Has anyone noticed the movements of gold, silver, etc… lately? As I write this, gold is almost at $1250. The gold price, silver prices, and the platinum price have all been going through the roof. Sovereign debt risk is the current topic of interest, and there is a tug of war going on between the profit takers and those looking to jump into the bandwagon.
I have been slowly investing in precious metals since the beginning of 2009, and I have built up a small stake in gold, silver, platinum, palladium, and rhodium. I saw how much the metals, especially palladium and rhodium, had fallen from their 2008 peaks, and I figured that they were very oversold. Unfortunately, I did not buy at the low point due to a lack of funds, but I did buy at lower prices than today.
The plan
Since my initial investment, I have been slowly adding to my position over time whenever the prices have dipped a bit. My current plan is to keep my precious metals investment at around 10% of my total investments. At each point along the way, I have slowly added as my total investments have grown, but I have never sold… until today.
I believe we are currently seeing a bit of mania going on in the markets. I have a friend who doesn’t follow the markets very closely, doesn’t look too much into investments, and even he is asking me if it’s a good time to buy gold and how he can do so. With all the interest in buying driving the prices up, I figured it’s a good time to finally take some profit! I have sold half of my stake in gold, silver, and platinum, in order to buy back at lower prices. If it turns out that I am completely wrong, then at least I still have some exposure to the movement.
My performance
My metals performance has been mixed. Gold has not done as well as I expected, though other metals have helped pick up the slack. The problem with palladium and rhodium is that there is an additional sales tax which immediately eats up 14% of your investment on top of the spread, which can be quite large. In spite of that, I have done well on these two metals; I don’t plan to add to my position nor sell, so I will sit on them for now.
| Gold | Silver | Platinum | Palladium | Rhodium | Overall | |
| CAGR | 10.3% | 17.9% | 28.4% | 63.7% | 30.3% | 27.01% |
Unfortunately, unlike my good buddy Mich, I cannot claim to have beaten the index. If I had followed the same investment strategy and invested in the S&P 500, I would have had a CAGR of 38%, instead of the 27% that I actually had. This is before brokerage fees and management fees, of course, but I still would have come out ahead.
So…
So, how about you? My feelings on this are pretty mixed. On one hand, I don’t like to sell; I prefer to buy and hold, building my position over time. On the other hand, this looks like a good opportunity to take some profit and wait for a minor correction; it seems that sovereign risk fears are sending Mr. Market into a panic and many people are buying at the top. I’m also a little disappointed that I haven’t even beaten the S&P 500.
So, what do you think? Do you think this is the next leg up to $2000 an ounce? Or people are rushing in a bit too fast and we are due for a minor pullback? I’d love to hear about it!
Hey Kevin!
Did you know that gold as an asset class has returned more that 15% per year since 2001? I was fortunate to make an investment in gold and silver early on. Throughout this bull market, each psychological barrier is met with nay saying and resistance. At first no one thought gold would breach $500. Then, it was never going to reach it’s old highs of $850 plus. Gold has years to go and many (yes many thousands left) IMO.
What most people miss is that gold is now acting as the leading currency around the world. I like your approach of allocating 10% of one’s portfolio to PMs. Silver should do well relative to gold the next few years.
Hey Mike,
I did a comparison not too long ago; Gold hasn’t done as well as the Wilshire 5000 since the late 70s, but it has destroyed it if you compare since the past 10-15 years or so. Unfortunately I didn’t have funds to invest in it until 2009!
I do agree with you, I also think that the fundamentals for precious metals are going to remain strong for a while; they are going to stay strong for all assets that rise with inflation. However, the money will follow wherever the “mania” currently lies; before 2008, this was in housing. It may yet go back into housing, but looks like it’s also starting to go into gold.
I know that you shouldn’t try to time the markets, but I feel that the very recent rise is based more on fear and greed than anything else, and I am expecting a short pull-back before we go up, up, up once again! If I am wrong, then… damn! It will be time to redeploy the cash, but at the least loss.
Hey guys,
An ounce of gold would have bought you a nice men’s suit in Shakespeare’s day. An ounce of gold would buy you a nice men’s suit today.
And when Joe Public, as you mentioned, thinks it’s a great time to buy something…. I can’t ever think of a historical time when following Joe public turned out for the investor following Joe.
No gold for this guy. I think that smart investors buy the asset class that has shown long term appreciation over many years (which gold hasn’t) and which currently disinterests investors—and they all see lousy future prospects for that asset class, for a variety of different reasons….the main one being the fact that it hasn’t moved in a decade or so.
I’m betting my portfolio on that premise.
Cheers—-and a great post Kevin!
Andrew
It would be fun to see a good-natured critique of this post. If it’s too long, you could just skip down to the last two paragraphs to get the gyst.
Cheers,
Andrew
http://andrewhallam.com/category/gold/
Hey Andrew,
The funny thing is that while I agree with Mike that metals still have a ways to go, I also agree with you when it comes to the very long term performance. I discovered this for myself when I compared from the late 70s to today, and I was actually shocked by the results because it wasn’t what I was expecting (who would have known that years of picking up gold at $200/ounce and then watching it go to $1100 would still not beat the market?).
I also agree that short-term timing is probably not the way to go. However, my main caveat is that governments are currently doing almost everything they can to make gold attractive and to upset the markets. This is bullish for PMs. I am very, very slowly starting to hear talk about “austerity” and “deficit reduction”, but until the 800 pound gorilla at the top of the hill starts talking about the same, then I don’t expect a big shift in the fundamentals.
It’s always driven in part by fear (of inflation) and greed (hoping that others are fearful so one can cash in), since as you say, gold doesn’t produce dividends or do anything. Its value is entirely in the eye of the beholder. Silver/Platinum/etc… do have a few more industrial uses. If I were to go back in time to last year when I started, I would probably ignore gold and go more into the industrial metals.
I fully acknowledge that this is a speculative play, and one that I would look to unwind if the fundamentals change. This is why the other 90% of my portfolio is in stuff I know I can’t screw up, like indexed funds. 🙂
There is a season for certain investments. They’re simply cycles. Gold’s action the last 10 years and especially the last 2-3 is more the result that gold has gone from a commodity to a currency. This can be seen by looking at gold’s price action versus all fiat currencies. I am not a gold bug because I am a doom and gloomer.
I don’t even think we should go back to a “gold standard” is it inhibits liquidity. This is one of the reasons why we went into a depression, people hoarded money in the 30s. But what is happening in Greece is not stopping in Greece. Greece has to borrow from “everyone” just to pay their bills. This is just like the US does from China and Japan. China isn’t stupid. They recently shortened all their durations and is now 2nd to Japan in terms of our lender. I believe a major default will occur and soon. When that happens it will be sudden and swift.
The amount of money in the bond market is enormous. To say there is default risk is an understatement. Look at the actions of the IMF and the EU. A $trillion loan package does not solve the debt problem. Forget about gold and inflation vs/ deflation. The main reason gold is moving up as a currency is because there is no default risk. For people to equate what is happening around the world (Eg Greece) and golds price with the Dot Com era is simply lunacy and lazy thinking. Again, there is a reason gold is rising against all fiat currencies and it is based on fundamentals. There will be a mania faze but that is still a ways away.
People think gold is speculative yet they don’t even see what is coming in the form of major currency defaults right and left. I would much rather hold an ounce of gold versus a currency that is 850% in debt to its annual GDP (when you count outstanding obligations) That’s about as fundamental as you can get.
I am not suggesting that anyone buy gold – of course you should come to your own conclusion. Fiat currencies come and go about every 80-100 years. Gold is the one currency that has a history of at least being able to hold it’s value during these turns.
.-= Mike´s last blog ..The Greece Mess – why we should care and what we can learn from it. =-.
Mike is right about seasons for investments. But when we throw in the human element, things don’t turn out as well for people, in reprospect, as they look like they would on paper. That’s not to say that it won’t work out for Mike; it might. But I love looking at the human element. Take stocks as an example. If the average rate of return on stocks has been 10% over the past 100 years, the average investor has only made about 6%. He buys when he feels good about the economy and sells when he thinks things look dire (or he doesn’t purchase as much). Gold is the same. For someone to get rich on gold, history would have to change. Because gold, long term, has barely matched inflation, as an aggregate. Throw in human behaviour (which makes us buy things that make us feel good, based on previous performance and rationalized fundamentals) and the average investor has lost a lot of money buying gold.
Mike is also right about the fundamentals that started driving the price. He bought at a great time, in 2001, when gold was trading at 98 cents on the dollar, post inflation. When Mike bought Gold, it had underperformed inflation (as an average) over the previous 200 years. His timing was great.
But back to the human element. We often think, psychologically, that what’s fundamentally happening today is always tougher than what has fundamentally happened in the past. But if we look at 1818, 1841, 1930-1935, 1974 and 1980 we can see periods where the price of gold was also fundamentally propelled by some scary scary scary stuff–and in each of those time frames gold appreciated by hundreds of percentage points. If we had 20% mortgage interest rates, like we had in 1981, the average person would have far more reason to be afraid of the monetary system collapse, you could argue. It’s possible that if we lived for 300 years, and if we were interested in economics, we might look at the current fears and suggest that the more things change, the more they stay the same.
I’m not smart enough to dive in and out of investments that tug at my heart (which all investments do). So I will stick with the tried and true.
$1 invested in gold in 1801 = $81 today
$1 invested in the U.S. market in 1801 = $10.4 million today
Fundamentals will always be present, long term, whether an entity is for sale on the open market or not. In 1948 the DOW was at 180 points. If the markets closed in 1948, and opened again in the year 2000, we’d see a DOW re-open at about 9000 points. Intrinsic value would be based on the price that the average investor is going to pay for a level of corporate earnings. Gold is going to be a heck of a lot trickier. True, there can be supply and demand fundamentals. But I think that much of it will always rely on fear and greed for gold.
Your arguments were sound Mike. I do like the way you think, and I’m going to check out your blog.
Cheers,
Andrew
.-= Andrew Hallam´s last blog ..Tioman – Paradise on a Shoestring =-.
Hey Mike,
I always enjoy reading well written and well thought out comments like these. It is one of the main things that motivates me to keep posting, post after post.
I agree with Andrew that the stock markets would have outperformed gold over the long run, but I also agree with you that there are cycles. There are cycles when investors have confidence in paper assets, and then there are cycles where they don’t.
Leverage in fiat currencies can only go so far. It is going to come to a head at some point, and we are seeing the beginning signs of this in Greece. However, this isn’t the first time that this has happened. Back in the 70s, Nixon basically defaulted when he refused to pay back debts in gold. There was a lot of inflation and pain during those years, but eventually, austerity measures were undertaken. Interest rates rose to painful levels, and the oil embargoes did not last forever. Those times can be bull markets for gold, but the bull market does not last forever. Someone who was investing since the mid 1970s in the market would have outperformed gold, even taking into consideration the last 10 years.
When I say gold is a speculative play, it is because it can be difficult to predict what actions are going to take place in the future and what the outcomes will be. Gold holds its value, and is a hedge against inflation, and indeed, it is the traditional form of money. However, its value is entirely dependent on factors that cannot be entirely predicted. Unlike other types of investments, gold does not spin off income, it does not give dividends, it does not have a balance sheet. Nobody can really say what the “right price” of gold should be; that is the speculative element.
What do I personally think is going to happen? Well, the euro countries are going to have some pain, but there is really nothing preventing the U.S. dollar or other sovereign currencies from being inflated away. This will have a great lift on the price of gold, of course, but it will also lift real estate, stocks, and everything else whose value shifts with inflation. The people who are going to get hurt the most are the poor, because prices will likely rise faster than their income. I am not decided on the impacts on the middle class because those who have a lot of debt will see their debt reduced in real terms. Savers will be punished like usual, and the rich will make out like bandits.
Why do I invest in precious metals? It’s in part because I want a hedge against this risk and also because precious metals in general were oversold in 2008 and 2009, but it’s also because I get a bit of moral satisfaction from knowing that governments are being punished by the market for their profligacy and waste. The politicians, of course, try to paint it as a conspiracy theory against them.
I think the mania phase is already beginning, but it has not yet quite run its course. There are many solid fundamentals to the price gain, but when every investor and his dog starts to get interested, then that worries me a little bit. I am sticking with my 10% strategy as I don’t yet see a sea change in the fundamentals, but I am prepared to exit should it happen. I certainly don’t want to experience what happened in 1980.
@Andrew, @Mike
You guys have both given me much to think about. I’m glad to have the opportunity to discuss things with you guys; you are both really smart and I am learning a lot. Thanks for the great feedback so far!
Gents,
I have to also add that I’m really enjoying this thread. There are loads of well established finance blogs out there with little substance to their posts or threads–despite what their Alexa ratings suggest. Mike, you can comment on my blog anytime, and I look forward to reading more of what you and Kevin have to say. You’re both intelligent blokes with intelligent ideas, and I take my hat off to you.
Cheers,
Andrew
.-= Andrew Hallam´s last blog ..Tioman – Paradise on a Shoestring =-.
Hi Andrew,
Yes, this is a productive discussion. For the record, I own stocks too. Most people automatically throw up the gold versus stock argument the I mention I am long gold. I don’t want to sound defensive but please realize that owning stocks does not preclude one from owning stocks. Anyone can take any investment/asset class (paper currency, equities, debt, PMa) and show you a macro time period where it was the winner in hind sight. So, I appreciate all of the history but I don’t rely on it.
For me, the problem with that kind of thinking is that while you may make a point, it has very little use for me as an investor today. Why? Because we all have finite life spans and need to understand what is happening around us today. Bonds were a great investment in 1980 as rates on US Treasuries were in the teens. That has run it’s course. Now we are left with a ton of malinvestment and the politicians of the world, like it or not, are at the controls. Their answer is to keeping issuing more debt.
I could say that domestic equities were a terrible investment from the 50s-79; but again, SO what. It’s history…LOL. Most investors are piling into bonds because they believe they can’t lose money as bonds are “safe”. The reality is that bonds will get “shredded” as rates go up. I (anything over a 3-5 year duration that is) it’s a fundamental relationship. But people will say “hey, even bonds outperformed gold the last 20 years” It’s useless for me to even open my mouth at that point because I realize the “discussion” will never take place.
So, in order for me to pick a winning asset class and be above average, I have to go out on a limb, challenge my thinking and figure stuff out in the world around me. The rule of group think is to shun anything threatening the status quo because it’s like looking into the black hole or fear. As a contrarian it is literally music to my ears when I hear the reasons why gold is a terrible investment of is simply a bubble. I am not suggesting that’s where you are coming from.
I don’t look at how gold did in 1800 to base my decision as to why I should own gold today. Things are so much more complex (non-linear) I could tell you that in 1971 an ounce of gold cost $35 or so. Let’s say you held the ounce of gold and I the $35 in US cash. Today, you can get $1250 and buy about 3 suits and I could buy a tie. But so what? It’s meaningless today. Because there are other factors driving asset classes right now. Nothing is truly simple as is appears when looking in the rear view.
Going to a gold standard IS NOT the answer and I don’t expect that. When gold makes its advance from where it is now to where I believe it is headed, people wont be buying gold for the sake of “speculating”. They will have witnessed what they can’t even see today. But it’s there right below the surface.
All of the above are simply my opinions. Thank you for the invite and I will be sure to check out your blog as well. Take Care, Mike
.-= Mike´s last blog ..The Greece Mess – why we should care and what we can learn from it. =-.
Hi Kevin,
Just remember if you ever want to spike the comments on a post, just blog about gold, LOL!
A contrarian realizes whatever is obvious to the masses today is too crowded. Case in point, in 2005-6 at the absolute peak, Real Estate was a no brainer that couldn’t lose. I sold my real estate in 1.07 against all my emotions. The best time to sell a business or an investment is when everyone wants it.
I hope you don’t mind me posting the following link. For a rather level headed discussion as to what is happening in the world, Jim Rickards breaks it down well in the following interview:
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/13_Jim_Rickards_files/Jim%20Rickards%205:12:2010.mp3
.-= Mike´s last blog ..The Greece Mess – why we should care and what we can learn from it. =-.
Cheers for the linked reading Mike,
And I love your response as well.
Andrew
.-= Andrew Hallam´s last blog ..Tioman – Paradise on a Shoestring =-.
Hey Mike,
When you mention the contrarian point of view, I get exactly when you mean. When I was first loading up on gold and other PMs in early 2009, I was getting laughed at and told that I was a fool. These guys were expecting massive deflation and that gold would be down to $500/oz or less. The thing that really worries me is that these guys don’t laugh anymore; now they want to know how to get in, too!
Thanks for the link, I’ll check it out!
Hats off to you guys for this quality level headed discussion!
.-= Mich @ BTI´s last blog ..5 Tips to Survive a Stock Market Crash =-.
Re: gold. The way I look at gold is that gold needs to be looked at as a currency, specifically “real” money. It’s price is simply reflecting the value or lack thereof in fiat based or paper currencies (non-“real”) Gold is simply in the process of reflecting the value of paper monies around the world, as it’s rising against all other currencies now; This is what defines a bull market in gold (rising against all other paper currency) NOT what you’re hearing on TV.
So, I am not looking for gold to outperform stocks or other investments. I am just Parking my money in the currency of choice right now. Once that process is complete, I’ll scale out of gold and silver while maintaining some. People worry about gold falling off a cliff as it did in 1979-80. That was the result of Volker raising rates in “lever-like” fashion, basically slamming them up, to raise the value of the dollar. That would simply kill the world economy today, guarantee massive defaults and send us into a 30s like depression. The Fed knows this and has already stated they are going to keep rates low as all the malinvestment works its way out of the system. The rate market will do it on it’s own anyway but with a lot of resistance from Central Banks.
Again, gold is simply in the process of reflecting the amount of fiat ALREADY CREATED. There really isn’t a whole lot of guesswork here. It is my impression that very few people look at gold and understand what it’s function in the global monetary system. It’s really just a barometer. Of course, people will eventually pile into gold, but less than 1-2% of the world’s investible assets are placed in the gold market. So, this is still has years and a lot of volatility to go.
Hope this presents a better explanation as to why I see gold doing well the next several years. The “bubble” is not in gold but in the already created and now more fiat paper. If you step back and really think about it – just consider that certain asset classes have to looked at with a different set of tools.
.-= Mike´s last blog ..The Greece Mess – why we should care and what we can learn from it. =-.
My asset allocation within my portfolio is targetting a 5% allocation to gold. I’m now 10% over that but not yet ready to rebalance.
Picking up on buying a nice mens suit. I run regular gold analysis on my blog. According to my analysis which corrects for inflation in real inflation adjusted terms we are I agree over the long term trend and average. However it remains that we are below the long term real high of $1,896 achieved in 1980.
As always DYOR.
.-= RetirementInvestingToday´s last blog ..Australian Property Market (Alternate Data) – May 2010 House Price Update =-.
I just wanted to say that anyone reading this *especially my responses* should you invest in gold, you need to expect sudden and sharp pullbacks that can last months!
I don’t think that anyone is going to read my response and run out and buy gold – yet, I thought I needed to balance my response with that warning.
If you think you are going to buy gold or silver (PMs) consider allocating a percentage of your portfolio and scale in over time. Not advice…just what I think is more prudent than trying to chase to make a killing.
.-= Mike´s last blog ..The Greece Mess – why we should care and what we can learn from it. =-.
@Mike
Interesting way of looking at it; you can consider gold as simply another currency whose value is currently rising against all fiat currencies. The 10% I have allocated into PMs replaces a similar amount I would otherwise have placed in cash. As for the pullbacks, you can use these times to build up your position until you’ve reached your target, and if you go over your target then you can start to sell off at the highs.
@RetirementInvestingToday
Welcome! I don’t know if we will reach the previous high in inflation-adjusted terms; the last time we were there, gold was clearly in bubble territory. If you listen to guys like Peter Schiff, he thinks we are going to blow way past that, all the way to $10 000. However, I believe the truth lies somewhere in the middle between the doom-sayers and the eternal optimists. I don’t think this run is finished just yet; remember, gold’s value is entirely intrinsic and capital value based, which means it relies highly on sentiments and investor confidence, and the sentiments of our time are quite negative as well as confidence in fiat money. Investors are losing confidence in all fiat currencies, and the Euro is not looking like such a great alternative these days. Gold is the exit door. I do think that the “easy money” which was there since 2002 or so is probably gone.
P.S., I shouldn’t say “entirely” as gold does have cosmetic and industrial uses; however, I don’t think that’s what’s driving the price today.
Hi Kevin,
Yea, that’s how I have come to think of gold, a currency. But I would caution anyone against over allocating to any investment class. Moreover, gold has thunderous pullbacks when you least expect it.
It seems like gold always drives a diverse conversation!
Good discussion.
.-= Mike´s last blog ..What The Markets Are Telling You, When The Dow Drops 1000 in a Day =-.
So more than a year on from the publication of this and I would be of the opinion that precious metals are even more on fire. Ignoring the ‘green shoots and all is rosy’ media reports, it seems that things are getting worse. With the Greek debt crisis/Eurozone disaster, and huge debt looming over the United States, it is pretty likely that the Titanic is sinking, and fast.
As a result, we will probably see more QE, which should be very bullish for precious metals. Therefore, you are right in saying that precious metals are on fire; moreso than ever would be my analysis of the situation.
Indeed, it seems Europe might be blowing up any day now. I would actually be happier if PMs crashed somewhat in price, as I could pick up some more, or it would mean the economy was doing well. Otherwise, it looks like PMs will be a good counterweight to the future bailouts and implosions yet to come!