Thursday, August 26, 2010

But experts warn that the bubble could burst all too easily

How long will gold remain the golden goose for investors?

Predicting the price of gold can trick even governments into making mistakes. Gordon Brown famously lost out by selling large chunks of the UK's gold reserve between 1999 and 2002, getting a lowly price of between $250 and $300 an ounce – making his decision to sell a costly one. But investors with the Midas touch have made a fortune in recent years. "Currently you can drive a bus through where experts believe inflation will be, but there are enough in the deflationary camp at this point of time, which will impact on the value of gold as the price will fall if we have deflation."

Posted by mark @ 10:34 AM (2067 views)
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32 thoughts on “But experts warn that the bubble could burst all too easily

  • christian’s take

    @2:54 (after tuesdays close) for about 50 secs

    http://www.youtube.com/user/psaadmin#p/u/1/kzUsAktnAjo

    Personally i agree and have said numerous times that it doesnt excite me to the long or short side. even if we do go through the roof eventually, before then we could easily fall quite a bit. If i was pushed – i would be a seller (but only very very maginal). its a crap shoot really – unless you have some position lower i wouldnt want to initiate.

    be careful! – christian is good for a laugh – well maybe i have a warped sense of humour.

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  • Several fund managers other than Julian Gibbs @ Jupiter (mentioned in the Gruniad article) have sold or reduced their holdings in Gold. My view is that for those who are prepared to take a long term view and have a well diversified investment portfolio then Gold with limited exposure is still worth holding. I get the impression from similar articles that people are perhaps ploughing too much into this one asset class ie all eggs in one basket which is not a good idea.

    Christian at perfect stock is so funny btw – love his introduction on the date “two thousand and tennnnnnn”

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  • “The problem with ETFs is that, while they make buying gold comparatively easy, they make liquidating the investment easy as well, prompting a far more violent downturn than would otherwise be the case should trader sentiment reverse,”

    This is the rub. ETF gold simply isn’t the same as physical. Moreover the price of gold always depends upon what else is happening in the world – and it isn’t looking good at the moment, with countries hell bent on inflation and devaluation like BOE – although they regard it as a ”surprise”.

    Expect more inflation and devaluation of currencies.

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  • Several fund managers other than Julian Gibbs @ Jupiter (mentioned in the Gruniad article) have sold or reduced their holdings in Gold

    They probably did that due to heavy losses in other areas.

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  • “They probably did that due to heavy losses in other areas” – no, more likely re-balancing the fund including taking the profit made on Gold.

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  • general congreve says:

    Oh no!!! Sell all your gold before it’s tool late you fools.

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  • “They probably did that due to heavy losses in other areas” – no, more likely re-balancing the fund including taking the profit made on Gold.

    No. To cover losses that they don’t want to tell anybody about.

    But I agree with general congreve, sell your gold – it’s a big con. Hold pretty coloured paper instead; you know it makes sense.

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  • hpwatcher- if you place money into investment funds such as those offered by Jupiter you can track the performance free of charge on a daily basis if desired (morningstar offer this facility) – Jupiter Fin Opps has returned 670% since launch on 1/06/1997 – so what is there to get vexed about?

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  • hpwatcher- if you place money into investment funds such as those offered by Jupiter you can track the performance free of charge on a daily basis if desired (morningstar offer this facility) – Jupiter Fin Opps has returned 670% since launch on 1/06/1997 – so what is there to get vexed about?

    Not vexed, I was just talking about the ”several fund managers” which I think you mentioned in your original post. I have actually heard of a number of forced sales or fire sales – though I don’t suppose anyone is going to shout about that from the roof-tops.

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  • hpwatcher – cant say I have heard of any forced sales or fire sales (within major funds) – but if this was the case then you are quite right they wont be shouting about it.

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  • general congreve said…

    “Oh no!!! Sell all your gold before it’s tool late you fools.”

    Oh – and what takes you to this conclusion general? Gold is the safest asset at the moment, if we go hyperinflationary the benefits are obvious, but even if we get a deflationary period, although the gold will devalue, so will everything else – so it won’t matter so much.

    In addition to this gold is traditionally the ultimate substitute for FIAT currency – and as history tells us, not FIAT currency system has ever ended in anything except total collapse.

    Only a fool doesn’t hold gold, I have several bars at home now as you cannot rely on ETF holdings because there isn’t enough in the world to fulfil all the promises.

    The value of gold is far greater than any speculatory one.

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  • Chinese demand for gold has been growing at an average of 13% per annum over the past five years and it now has to import gold to meet national demand, despite being the largest producer of gold in the world.

    Whilst the IMF is losing it’s gold reserves, the likes of Russia are buying more.

    That’s right folks, sell ya gold, it’s in a bubble… says the West.. who are bankrupt.

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  • @Fubared – I think the general congreve was being sarky (based upon his most recent posts which were all very bullish on gold)

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  • What was your address again fubared ?

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  • Oh – and what takes you to this conclusion general? Gold is the safest asset at the moment, if we go hyperinflationary the benefits are obvious, but even if we get a deflationary period, although the gold will devalue, so will everything else – so it won’t matter so much.

    General congreve is one of the few, who in my view, have been sensible enough to include gold amongst their investments. People have been talking about gold being in a bubble for around the last 3/4 years. No-one I know owns gold, and probably won’t be owning gold ever, because they are scared off by the ”gold bubble” articles – fine by me as it stops the price from overheating.

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  • For those who keep saying stay away from Gold ETF’s, that’s OK if you only want to hold say £5000 of physical gold. You might feel comfortable where you have it stashed. But what if you wanted £50,000 or £100,000 worth? Would you sleep well at night having it stashed wherever it is? Not worried about theft or accidental discovery? The only reason I would want to hold Physical Gold is so that thieving Governments/Taxmen don’t know I have it, but I don’t have anywhere to keep it. That is what stops me holding physical gold. I don’t hold Physical Gold ETF’s because they don’t pay dividends. I have a (small) position in a Physical silver ETF.

    In any case, demand for gold is demand for gold. Physical ETF’s create demand that causes gold prices to rise. They only reason they would “collapse” is if people demanded physical delivery of the gold, as they are entitled to. But who would do that? The reason they buy ETF’s is because they don’t want to store the gold!

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  • For those who keep saying stay away from Gold ETF’s, that’s OK if you only want to hold say £5000 of physical gold. You might feel comfortable where you have it stashed. But what if you wanted £50,000 or £100,000 worth? Would you sleep well at night having it stashed wherever it is?

    This can be done very easily. Baird & Co offer purchase of pm’s together with a storage & insurance facility at a very reasonable fee. the benefit is that you can also sell – with a moments notice – without having to take the physical stuff over to them.

    In any case, demand for gold is demand for gold. Physical ETF’s create demand that causes gold prices to rise. They only reason they would “collapse” is if people demanded physical delivery of the gold, as they are entitled to. But who would do that? The reason they buy ETF’s is because they don’t want to store the gold!

    ETF gold is oversold, and relates to physical gold at a ration of 10:1 ounces. I started with ETF’s because I didn’t know any better; I soon got rid of them and started purchasing the real stuff. I simply don’t trust ETFs.

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  • Not sure where you are getting your information from HP. Are you sure you are not confusing the entitlement as being 1 ETFshare = 1/10 ounce? That is to say, 1 share= 1/10 the price of 1 ounce of Gold, therefore the entitlement is 1/10 of an ounce. As far as I know, there isn’t an ETF that operates on a 10:1 ratio that you say.

    ETF Securities: Metal Entitlement (ounces) 0.0987045 / 1 share (it isn’t exactly 0.1 because of management fees. You are also paying Baird and Co for storage no doubt)
    ETF Securities Share Price: Last price (USD) $122.40 – 26/08/2010 15:56:08 (ie/ 1/10 ounce of gold)

    Having Gold stored at Baird and Co is no different to having it stored by the ETF provider, what makes you say it is? Have you been into the vaults of both to see if your name is/was written on the gold bars? I am not talking people into or out of Physical/ETF gold, I just think there is a lot of ill informed misinformation and old wives tales. If I was to have Physical gold over an ETF it would be because I trust NOBODY to store it for me and I don’t want ANYONE knowing how much I have.

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  • “The popularity of gold has rocketed in recent years”

    Evidence? The price has certainly shot up but I’ve yet to meet a single person who advocates investing in it.

    “Predicting the price of gold can trick even governments into making mistakes. Gordon Brown famously lost out by selling large chunks of the UK’s gold reserve between 1999 and 2002”

    Brown wasn’t stupid. I doubt it was a mistake. Here’s one theory about what really happened:
    Browns Bottom is an enormous issue in the UK

    “If large institutional investors pull out, the risk is that retail investors who bought at the top of the market will be the ones who suffer.”

    It’s large institutions that relentlessly short gold.

    “Most experts believe that low inflation or deflation would see gold stumble, though it is far from obvious what inflation will do in the coming months: historically the price of gold has risen in line with inflation.”

    There is little evidence that inflation is good for gold. Try Mish for a better explanation:
    Is gold an inflation hedge

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  • estrader @ 20 >>Having Gold stored at Baird and Co is no different to having it stored by the ETF provider, what makes you say it is?
    If you have an allocated bar then it is yours and you pay them rent. If you have unallocated gold then it is similar to an ETF in that they have an unsecured financial liability to you.
    Most ETFs, however, are not auditted in the way some would wish whereas as Bairds most certainly are (and Fort Knox most certainly is not). There is a gold etf based in Zurich and quoted in NY which seemed the better of that bunch.
    There is a big dance of the goldbugs that goes on around gold. Leaving that aside there are arguments for a sensible holding within a portfolio. Myself – I think it will be markedly lower by Christmas but it is hard to tell.

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  • estrader @ 20 >>Having Gold stored at Baird and Co is no different to having it stored by the ETF provider, what makes you say it is?

    A final comment to make here is that if my gold bar (which they sold me and I pay rent upon) turns out to be gold plated tungsten things get interesting. If I have not removed it from their premises then they can hardly accused me or dodge liability in any other way!

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  • Not sure where you are getting your information from HP. Are you sure you are not confusing the entitlement as being 1 ETFshare = 1/10 ounce? That is to say, 1 share= 1/10 the price of 1 ounce of Gold, therefore the entitlement is 1/10 of an ounce. As far as I know, there isn’t an ETF that operates on a 10:1 ratio that you say.
    I don’t have the link to post, but I have read a few articles that state for every 10 ounces of ETF gold, there is only 1 ounce of real gold behind it – so you are effectively putting money in a gold ‘themed’ bank account. I will try and dig the link out.

    ETF Securities: Metal Entitlement (ounces) 0.0987045 / 1 share (it isn’t exactly 0.1 because of management fees. You are also paying Baird and Co for storage no doubt)
    Yes, of course, but it is real gold – not fiat gold.

    Having Gold stored at Baird and Co is no different to having it stored by the ETF provider, what makes you say it is? Have you been into the vaults of both to see if your name is/was written on the gold bars?
    Well, it is actually. Gold bars have serial numbers, which are passed on to me and then stored in my own storage area. Give Baird & co a call, they will be able to answer all of your questions.

    I am not talking people into or out of Physical/ETF gold, I just think there is a lot of ill informed misinformation and old wives tales. If I was to have Physical gold over an ETF it would be because I trust NOBODY to store it for me and I don’t want ANYONE knowing how much I have.
    It is possible to buy and store gold in many places across the world. For example, I know people who buy and store gold in the Perth Mint in Australia – it’s fairly easy to set up an account. You could buy here and store there, or store there and buy here.

    The problem with ETF gold, is that it is effectively no better than having a bank account….and that defeats the whole object of the exercise. I call ETF gold, Fiat gold – that’s what it is.

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  • Myself – I think it will be markedly lower by Christmas but it is hard to tell.

    Yes, a few people have said that, and it’s my feeling too for the short term.

    With regards to the economy, I am simply not seeing things improve, and I think things will deteriorate further. I think that things will really start hotting up from October onwards…there are quite a few very nasty chickens in the process of coming home to roost.

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  • “The popularity of gold has rocketed in recent years”

    Evidence? The price has certainly shot up but I’ve yet to meet a single person who advocates investing in it.

    Me too, so it can’t be in a bubble then?

    “If large institutional investors pull out, the risk is that retail investors who bought at the top of the market will be the ones who suffer.”

    It’s large institutions that relentlessly short gold.

    Yes, they keep the price right down.

    There is little evidence that inflation is good for gold. Try Mish for a better explanation:
    Is gold an inflation hedge

    Depends on the degree of inflation. But Mish is a deflationist, so bear that in mind when you read anything of his.

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  • I suppose my idea (and reasons) for holding Physical Gold is different to that of those here and anyone else who doesn’t trust Physical ETF’s. My definition of having physical gold means actually having it on hand or close by, so to speak. My reason for holding physical gold would be in case the Gerald Celente collapse of society scenario materialises and I need gold to buy food, water and other basic necessities. Or to avoid being taxed on gains made to preserve my wealth. If am a buying gold as a hedge or investment then nobody yet has given me a convincing argument to choose stored gold over a Physical ETF. I am getting opinions and ‘hearsay’ but no real concrete facts. What happens if the is a ‘run’ on Baird and Co? What if their ‘Gold’ isn’t really gold but just gold plated silver with some lead mixed in? How far do you want to go with the paranoia and hearsay and what not!?

    Holding Physical Gold to me means having it in your possession and being able to hold it, admire it, polish it and use it immediately to barter with if need be. Anything else is simply a piece of paper saying that you own gold somewhere, just like a Physical ETF.

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  • Holding Physical Gold to me means having it in your possession and being able to hold it, admire it, polish it and use it immediately to barter with if need be.

    But you wrote earlier:-

    …but I don’t have anywhere to keep it.

    I think you want to have your cake and eat it.

    Anything else is simply a piece of paper saying that you own gold somewhere, just like a Physical ETF.

    It isn’t actually. But, if you aren’t convinced, you could always buy physical and then get your own safe deposit box elsewhere and store it there.

    Or alternatively you solve the problem by not buying any and dropping the idea.

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  • The only people who doubt gold.. just don’t understand, it’s as simple as that.

    Anyone who thinks an ETF is as good as bullion also doesn’t understand.

    Gold is a currency, not a commodity, it’s also not inflation linked either.

    In fact, gold has done better through deflation periods, just look at Japan.

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  • HP,

    Let me clarify:

    1) I would LIKE to hold physical gold ie/ have the gold bars within reach because THAT is my idea of holding Physical gold as in gold bullion. But, you are right, I have nowhere safe to keep it. So I don’t have physical gold.

    2) If I wanted to own gold as a hedge, I personally think there is NO DIFFERENCE between a PHYSICAL ETF and Gold bullion stored in a safe “somewhere” with my name on it and a piece of paper in my possession saying that gold is mine.

    3) Therfore, I don’t own gold because I want to earn DIVIDENDS, so I buy shares.

    So, in summary, Yes, I would own Physical Gold IF I had a safe bolted to the floor of a house that I owned instead of one that I rent. I don’t own a house or a safe so I don’t own gold.

    Debtfree, tell me one Physical Gold ETF that didn’t survive the GFC? I can’t think of any, they are all still around and completely intact. There is just no evidence at all of the things people are saying about Physical ETF’s.

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  • estrader said ” If I wanted to own gold as a hedge, I personally think there is NO DIFFERENCE between a PHYSICAL ETF and Gold bullion stored in a safe “somewhere” with my name on it and a piece of paper in my possession saying that gold is mine.”

    I think the piece of paper is the clue in this mystery.

    Because that’s all it is… just a piece of paper.

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  • “I think the piece of paper is the clue in this mystery.”

    You need to explain that one to me. If you are a registered shareholder of a Physical ETF there is a record of your entitlement to Physical Gold which you can have delivered if you wanted. If you keep your gold in safe that is not your own and decided that you wanted to collect it, how would you prove the gold is yours?

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  • The people who want gold to hedge against Mad Max scenarios, might I suggest instead investing in guns, generators, antibiotics and water purification tablets. If gold is worth anything in those circumstances it is as an unwieldy a club to beat people to death with.

    Those who are speculating that the price will go up, well it might or it might not. It’s worth remembering that gold isn’t, and never again will be, a currency. It is a comodity that people bet on speculatively.

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