Why Not To Buy Gold?

[LC1]

I hope this topic won't start a slanging match, that certainly isn't the intention. In fact I would like the goldbugs to keep quiet for this one!

I've been thinking about buying some PMs for a while now, but haven't yet pulled the trigger. Every new high in gold makes me feel more and more foolish for not having done so months ago. I am highly convinced by the arguments for buying and holding gold in the current financial climate.

But while this forum has a great deal of information about the wisdom of buying gold, even at today's prices, I haven't managed to find many reasoned and detailed theories as to why this may be (is?) a risky strategy.

I know that there are posters who challenge the predominantly bullish view espoused here, but it often seems that this is often along the lines of "it's a bubble/ponzi, stupid" rather than clear arguments about when or why the bull run is likely to come to an end.

As far as I can see, as long as world govts are pursuing ZIRP/NIRP policies and the devaluation of their currencies to help pay down the debt, gold is going to rise in value against fiat currencies. So what then could function as the trigger to bring gold prices down?

As a non-economist, I would love some help in trying to understand the mechanics of this. Is it simply a division between those who think the global economy will begin to recover in coming years and those who think it's fooked?

Cheers in advance.

[Pent Up]

I don't think we will see any sustained fall in gold until we have a global economic recovery. There will probably be corrections on the way for example if we fall back into recession and people liquidate to meet margin calls/ pay bills. But this will probably be short lived. I believe gold dropped for about a month in 2008 by 20%ish. If that happens again I'll be buying.

[Enemy of the State]

I think it is a very poignant question you've asked and I'd be interested to hear the answers too. We perhaps here too much of the bugs side of the story, much of which makes sense, but they make it sound like such a sure fire winner one can only think that it sounds too good to be true. However, I also see foundation in the arguments put forward by some that this is something different to a stock bull run for example. So some clarity on the reasons against owning gold would be most welcome.

If it helps to get the ball rolling I believe the definition of an investment bubble is a bull market not supported by the fundamentals, i.e. the housing ponzi that was driven by pumping up unsustainable cheap credit., tech stocks were a frenzied rush of investors money into companies that they didn't understand and many that had no business plan, let alone profit or even turnover. Can anyone tell us what the unsupportive fundamentals are for gold?

[hpwatcher]

I would say don't look at the charts - look at what is happening in the world. How confident about things do you feel?

I have bought most of my gold, but will continue to buy in smaller and smaller amounts.

It's not the price of gold I am worried about - it's more how devalued my paper money savings are becoming. Governments are going to continue to devalue, especially Europe, UK and US.

[hpwatcher]

Gold now through the £1,100 barrier.......next big one is the $1,800.

[LC1]

If it helps to get the ball rolling I believe the definition of an investment bubble is a bull market not supported by the fundamentals, i.e. the housing ponzi that was driven by pumping up unsustainable cheap credit., tech stocks were a frenzied rush of investors money into companies that they didn't understand and many that had no business plan, let alone profit or even turnover. Can anyone tell us what the unsupportive fundamentals are for gold?

Thanks for your comments. I also am yet to be convinced that gold is behaving like the examples you mention, so would also be very interested to hear any bearish views on the fundamentals of gold cycles.

[LC1]

It's not the price of gold I am worried about - it's more how devalued my paper money savings are becoming. Governments are going to continue to devalue, especially Europe, UK and US.

Exactly. I wouldn't be buying to yield a profit, just hoping to protect my savings. That's why I want to hear views on the likely risk of this.

[hpwatcher]

I bought gold NOT to make money, but simply to protect my savings. BUT the key thing is to enter the market at the right time, and do it slowly i.e. start with small amounts and build up.

I would advise having a look on the kitko forums and also market oracle.

[Hmmmm]

OK I'm ready for a slamming! Basically, this is just me thinking aloud and just so you know, on balance I've decided not to buy.

- The government don't have any for the first time in it's history. Not sure what that means though. Do they have any incentive to therefore make sure that after a crash, gold can be converted into lots of pounds?

- It is considered a safe haven for all the money that has nowhere to go. If something more attractive comes along as an investment, you can bet your @rse that it's going to bomb.

- It's physical so could be hard to protect and eventually to convert into cash when you need to spend it, if it does start to bomb.

- More and more of it is being found. Recently saw somewhere that they could extract massive amounts from the sea (both the sea bed and even the water?!). Can't really see this making much difference in this climate though, unless they suddenly find a really easy way to extract it. But you could argue that the calculation that was done in the past didn't make it viable (ie cost of extraction, exceeded cost of sale), that margin is rapidly diminishing and if it is crossed significantly, it could all change very quickly.

- There is lots of paper gold around, not really sure what that means though, but it could potentially cause issues.

I'm really scraping the barrel with some of those... Anyway, I think the biggest threat as far as I'm concerned is that gold in itself has no inherent value (it's just that there has historically been a relatively finite amount of it and a very small amount at that) and that meant it could never be debased by any significant amount. It was easy to store and was accepted everywhere. The situation now though is that you can't really use gold to buy anything directly and many of the people making the decisions on how much it should be worth when converted into a currency you can actually spend, no longer own any, or don't seem too interested in owning any. There's also paper versions of it (although like I said, not sure it's any better than FIAT and might not be an issue). So basically, that all important step where you turn that gold into something you can spend is where I see the biggest potential upset. Time it wrong and it could cost you dear, but to say the truth, a lot of people on here are well ahead of the curve so as long as you keep an eye on things, I can't really see you making anything other than a gain, never mind a loss.

[hpwatcher]

Anyway, I think the biggest threat as far as I'm concerned is that gold in itself has no inherent value

Money never does, but the point is that it is more tangible that either ''paper'' or bits and bytes held on a computer system. Gold has uses in industry, as a conductor and also to wear.

[FaTB]

I'm in the exact same position as the OP.

I can absolutely see the argument for it going up until governments stop printing, de-valuing, bailing out, and adding to the debt.

But I can't help feeling it's gotta be due a correction, once the current upsets in the news calm down a bit.

[Enemy of the State]

OK I'm ready for a slamming! Basically, this is just me thinking aloud and just so you know, on balance I've decided not to buy.

- The government don't have any for the first time in it's history. Not sure what that means though. Do they have any incentive to therefore make sure that after a crash, gold can be converted into lots of pounds?

- It is considered a safe haven for all the money that has nowhere to go. If something more attractive comes along as an investment, you can bet your @rse that it's going to bomb.

- It's physical so could be hard to protect and eventually to convert into cash when you need to spend it, if it does start to bomb.

- More and more of it is being found. Recently saw somewhere that they could extract massive amounts from the sea (both the sea bed and even the water?!). Can't really see this making much difference in this climate though, unless they suddenly find a really easy way to extract it. But you could argue that the calculation that was done in the past didn't make it viable (ie cost of extraction, exceeded cost of sale), that margin is rapidly diminishing and if it is crossed significantly, it could all change very quickly.

- There is lots of paper gold around, not really sure what that means though, but it could potentially cause issues.

I'm really scraping the barrel with some of those... Anyway, I think the biggest threat as far as I'm concerned is that gold in itself has no inherent value (it's just that there has historically been a relatively finite amount of it and a very small amount at that) and that meant it could never be debased by any significant amount. It was easy to store and was accepted everywhere. The situation now though is that you can't really use gold to buy anything directly and many of the people making the decisions on how much it should be worth when converted into a currency you can actually spend, no longer own any, or don't seem too interested in owning any. There's also paper versions of it (although like I said, not sure it's any better than FIAT and might not be an issue). So basically, that all important step where you turn that gold into something you can spend is where I see the biggest potential upset. Time it wrong and it could cost you dear, but to say the truth, a lot of people on here are well ahead of the curve so as long as you keep an eye on things, I can't really see you making anything other than a gain, never mind a loss.

I heard about the sea water thing, 4 parts per million or billion or something, so there's tones of it in sea water. Finding the energy to extract it cheaply enough to be viable is the problem. They can also create gold atoms in particle accelerators, but an ounce would cost millions to make at current energy costs. The only reason to fear this as problem would be if we suddenly cracked nuclear fusion and got ourselves unlimited energy. Then they could start manufacturing gold inflation, although even then I still imagine the paper and digital presses will be able to outpace the seawater to gold manufacturing plants in terms of money creation.

The paper gold story is only a problem if you are holding the paper from what I understand, as could turn out to be an empty promise. Those holding the real thing seem to view paper gold as a good thing, because when/if it collapses a massive part of the notional supply of gold will evaporate, sending the price of the remaining real gold rocketing.

I go with your point on not being able to use gold as currency and unless it becomes exchangeable for notes or digitised so you can spend it using debit cards. such as gold backed currency could be, then that is certainly an inconvenience. Not one that would put me off owning gold though, as a bit of inconvenience with transferring gold into spendable currency is little more difficult than getting foreign currency for a holiday as far as I can tell, i.e. go to the appropriate outlet and exchange for pounds at the current rate. I think such a minor inconvenience with regards to wealth preservation trumps watching the value of paper currency savings dwindle.

[MrFlibble]

I go with your point on not being able to use gold as currency and unless it becomes exchangeable for notes or digitised so you can spend it using debit cards.

I hear Peter Schiff and Europac are launching a Gold backed credit/debit card, not sure of the details yet and what the loading will be but it's an interesting idea.

From the sounds of it you convert your filthy fiat into Gold and then spend bits of your Gold via the card. Puts an whole new perspective on having a Gold Card

[LC1]

OK I'm ready for a slamming! Basically, this is just me thinking aloud and just so you know, on balance I've decided not to buy.

- The government don't have any for the first time in it's history. Not sure what that means though. Do they have any incentive to therefore make sure that after a crash, gold can be converted into lots of pounds? Yes, but you can't presume government intelligence and longsightedness

- It is considered a safe haven for all the money that has nowhere to go. If something more attractive comes along as an investment, you can bet your @rse that it's going to bomb. Yes, and I'd love to hear people's opinions on what these might be.

- It's physical so could be hard to protect and eventually to convert into cash when you need to spend it, if it does start to bomb. True, but that's not a reason why it might start to bomb in the first place!

- More and more of it is being found. Recently saw somewhere that they could extract massive amounts from the sea (both the sea bed and even the water?!). Can't really see this making much difference in this climate though, unless they suddenly find a really easy way to extract it. But you could argue that the calculation that was done in the past didn't make it viable (ie cost of extraction, exceeded cost of sale), that margin is rapidly diminishing and if it is crossed significantly, it could all change very quickly. The seawater thing is probably a long way off, but maybe they will massively ramp up production from traditional mining now?

- There is lots of paper gold around, not really sure what that means though, but it could potentially cause issues. From what I've read, the paper gold is actually a bonus for those holding physical, as any devaluation would be proportionally weighted on paper (or something )

I'm really scraping the barrel with some of those... Anyway, I think the biggest threat as far as I'm concerned is that gold in itself has no inherent value (it's just that there has historically been a relatively finite amount of it and a very small amount at that) and that meant it could never be debased by any significant amount. It was easy to store and was accepted everywhere. The situation now though is that you can't really use gold to buy anything directly and many of the people making the decisions on how much it should be worth when converted into a currency you can actually spend, no longer own any, or don't seem too interested in owning any. There's also paper versions of it (although like I said, not sure it's any better than FIAT and might not be an issue). So basically, that all important step where you turn that gold into something you can spend is where I see the biggest potential upset. Time it wrong and it could cost you dear, but to say the truth, a lot of people on here are well ahead of the curve so as long as you keep an eye on things, I can't really see you making anything other than a gain, never mind a loss.

Thanks for this, interesting reading. I can see the potential disadvantages of storing, protecting, converting, timing etc, but I'm still wondering about the factors that will precipitate declines in the price. Sure, money will go elsewhere when other investments become more attractive, but what will these be, and when? Of course, rising real interest rates will have a big impact when (if) they occur, but I think we're beginning to see that this won't be for some considerable time yet.

So anything else that will trigger price tumbles?

[sleepwello'nights]

Like the OP I found the arguments for holding gold to be very persuasive. The arguments against seem to boil down to it's only a lump of metal without large scale industrial uses.

I'm not fully convinced but have diversified some of my savings into PM's. In particular for its anti cyclical financial behaviour. So far so good.

I too would be interested to hear the arguments against holding gold.

[Bruce Banner]

Like the OP I found the arguments for holding gold to be very persuasive. The arguments against seem to boil down to it's only a lump of metal without large scale industrial uses.

I'm not fully convinced but have diversified some of my savings into PM's. In particular for its anti cyclical financial behaviour. So far so good.

I too would be interested to hear the arguments against holding gold.

Each to his own. If you buy a few £K worth or even £10K worth, no problem, it's probably worth the risk of hiding it around the house. But, if you're talking about a few £100K worth I wouldn't be happy doing it.

Safety deposit boxes can get broken open by the police and then you have to jump through hoops to get it back.

There's a risk of government confiscation and, of course, it's doesn't provide a tax free

gain if it goes up and it can go down. Also, don't forget the spread.

Take a look at this thread for some opinions.... http://www.housepricecrash.co.uk/forum/index.php?showtopic=167412

I seriously considered buying some a few years ago, but decided against it due to storage concerns.

['Bart']

Each to his own. If you buy a few £K worth or even £10K worth, no problem, it's probably worth the risk of hiding it around the house.

I own in the region of £25k worth, which is about as much as I plan to buy.

That amount represents only a small amount of physical gold, so it can be easily hidden.

A matchbox can hold a few thousand pounds word of gold.

Silver is a different matter, £25k of silver would be a lot harder to hide. Apart from about 100 ounces of physical silver, all my silver buying is done via Goldmoney.

[Bruce Banner]

I own in the region of £25k worth, which is about as much as I plan to buy.

That amount represents only a small amount of physical gold, so it can be easily hidden.

A matchbox can hold a few thousand pounds word of gold.

Silver is a different matter, £25k of silver would be a lot harder to hide. Apart from about 100 ounces of physical silver, all my silver buying is done via Goldmoney.

That sounds reasonable.

['Bart']

That sounds reasonable.

Time will tell if it (gold) was a good call.

Still, it feels better than just sitting there with my accounts paying next to zero interest, which was indeed happening only a few years ago.

(I do now have a cash ISA as well that pays 3.9% for 3 years so I'm not getting as screwed by low IRs as I once was.)

Any future cash savings might go into NSI&I Index-linked Savings Certificates (if they haven't been pulled again by that point).

[sesim]

The main problems I can see are:

1. It''s a rigged game

Central Banks hate people rushing into gold, as it demonstrates how worthless their paper currencies are. Should QE continue (and it will..) people will move en masse to gold. When that happens, the central banks/goverments - in the west at least - will announce a 90% sales tax on all metals and etf's.

Or just threaten to dump a massive amount on the market. Watch the price crash. Before that, if they let the mania go on for long enough, it will be the gold holders (the traceable ones..) that will be paying off the sovereign debt in future with the taxes raised. Guiding principle: If you have wealth in any form, it will be taken from you.

In the meantime, they're happy to let it go up as their banking buddies can make fast buck, then with inside knowledge, sell at the top, crash it, then buy at the bottom. It's a rigged game - betting against the central banks is not wise in the long term. They control the money supply, and decide what is money. You can't pay your taxes with gold.

2. It's price is highly volatile

Time the entry and exit wrong, and you'll get burned badly. The higher the price goes, the more volatile the moves will be. You need to have a healthy disregard for the value of money and gold to stomach the moves. They will take the price down when it suits them, not you, and the prices move so fast, you may not get an opportunity to sell up before you get wiped out / are left with metal that will only be valuable again in 30 years.

3. We have already hit the shoe-shine era

Where everyone (your girlfriend, her hamster etc.) is saying buy gold. For the central banks, this is a serious indicator that fruit is now ripe, and harvesting will be due soon.

4. The CBs have to get money out of gold otherwise liquidity dries up

If everyone piles into Gold, there won't be enough money sloshing around for either

a. the recovery... private enterprise needs people to buy into real productive companies and industries

b. buying the soverign debt bonds.. someone has to buy the bonds, or the central banks have to print money to buy them

At some point, metals holders will need to be relieved of their wealth by force/taxation/regulation for redistribution to a. and b.

5. These things go in cycles (even Fiat currencies)

At any point in time, either shares, bonds, property or metals are either up or down. Even if this is the end of the current crop of Fiat currencies, they will just print a new set and revalue gold (downwards). Pegging currencies to gold doesn't suit the CB/their banking chums, since credit can't be created out of thin air / there's much less money to be made. This will happen over a bank holiday, and you'll be done for.

6. The higher gold goes, the more attractive other investments become

If for example, stock markets continue to crash, the price/earning ratios of shares and markets become more attractive, such that if they go down a lot, you can probably get a good yield and capital growth <-- Yes I know the markets have gone nowhere in the last 10 years, but metals have. Google the Dow/Gold ratio then convince me you should be buying metals right now, not shares. Greed and Fear are the two main cycles. We're in the middle of a fear cycle, but when this is over (after a war/new currencies/debt jubilee/delete as appropriate), then the next greed cycle kicks in. Don't be late into the party.

By buying metals now you are following the herd and buying the the fear cycle when in fact the smart money is being the contrarian. They are selling gold, preparing for more stock-market crashes, then slowly preparing for the next greed cycle. At the appropriate time, they will crash the metals market, which will force people with wealth left into stocks and shares. But the smart money will already have theirs bought at a super low price. As always, the public will be last-in to the next shares bonanza, and get burned (again), just like in 2000. Do the opposite of what everyone else is doing. Don't try to profit at the end of the current cycle, divert your money to the beginning of the next cycle.

7. Invest in something useful.. be part of the solution

In your heart you know you really should be investing your money in real companies and people, not a heavy (but very shexy) mostly useless metal. You'll feel better about yourself when you sell it, book the profits, invest in shares and know you are investing the recovery, not behaving like a squirrel trying to protect your own stash.

That said, I personally think that if there is any money to be made in metals, wait for a correction eg. down to 1500 USD, then hold on to your hat as it goes parabolic. Don't get greedy, and when you have made a good profit, get out. There are still a lot more bad news events out there.. real banks runs across europe, economic war, then real physical war etc. It's got a long way to go.

This time "it isn't different", because greed and fear are the two primary motivators of the human condition, and the popularity of investment vehicles reflects where we are between those two polarities. Gold WILL crash, and shares WILL rise. But not yet.

[end of sermon]

Disclosure: I bought metals and etfs from 2008, but I exited all positions last week due to the mad volatility, now 100% cash. Waiting for a metals smackdown to 1500 so I can buy again - and hold for 6-18 months(only), or a stock market crash where I can get shares with p/e ratio average of 10.

['Bart']

Or just threaten to dump a massive amount on the market.

After years of selling, they (the Western economies) don't have the resources to do this in any significant manner (IMO of course).

Easter economies (China, South Korea, India) are buying gold

Where everyone (your girlfriend, her hamster etc.) is saying buy gold.

Depends on your circle of friends of course but I know of practically no one who has the spare cash to buy gold at current prices.

If Helicopter Ben were to leave the Fed and be replaced by a modern day Paul Volcker, that would definitely be a signal to consider selling gold.

If everyone piles into Gold

Most people can't afford to.

they will just print a new set and revalue gold (downwards).

The gold price was overtly controlled in the days when the US was on a gold standard. As soon as this ended, the price discovery mechanism kicked in.

If they could control gold prices so easily, why don't they do the same with oil?

By buying metals now you are following the herd

No one else I know owns gold or even talks about buying any. Most would never even consider it.

In your heart you know you really should be investing your money in real companies and people... You'll feel better about yourself when you sell it

I hate to disappoint you but... no, I wouldn't.

If the gold market is rigged, the stock market is also, and to a far greater degree

Bernie Madoff: The Market Is A Whole Rigged Job, And There’s No Chance That Investors Have In This Market

[sleepwello'nights]

I followed a link from Kitco to this article which explains why the author thinks gold is an unsound investment.

Smart Investor: why I don't invest in gold

Make what you will of his reasoning.

[jonesinamillion]

The main problems I can see are:

1. It''s a rigged game

Central Banks hate people rushing into gold, as it demonstrates how worthless their paper currencies are. Should QE continue (and it will..) people will move en masse to gold. When that happens, the central banks/goverments - in the west at least - will announce a 90% sales tax on all metals and etf's.

Or just threaten to dump a massive amount on the market. Watch the price crash. Before that, if they let the mania go on for long enough, it will be the gold holders (the traceable ones..) that will be paying off the sovereign debt in future with the taxes raised. Guiding principle: If you have wealth in any form, it will be taken from you.

In the meantime, they're happy to let it go up as their banking buddies can make fast buck, then with inside knowledge, sell at the top, crash it, then buy at the bottom. It's a rigged game - betting against the central banks is not wise in the long term. They control the money supply, and decide what is money. You can't pay your taxes with gold.

2. It's price is highly volatile

Time the entry and exit wrong, and you'll get burned badly. The higher the price goes, the more volatile the moves will be. You need to have a healthy disregard for the value of money and gold to stomach the moves. They will take the price down when it suits them, not you, and the prices move so fast, you may not get an opportunity to sell up before you get wiped out / are left with metal that will only be valuable again in 30 years.

3. We have already hit the shoe-shine era

Where everyone (your girlfriend, her hamster etc.) is saying buy gold. For the central banks, this is a serious indicator that fruit is now ripe, and harvesting will be due soon.

4. The CBs have to get money out of gold otherwise liquidity dries up

If everyone piles into Gold, there won't be enough money sloshing around for either

a. the recovery... private enterprise needs people to buy into real productive companies and industries

b. buying the soverign debt bonds.. someone has to buy the bonds, or the central banks have to print money to buy them

At some point, metals holders will need to be relieved of their wealth by force/taxation/regulation for redistribution to a. and b.

5. These things go in cycles (even Fiat currencies)

At any point in time, either shares, bonds, property or metals are either up or down. Even if this is the end of the current crop of Fiat currencies, they will just print a new set and revalue gold (downwards). Pegging currencies to gold doesn't suit the CB/their banking chums, since credit can't be created out of thin air / there's much less money to be made. This will happen over a bank holiday, and you'll be done for.

6. The higher gold goes, the more attractive other investments become

If for example, stock markets continue to crash, the price/earning ratios of shares and markets become more attractive, such that if they go down a lot, you can probably get a good yield and capital growth <-- Yes I know the markets have gone nowhere in the last 10 years, but metals have. Google the Dow/Gold ratio then convince me you should be buying metals right now, not shares. Greed and Fear are the two main cycles. We're in the middle of a fear cycle, but when this is over (after a war/new currencies/debt jubilee/delete as appropriate), then the next greed cycle kicks in. Don't be late into the party.

By buying metals now you are following the herd and buying the the fear cycle when in fact the smart money is being the contrarian. They are selling gold, preparing for more stock-market crashes, then slowly preparing for the next greed cycle. At the appropriate time, they will crash the metals market, which will force people with wealth left into stocks and shares. But the smart money will already have theirs bought at a super low price. As always, the public will be last-in to the next shares bonanza, and get burned (again), just like in 2000. Do the opposite of what everyone else is doing. Don't try to profit at the end of the current cycle, divert your money to the beginning of the next cycle.

7. Invest in something useful.. be part of the solution

In your heart you know you really should be investing your money in real companies and people, not a heavy (but very shexy) mostly useless metal. You'll feel better about yourself when you sell it, book the profits, invest in shares and know you are investing the recovery, not behaving like a squirrel trying to protect your own stash.

That said, I personally think that if there is any money to be made in metals, wait for a correction eg. down to 1500 USD, then hold on to your hat as it goes parabolic. Don't get greedy, and when you have made a good profit, get out. There are still a lot more bad news events out there.. real banks runs across europe, economic war, then real physical war etc. It's got a long way to go.

This time "it isn't different", because greed and fear are the two primary motivators of the human condition, and the popularity of investment vehicles reflects where we are between those two polarities. Gold WILL crash, and shares WILL rise. But not yet.

[end of sermon]

Disclosure: I bought metals and etfs from 2008, but I exited all positions last week due to the mad volatility, now 100% cash. Waiting for a metals smackdown to 1500 so I can buy again - and hold for 6-18 months(only), or a stock market crash where I can get shares with p/e ratio average of 10.

Great post, can't say I agree with all your posts but good food for thought.

Time scale wise I think some of your preditions are 5,10,15 years down the line; the worls pretty efffd up at the moment!

[MrFlibble]

Invest in Gold, no, hold some of your wealth in Gold, yes.

[Mikhailo]

I followed a link from Kitco to this article which explains why the author thinks gold is an unsound investment.

Smart Investor: why I don't invest in gold

Make what you will of his reasoning.

To sum the piece up: 'Don't buy gold 'cos you can't predict the future'.