaluation mechanism unless that ore body is producing and even then it will not reflect total reserves. Savvy investors can look for dislocations in valuations. Many exist!!!

I have bought gold companies at $25 per ounce in the ground only to see them rise to $300-700 per ounce. Today the average non-producing company trades at roughly $150 per ounce still providing sufficient leverage to the price of gold, even when including cost of production.

This industry is a totally different one from reading vanilla balance sheets and income statements. A whole new set of skills is required. But I can promise you Gold as a commodity/currency/natural resource has fantastic long-term fundamentals. And so the trick is to buy an ounce of gold today at a discount to its intrinsic value in the future.

Personally, I believe that Central Banks globally have become irresponsible and that the only true currency left is Gold. Gaining exposure to companies that own significant resources will be the trade of this century. I have no doubt in my mind!



T





broxburnboy

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Re: Why buy gold?
« Reply #12 on: August 27, 2010, 03:49:40 PM »
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."


We've had several iterations of this same discussion over the last couple of years but it boils down to this:

Gold is money, fiat currencies are not. Either you get it or you don't.

Gold alone amongst all the different means of exchange that have been used throughout history maintains its role as a store of value not dependant on someone els'es promise. What you see is what you get... an ounce if gold has its own intrinsic value. If it was next to worthless, it would be used in plumbing, electronics, jewellry, as an industrial catalyst, as a superior roofing material etc. etc. etc.... paper, whether fiat currencies, stock certificates, or any other iou, contract etc.. is all counterparty risk and has a miniscule intrinsic value

With this in mind you can say that the US dollar is devaluing in terms of gold, not that gold is getting more expensive, the observation then becomes, that the "greater fool" will now sell their gold for depreciating piece of paper with a little more ink on it.

If you beleive that Gold and Silver are intrinsically worthless, please explain why the dollar value of silver coins withdrawn from circulation in the 70's have increased in fiat price by a factor of about 10.... according to your theory they should have dropped and should now be virtually worthless.
Also please explain why the IMF, the Federal Reserve and most central banks hoard their gold as assets to back their currency. They should have dumped their gold ages ago since it is worthless and creates no real return.

rick_v

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Re: Why buy gold?
« Reply #13 on: August 27, 2010, 04:02:32 PM »
Good points, what many people don't know is that the US has the largest gold hoard out of all the other nations. That is if its all really there :)

Myth465

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Re: Why buy gold?
« Reply #14 on: August 27, 2010, 06:50:39 PM »

We've had several iterations of this same discussion over the last couple of years but it boils down to this:

Gold is money, fiat currencies are not. Either you get it or you don't.

Lol

This should say either you  agree or you dont. I dont. Gold has a value just like corn, wheat, or labor but its not money to the vast majority of people walking around today.

Im agnostic towards it from an investment perspective, but I would venture to say you are the minority in this argument.

SmallCap

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Re: Why buy gold?
« Reply #15 on: August 27, 2010, 08:43:02 PM »
Quote
please explain why the dollar value of silver coins withdrawn from circulation in the 70's have increased in fiat price by a factor of about 10.... according to your theory they should have dropped and should now be virtually worthless.

you are talking about something that is valued by collectors not metal recyclers. Those coins were removed from circulation quicker and more aggressively because of their metal content and so those coins became rarer and therefor worth more.
Love watching what people can accomplish through business.
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SmallCap

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Re: Why buy gold?
« Reply #16 on: August 27, 2010, 08:50:02 PM »
Quote
90% of the above ground gold has been mined since 1900
Annual Gold Demand has been steady at 3,500 tons a year yet supply from mines is only 2,500 tons a year which means that about 1,000 tons each year come from central bank sales and scrap recycling (sell your gold to me.com's).
A mine which is considered "rich" will yield one ounce of gold from two truckloads of ore. *again this is a rich ore body.
Since 1998, as price of gold has quadrupled, annual expenditures of public companies for new mine discoveries has gone up from $800m each year to $3.8B last year. Yet the amount of gold discovered (annual mine discoveries in ounces) has decreased by 74%!!! In 1998 public companies discovered 70m ounces of gold and in 2009 about 15m had been delineated.
Cash costs for producing gold have been going up and up and up.

I don't have the comparable numbers for other metals like platinum but if you remove the historical aspect of Gold

Quote
Gold is the ULTIMATE Store of value it backs itself. Why? Because we as human beings have been using it as a means of exchange for thousands of years.

then wouldn't there be the same type of arguments behind platinum? Take away the historical aspect of gold and what is so different about it in comparison to any other rare metal?
Love watching what people can accomplish through business.
www.sethgetz.com @sethgetz

bargainman

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Re: Why buy gold?
« Reply #17 on: August 27, 2010, 09:13:00 PM »

We've had several iterations of this same discussion over the last couple of years but it boils down to this:

Gold is money, fiat currencies are not. Either you get it or you don't.

Lol

This should say either you  agree or you dont. I dont. Gold has a value just like corn, wheat, or labor but its not money to the vast majority of people walking around today.

Im agnostic towards it from an investment perspective, but I would venture to say you are the minority in this argument.

I think the 2 most convincing arguments I've heard regarding gold are
1. it's a store of value because there are thousands of years of human history saying gold is valuable.  Plus, if you ask any Joe, Jane on the street anywhere in the world, if gold is valuable, they will say "yes" pretty much unequivocally.  It's basically human behavior, ingrained, and it would take a lot to change it.  Changing behavior and beliefs on a large scale like that is next to impossible.  I mean it's the whole idea of having a brand!  A brand means something, just like gold has a brand which means 'money'.  Only 'elitist' investors (  ;D ) argue about whether it's actually valuable or not.  The vast majority of the world just takes it as a given, and that's not going to change.
2. There is a very limited supply and it's not growing very fast not will it grow very fast.

That said, I personally won't invest in it because I agree with Myth and Watsa_radian that it doesn't produce any cashflow or do anything productive other than just be.  But the 2 points above do convince me that it's valuable in and of itself.

stahleyp

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Re: Why buy gold?
« Reply #18 on: August 28, 2010, 06:06:20 AM »
I think gold is good for diversification purpose in a portfolio, a small amount, of course, as an inflation hedge, and for jewelry. I don't think it's a good time to be buying a lot of gold, though.

Gold is getting a ton of hype now. Gold commercials, gold stores, gold vending machines! Anyone remember a few months before the oil market burst, they were selling prepaid gas cards? lock in all the gas you want for only $4 a gallon! everyone knew that gas was never coming back down. peak oil! emerging markets using more oil!  dollar devaluing against oil! on and on.

Gold may continue it's torrid pace. People much smarter and richer than any of us (i'm assuming!) are betting on it. i just think history is against those that buy gold, and there are plenty of indicators that the market is getting a bit frothy.

Something else I wanted to throw out there. a lot of people say that gold has a way to go because it's still so much below the inflation adjusted prices of the 70s. Well, that might be true. I would make the argument that it may not get that high again, because the market learned from it's mistakes last time. when you buy gold at outlandish prices, be prepared for terrible gains. Is it an outlandish price right now? i don't know, but it's certainly not cheap.

Paul

biaggio

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Re: Why buy gold?
« Reply #19 on: August 28, 2010, 07:31:11 AM »
for what it is worth, it is hard to buy gold as a value investor. "We" normally like to buy the present value of $1 for $0.50. It is hard to buy without knowing what the IV or present value is. It is especially hard buying something that probably does not have a lot of personal utility value. Most of us are cheap skates + only after we get enough pressure from our wives that we breakdown + maybe buy some jewelery (I can t even spell it).