Gold Can't Even Keep Up With Inflation Over A Long Stretch of History

Discussion in 'Economics' started by ByLoSellHi, Oct 22, 2008.

  1. Gold May Pay Only in Case of Maximum Despair: Jane Bryant Quinn

    Commentary by Jane Bryant Quinn

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    Oct. 22 (Bloomberg) --
    Gold is for rich guys -- buying physical gold, that is. The metal's highest and best investment use is as insurance policy against a currency collapse. For that purpose, you need a lot of it, stored around the world. Owning 20 or 30 coins is nice but won't protect your standard of living in a world where dollars are dust.

    Gold isn't even a reliable hedge against inflation. It reached $850 an ounce in January 1980, a price not seen again until January 2008. During those intervening 28 years, gold plunged and reared but lost more than half of its purchasing power. For a 1980 investor to break even after inflation, gold would have to reach $2,200.

    It might, but how long did you plan to wait?

    For the average investor, gold boils down to a speculation on higher prices. The latest run-up started in August 2007, when the housing market visibly started falling apart. From $652, it raced up to $1,003 an ounce last March, zig-zagged back to $747 in September, jumped to $905, then slid to $772 as of yesterday.

    Hedge funds drove the market but individuals jumped in, too. So far this year, investors have purchased 611,000 newly minted, one-ounce U.S. gold coins, compared with 315,000 in all of 2007.

    ``We've seen a switch in appetite, with investors moving from futures to physical gold, either owning it directly or going through exchange-traded funds,'' says Suki Cooper, an analyst at London-based Barclays Capital.

    Coins purchased strictly for their gold value, not their numismatic value, are known as bullion coins. Many countries mint them -- South Africa (Krugerrand), Canada (Maple Leaf), China (Panda), Austria (Philharmonic) and Australia (Kangaroo), among others. The U.S. Mint makes Buffalos and American Eagles. For investment purposes, you want the one-ounce size.

    Supply Shrinks

    That is, if you can find them. The yearlong run on bullion has dried up the supply of coins for immediate delivery. Everything was out of stock last week at the online dealer had Maples at 7 percent more than the spot gold price.

    ``The premium will likely come down 1 or 2 percent when all coin supplies improve a bit,'' says Jon Nadler, senior analyst for Kitco Metals & Minerals in Montreal.

    The various mints project the number of coins they expect to sell each year and produce on demand. Toward the end of each year, they let their inventories run down while gearing up for next year's run. The surge of buyers left them short of high- quality blanks.

    Currently, the U.S. Mint is striking only a limited number of 2008 Eagles. The wholesalers are on allocation. No Buffalos are being shipped at all, although a small number might still be minted before the end of the year. By late December, dealers expect to start receiving 2009 coins.

    Coin of the Realm

    For U.S. investors, American Eagles are the bullion coin of choice. You can put them into individual retirement accounts as long as they remain in their original U.S. Mint capsules. (It's not clear that Buffalos are allowed.)

    Eagles also slip through a loophole in the tax reporting law, says Scott Travers, author of ``The Coin Collector's Survival Manual.'' Dealers have to report to the Internal Revenue Service if you sell 25 or more Maples or Krugerrands. They're not required to report your sales of American Eagles and some other coins, although some may do so. (Kitco, in Canada, says it does no tax reporting at all.)

    Normally, one-ounce Eagles sell for 5.5 percent to 7.5 percent over the gold price, Nadler says. Small dealers might mark up the price even more.

    In this buying panic, I saw online dealers charging as much as 13 percent more than spot gold. Their Web sites warned that there might be a wait before your Eagles could be shipped.

    Fool's Gold

    On EBay and the Home Shopping Network, coins sell at fantasy prices. A set of Eagles in four different weights was offered on HSN at $4,999.99. In gold, it's worth about $1,450. Prices like these take advantage of neophytes. A coin dealer might sell a four-coin set for $1,850, Travers says.

    A cheaper way of buying gold is through an exchange traded fund. The most widely traded fund, SPDR Gold Shares, costs 0.4 percent a year in fees, plus your brokerage commission. You don't own the gold directly. A trust holds large gold bars (warehoused principally in London) and sells shares against them, which are traded on the open market. You can't redeem in gold itself.

    It costs even less to buy bullion in a pool account, such as the ones offered by Kitco. Like an ETF, a pool account sells shares in a large bar of warehoused gold. You pay just a hair over the spot gold price, and sell it back to Kitco for just a hair under. There are no annual expenses. For a fee, you can redeem in gold itself. As with ETFs, you depend on the pool's trustee to support its guarantee.

    Gold, by the way, is taxed as a collectible -- whether you buy it in the form of coins, ETF shares or an interest in a pool account. Your tax rate on long-term capital gains would be 28 percent, compared with 15 percent on other assets. Only a significant price gain (or currency collapse) redeems your bet.
  2. But it is alot closer to inflation than fiat money.
  3. The funny thing is, that all these people buying and holding gold right now (physically) are going to see gold prices drop down and when they get to around to the 600 or so range everyone will figure gold is going back to 350-450 per ounce (like it had been for 20 something years) and start dumping their gold. That will further push the price down and I dont think its unrealistic to see gold in the high 200 dollar range like back in 97. That will put alot of gold mines out of business (as If i remember right it costs something like 265 dollars or so to dig it out of the ground) Well thats the figure I heard back in 1997, so I'm guessing it could be more now.
  4. m22au


    The funny thing is, that all these people holding US Dollars right now are going to see US Dollar prices drop down and when they get to around to the 1/1200 gold ounce or so range everyone will figure the US Dollar is going to 1/1500 gold ounce and start dumping their US Dollar. That will further push the price down and I don't think its unrealistic to see US Dollars below 1/1600 gold ounce.

  5. Excellent points. I saw an interview with the CEO of AngloGold Ashanti on Bloomberg a couple months ago (I believe it was in August) and he said that a third of their competitors start to make losses when gold drops below $800, as the cost of producing an ounce of gold has doubled over the last 5 years.

    Good luck to the gold bugs :cool:

    Edit: Video link
  6. Dumb article.
  7. why would anyone pay a premium for anything, particullarly a commodity that is clearly priced?

    If you want to see how much gold is really worth, check out your local pawn shop.

  8. As soon as the mining companies start shutting mines, COMEX will default.

    Any mining company with Copper, Nickel, Zinc as a byproduct is probably losing cash for every ton of ore processed now. There is no point wasting fuel, tires, and electricity at current prices.

    The shares are already so low they have nothing to lose by shutting down till prices improve.

    Pawnshops are selling their gold on ebay these days. They are getting $950 for junk coins.