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Gold fever is global. Should we trust it?
A handful of gold jewelry
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TEXT OF STORY
TESS VIGELAND: It's hard to recognize an economic bubble when you're inside it. But even the wise men should be able to spot this one. I's not frankincense or myrrh, which leaves us this holiday season with a growing bubble of gold. An ounce of the shiny metal is trading for around $1,100.
It's been setting all kinds of price records for the last several months. And the question now, of course, is whether and how long that can continue. Many of you are writing in with questions about investing in gold. And I'm sorry to say they remind us of the days when you wrote in with worries about how the amazing housing market was going to pass you by.
We asked Marketplace's Jeff Tyler to get out the pennyweight scale and measure the merits of going bullish on bullion.
Jeff Tyler: In India, gold is so popular that even people who can't afford it know the price.
Krishna Deepakyadav: $16,500 rupees for 10 grams.
That's Krishna Deepakyadav. He's 28 and works at a hotel in the Hindu holy city, Varanasi. He believes prospects are good for gold prices
Deepakyadav: They never come down. Always going to high.
Krishna thinks his own prospects for a wife would improve, if he could buy gold.
Deepakyadav: When I am buying the gold, then I can get married.
I dodge bicycle rickshaws crowding the street to visit local gold dealers. Even with record high prices, the first shop I visited was so packed with customers buying gold that management didn't have time to talk.
I had better luck at the next gold merchant -- Vishwanath Alankar Mandir. Behind the counter, Sant Daylseth agrees that gold is important to Indian culture.
Sant Daylseth: There will be no marriages, no religious ceremonies or no parties without gold and silver.
And therefore...
Daylseth: The demand for gold is never-ending.
India is the world's largest consumer of gold. Some prognosticators see India's growing prosperity as a particularly good omen for the gold business. Daylseth agrees.
Daylseth: People are earning more, having more capacity to spend. So people will spend in gold.
Gold fever is nothing new in India. But it's just becoming vogue on the other side of the world.
In London, the mega-department store Harrods is selling bullion. Gold coins, but also bricks of gold. The kind they store at Fort Knox. Each brick weighs almost 30 pounds and costs almost a half million dollars. The perfect stocking stuffer!
Ad for gold investments: Gold has increased over 100...
Mark Levin on a Goldline ad:...Owning tangible assets like gold.
Laura Ingraham on a Goldline ad: There's only a finite amount of gold.
Back in the U.S. of A, gold mania is just picking up speed. Seems like everybody and their brother is pitching the stuff. Even Watergate conspirators.
Gordon Liddy: I'm Gordon Liddy. And I want to share with you something that will protect your future in a very solid, very real way. Gold. It's never too late to secure your future with gold.
David Moon: If a guy like Gordon Liddy is suggesting that you should buy gold, it's probably the time to do the exact opposite.
That's David Moon, president of Moon Capital Management, an investment-management firm in Knoxville, Tenn.
Moon: If these companies, who are selling the gold actually thought that it was a great investment, why are they selling the gold? Why aren't they taking the money they're paying Gordon Liddy and instead use it to go buy more gold at $1,100 an ounce. Instead, what they want to do is sell you gold at $1,100 an ounce.
But it's not just salesmen who are bullish about bullion. Some prominent Wall Street types have forecast higher gold prices ahead.
Jeff Clark is a writer and editor for Casey Research, which focuses on investments in natural resources. He says he wouldn't be surprised if gold prices fall a little bit in the short term. But long term, he predicts --
Jeff Clark: $3,000, $4,000, $5,000 an ounce could be realistic for a gold price.
In Clark's view, the appreciation of gold has nothing to do with demand from emerging markets, like India.
Clark: The reason we believe gold is going to go higher is not because someone wants to wear more jewelry in any particular year. It's because of what's being done to the dollar and because of pending inflation.
He worries that the Federal Reserve has printed money too freely and the U.S. government has borrowed beyond its means. Clark argues that gold is the best hedge against inflation.
It's an argument that investment advisor David Moon has heard for a long time.
Moon: I had a professor who said that 10 to 15 percent of every investor's portfolio should be invested in gold as a hedge against inflation.
How good was that advice?
Moon: Looking back over the last, almost, 30 years, gold was a terrible inflation hedge during the entire period, except during the last three years.
Since 1980, Moon says the Consumer Price Index, which gauges inflation, rose almost three times as much as gold. To hedge against inflation, Moon prefers the stock markets.
Moon: From September of 1980, gold increased 57 percent. nd from that same time period, the Dow Jones industrial average was up 989 percent.
Obviously, unless you're a hard-core survivalist expecting doomsday, you wouldn't want to put all your investment money in gold. But let's say you wanted to buy a little bit. You have some options. Clark says you could buy a certificate for gold stored in a mint in Perth, Australia. Or...
Clark: You can also buy paper forms of gold, just like you would a stock.
Those are known as exchange-traded funds, or ETFs. But for his own investments, Clark says he favors the coins.
Clark: What you really want to have is one-ounce gold coins. They're easy to buy, easy to sell. They're easily recognizable. They're common. You're not going to get a question from someone when you go to sell them some day.
He says a coin should cost about 5 or 6 percent above the market price for gold.
The U.S. recently re-released the one-ounce buffalo gold coin. I hear they make great gifts. Mom, if you're listening, that was a hint.
In Los Angeles, I'm Jeff Tyler for Marketplace Money.
Dear Marketplace,
Regarding the story about gold on December 18 and the comments of David Moon:
The next time you see Mr. Moon ask him about the following equations.
If you go back to price levels of January, 2000, and divide the DJIA, approximately 11500, by the gold price, about $300, you get 38.33 which means that back then you needed 38.33 ounces of gold to but the entire Dow.
If you do the same calculation right now, 10328 divided by $1113, you get 9.28 ounces of gold to buy the Dow, which means that an ounce of gold today buys four times what it bought 10 years ago relative to the DJIA. So where is the increase in purchasing power, in paper stocks or in rock-solid gold? Remember, figures don't lie but liars figure. Thanks.
Paul
To Gordy Silver : because in the second sceanrio, Moon Capital Management is selling their services and expertise to a third party helping them decide which asset to invest in and helping them understand all the risks associated with that particular investment. Without this expertise and rating of stocks and bonds the third party would not be able to make a feasible investment decision. In the Gold company scenario, they are claiming that gold is the end-all be-all investment that will never fail, and Mr Libby is providing a testimonial not a service like the money management firm.
To Gene: A Response:
1) Gold is an asset not an investment. It holds its value over a long term ( remember " buy and hold" ? It applies to anything of value. You can't "flip" anything if you buy it at or near market value. But if you consider having a savings account or CD, which would you rather have - $100k CD with 0.75% or 3 kilos of gold coins? You can always sell some coins whenever you want to get some cash, but can't have access to the CD, or at least take a big hit. Also, 0.75% won't get you anything.
2)Never buy anything less than .999 pure gold. US mint coins ( also Kruggerands) are diluted with copper, which makes them not too attractive to jewelry makers or foreign buyers. Buy Credit Suisse, Maple Leafs, Pandas, etc. - pure gold basically.
3) When you sell, find a reputable coin dealer, bullion dealer etc. You wouldn't sell your house at a flea market , so why sell your gold to someone who is not a reputable dealer? You can also sell to gold refiners. Basically, expect to get 5% less than market price, which is the going rate for ethical buyers. More than 10% off, and you should run away.
3)Finally , consider these 2 scenarios:
Time window: 25 years
a)After paying off your mortgage, your house loses 30% value. Also, no credit line available or at best 35% of the lowest market value.
b) After accumulating precious metals for 25 years , you cash out and buy up cheap real estate on the foreclosure at 10 to 20 cents on the dollar.
Food for thought...
During the Carter administration, there was another gold rush. The price kept going up and up, and I decided I had to buy some, to get in on the bonanza. I got some U.S. Government Sacajawea 1-oz coins.
Shortly after I bought them, the price of gold dropped, until it was half what I had paid for them. I decided to hang on to it, and wait for the long term results.
A couple of years later the price had not risen, and I was needing cash. I started looking for a place to sell them, and could only find pawn shops and similar places that advertised that they bought gold. They offered a fraction of the price reported in the newspaper.
I eventually sold them for just a little less than the market price in a combination buy-gold and tobacco shop. The owner stated that, since it was pink gold, it could not be melted and mixed with other gold, which depreciated its value (though it had not done so when the government was selling it to the public.)
Now, where is the profit in somebody who is not a mega-bank buying gold? Similar to the same question about diamonds, where does one sell it when he decides to?
Jeff your expert needs to engage there brain before they speak. Today you get the to sit in the corner with the pointy hat on. Your expert said;
"_*Moon: * If these companies, who are selling the gold actually thought that it was a great investment, why are they selling the gold? Why aren't they taking the money they're paying Gordon Liddy and instead use it to go buy more gold at $1,100 an ounce. Instead, what they want to do is sell you gold at $1,100 an ounce_
You need to think about what your experts are saying, before you you put them on air*
Moon: * If these companies, who are selling the *Stocks & bonds * actually thought that it was a great investment, why are they selling the *Stock & bonds*? Why aren't they taking the money they're paying *Moon Capital Management* and instead use it to go buy more *Stocks & bonds* at $1,100 an share. Instead, what they want to do is sell you* Stocks & bonds* at $1,100 an share.
Get the point. why not just say you don't like Gold as a investment
Take Care
Gordy
