Link to Profile Semperoper, Dresden Sieg (auf dem Siegesäule), Berlin Brandenburg Tor, Berlin Skyline, Frankfurt am Main

Thursday, May 04, 2006

Mark of the Beast

Gold prices are hovering around $666 per ounce the last couple of days ... is the apocalypse upon us? Probably not, although many economists and pundits will tell you that this is a signal of rising inflation (it might better be termed an indication of the depreciation of the US Dollar), while others more optimistic on the US economy will tell you it is a sign of the global demand for commodities. Both camps are right.

Can you make money with gold and so-called precious metals? Sure. You can also lose money with gold and so-called precious metals.

Buying jewelry as an investment is a splendid way to lose money in precious metals (and stones). One of my grandmothers did this. Yes, when she died with a house full of the stuff, it was worth more than she paid for it, but the average rate of return was somewhere around 0.2%. I wish she had simply spent the money and enjoyed more of her life.

Buying coins is another fantastic way to lose money in precious metals. My father decided in 1971 to buy a bunch of 1963 US Proof sets (1963 was the last year that the US dime, quarter and half-collar were struck in silver). I think he spent something like $10 in 1971 dollars to buy each set ... that would be roughly $47.58 in today's dollars, to buy $0.91 in coins. I recently saw one of these going for roughly $16.00 in today's dollars. Rate of return adjusted for inflation would be somewhere around -66%. My father's investment genius extended to the sale of grandma's jewelry, which he managed to sell with the help of "a good friend" for about 60% of what he might have gotten on e-bay. You can make fantastic money in Roman coins ... maybe ... but not so much for their precious metal content as for the fact that they are rare - they are two thousand years old, and getting harder to find.

You can actually buy the physical metals. This is possible but tough. You've got to find someone to do it, and they take a pretty good cut because there is a lot of overhead involved in handling physical metals. Then you have to store it. Same deal with respect to overhead. Most of the people who actually buy physical metals are the doom and gloom types who think the apocalypse is upon us. I suppose things like gold might have some value in a post-apocalyptic world, but the markets will be too inefficient to make it worth the bother. Better to buy a gun.

You can buy mining stocks. Yes, for the longest time this was the way to invest in precious metals. Key thing to keep in mind is that mines are holes in the ground, and in many cases that is where you are throwing your money. I have some really nice share certificates from mining companies of the 1890's. The certificates themselves are worth a good deal, but I suspect far less than the inflation adjusted dollars that originally bought them. In the short term, however, this is a "not bad" way to do it if you buy a reputable company. Nevertheless, you are buying into the market's opinion of the company's expected performance, and the value of the precious metals is only a part of it.

You can open a commodities trading account at a number of brokerages. You need to have a substantial net worth, or at least represent that as being the case. Most speculators are playing on margin anyway, so what the heck. Choose your firm carefully, however. One of the largest just went spectacularly bankrupt, and while customers did not necessarily lose their money, they did find themselves illiquid for quite some time.

Finally, you can try buying exchange traded funds based on the underlying metal. i-shares has a couple of ETF's based on gold and silver. If you still have a stomach for the risk after reading the disclaimers, this might be a reasonable way to play these two metals.

Don't ask me where gold is going and what you should do about it: About the former, I have an opinion, but for the latter, it would not be appropriate for me to give investment advice. Sorry.



Anonymous Hamish said...

Excellent timing on this great piece, do you happen to work for BGI? Just kidding, but your disclaimer seems to be busted.

I've seen some research lately that points to commodities becoming increasingly correlated to the market and losing their value as a hedge, so I tend to be more in the optimist camp. Also, it's hard to deny a certain up and coming superpower's thirst for raw materials. Then again, the inflation picture doesn't look so rosy, so, like you said, everyone's right.

I'd like to say more, but you know the deal.

5:34 PM, May 04, 2006  
Anonymous Hamish said...

Sorry, your disclaimer works fine, just not from the comments page.

5:59 PM, May 04, 2006  
Blogger Mike B said...

Thanks for the compliment. No I don't work for BGI ... I'm currently "on the beach."

Lots of reasons for correlation, but things aren't as volatile as they used to be. Well, not yet. One superpower up and coming, another major power right behind them.

6:05 PM, May 05, 2006  

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