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geojanes
Dignitary

Mon Jun 28, 2010 7:19 am

Found the following on a blog this weekend. Funny, and the right way to look at the shiny metal.

Quote:

Glenn Beck cries about the importance of buying it. A gazillion different Google Adwords links blink incessantly trying to lure you. From huge, old, well performing mutual funds to your mother-in-law (yes…the one who bought the tricked out Super Mac she talks to trying to turn the power on) have been bitten by the gold bug.

Long the preferred tender of end timers, pirates and James Bond villains, the shiny yellow stuff has enjoyed a resurgence as the default currency of a world gone mad. Historically, at least in semi modern times, experts and cab drivers alike have touted gold, physical gold, as being a necessary inflation hedge. And with the Godzilla size tidal wave of eventually worthless fiat currency filling the vaults of central banks all around the globe, that thesis seems to stick on the surface. I don’t buy it. Not no way. Not no how.

Sure, as an asset class, gold has performed spectacularly over the last couple of years. If you hit it at a low, you’re sitting on some nice 70%+ gains. Congratulations. Please rub it in amongst equity believers who were back to even or better up until this past April. Real smart guy, huh? Let’s look at this whole “inflation hedge” BS historically. Step into Mr. Peabody’s Wayback Machine and stow all loose items in the overhead bin or under your seat. The controls have been set at 30 years in the past.

It’s winter 1980. Jimmy Carter is stumbling around in the White House in his cardigan looking for the light switch. 53 Americans are held hostage in Iran at the U.S. Embassy by student militants. Energy prices are on the rise as is inflation, interest rates, and unemployment. Modern American life feels pretty sucky. Maybe the world IS coming to an end? The price of gold spikes to around $850 an ounce. Well, if things do end up going to hell in the proverbial hand basket, you’ve got your gold and your guns. Just like the cowboys. Better get some of that. Money’s pretty tight so all you could buy was an ounce. You run to the bank (if it hasn’t failed yet) and put your one ounce of the bullion you can’t make soup with into the safe deposit box. Eventually, things get better. Ronald Reagan is elected President and America’s bull run in everything leaves the launching pad around 1982 and doesn’t look back for nearly 20 years. OK. Let’s go home to good old 2010.

Strangely, things look kind of like they did 30 years ago. Gold is knocking on another all time high. You go to the bank (if it hasn’t failed yet). Yep. Your ounce of gold is still there. Still an ounce. Still shiny. Still yellow. Only, now, its worth around $1,250 an ounce. Over 30 years. That’s an average annual return of about 1.5%. Yippee. Your inflation hedge didn’t even keep pace with inflation.

What if you hadn’t been such wuss and bought 300 shares of Procter and Gamble (PG) 30 years ago and put the stock certificate in the safe deposit box. 30 years later, people are still using soap and deodorant and toothpaste. You would’ve enjoyed an 86% average annual return, received 120 dividend payments, and, thanks to five 2 for 1 splits, your 300 shares would now be 9600 shares. No splits or dividends from the shiny metal from Davy Jones’ Locker. But since it still weighs an ounce (just like it did 30 years ago), you can put it in your pocket when you go to the pawn shop where they might pay you 80 cents on the dollar. But stocks are scary. Gold’s a lot more frightening.

The massive amount of gold buzz only reaffirms my belief that if you made money on it, its time to sell or, if you didn’t participate on the way up, avoid or short if you dare. If you’ve just got to get in on gold, treat it for what it is: an asset class to trade. Not a replacement for currency or purchasing power. Buy the SPDR ETF tracker, GLD. Hell, sell some covered call options. At this writing, the September 133 calls would pay the seller approximately $197 per 100 share contract. If the shares are called in four months, that’s a 12.8% total return (GLD is around $121.75). 38.5% annualized. Sure beats 1.55%. Get paid. Well. Better than if you pulled a Ron Paul and bought some Kruegerrands only to bury them in the back yard.

Source: http://yieldpig.blogspot.com/[/url]

posts: 1290 | location: New York, NY | joined: 01 Oct 2000 | medals: 2

theodorelogan
Emissary

Mon Aug 23, 2010 7:17 am

The picked the exact time period (1980) which produced the lowest return. Talk about cherry picking data.

If you pick a more obvious and unbiased date (1971, when the US went off the gold standard) the return is 9% per year.

If you go back to 1910, when gold was $20/ounce (picked just because it was 100 years ago) the rate is 4% (pretty darn respectable for something with such low risk)

That article is garbage, sorry George. I could cherry pick dates and show way worse returns for other investments.

How many years are you going to keep bagging on gold?

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