<p>So I read that in one of those magazines you find in airplanes. I immediately sold my Walmart, IBM and Apple stock so I could invest in the shiny metal. My question is … if I buy the bullion in bars, how do I know how much to scrape off an the supermarket in trade for bread? It doesn’t seem practical to lug around 40,000 Krugerands. I’m stumped.</p>
<p>OK, that’s not really the question. What I’m REALLY wondering is how normally rational friends can conclude that their investment in gold is so gilt-edged (sorry, couldn’t help myself) that there’s no need for stops or an exit strategy.</p>
<p>I don’t have 30% of our assets in gold, but any well-balanced investor holds gold in their portfolio. These days, more, rather than less. Particularly as the fed continues to print dollars and devalue our currency. The Chinese are quietly dumping dollars and are buying gold and other currencies.</p>
<p>I can’t help but think there’s going to be a “gold bubble”. With all of these people buying gold (during the recession), it would seem to be inflated beyond typical demand.</p>
<p>It will never go to 0, can always be sold easily and has done well in some bad times. Right now I think some holding some gold is good. Hopefully those gooballs on TV won’t find much.</p>
<p>Where is all this “new gold” coming from that people are buying? Annual world production is about 82 million ounces. At current prices that’s $111 Billion … just one-third the market value of Apple Computer.</p>
<p>The time to buy was in 2000 or 2001 when it was $250/ounce. Or silver at $4/ounce.</p>
<p>Perhaps you remember back to before 1964 when half-dollars, quarters and dimes were made of silver. It was relatively easy to buy small items with silver coins. If you have one-ounce gold coins and you need smaller amounts, you trade one for silver and use that for small purchases - assuming we go back to silver currency which would be an interesting idea. People and governments buying gold is a vote of no confidence on governments and central banks. Gold can do well in inflationary and deflationary times.</p>
<p>I just checked my holdings and I have about 18% of assets in gold, silver, platinum and their miners. It’s been a great decade.</p>
<p>Interesting show but the big miners look for locations where they can get eight to ten grams of gold per ton of ore. There are some richer mines where there is a higher concentration. That one-ounce gold coin in your pocket may represent several tons of ore. The methods to get the gold out of the ore can be rough on the environment if not done properly.</p>
<p>Goldcorp in Canada has production costs of around $285/ounce. They can sell it for quite a bit more. I haven’t read that much about doing it the old fashioned way but it sounds like a rough way to live. Unless gold goes much higher.</p>
<p>My MIL bought gold back at in the late seventies when it hit north of $600 an ounce. It wasn’t until 2007 – nearly 27 years later – that it reached that level again. On an inflation adjusted basis, she still isn’t as well off as if she’d just bought treasury bills. Buy low and sell high is still a good concept.</p>
<p>And please note – owning gold, the metal, itself, is very, very different than owning stock in gold mining firms, just like owning bonds directly is quite different than owning a bond fund. Really different characteristics.</p>
<p>Some understanding of cycles is useful in trading gold. Gold was in a long-term (or secular) bear market from 1980 to about 2000. The period almost aligns with the secular bull market in equities from 1982 to 2000.</p>
<p>What happens when precious metals goes into a secular bear market? Well, miners go out of business, only go after the richest strains first, do not spend money on exploration. They sell forward contracts further depressing the price of gold. Then when demand starts to turn up, miners can’t produce, they can’t ramp up exploration and production, they have to deal with permitting issues - especially environmental, they have to then use the less rich mines because the rich ones were mined in bad times.</p>
<p>Central Banks become complacent when gold prices tank as gold is the tell on how well central bankers are doing. Politicians and central banks have room to pump when gold is down. You can read about the GATA lawsuits if you want to learn about what central bankers have done to suppress the price of gold if you are curious but knowing that really isn’t fully important for trading gold.</p>
<p>I know a guy that lost all of his retirement money trading gold this past decade. Gold is up 1,000 percent over the last year. They guy made a lot of money and thought that he was god, levered up and got killed. It happens.</p>
<p>If you don’t like gold or gold miners, there are lots of other commodities to play around with. Soybeans, coffee, sugar, orange juice, chickens, eggs, etc. Even iPads. Of late, Rare Earth miners have been on an absolute tear.</p>
<p>Regarding the Discovery Channel gold miners, those guys were idiots and should not be taken seriously. Their lack of regard for safe operations is appalling.</p>
<p>Whether the investment is gold, stocks, bonds, real estate or something else, the best course is to buy low and sell high. Human nature causes us to do the opposite. </p>
<p>Now that gold has really gone up in value, we wish we had it or we wish we had more. So we want to buy when it is priced high. Conversely when an asset drops in value, we want out. If the asset really tanks, we panic and sell to limit our losses. Of course that means we end up selling low. Certainly that happened with the stock market a couple years ago. </p>
<p>As I have become older and more cynical, I am doing better with my investments. When an investment is doing well, it is time to start selling. When an investment is doing poorly, it is time to start buying. A good cynic also looks at the financial gurus and considers them to be idiots. Good thing I am not a financial guru. You can trust my advice. …yeah, sure.</p>
<p>Here is a quote from a famous trading book:</p>
<p>"I think it was a long step forward in my trading education when I realized at last that
when old Mr. Partridge kept on telling the other customers, “Well, you know this is a
bull market!” he really meant to tell them that the big money was not in the individual
fluctuations but in the main movements that is, not in reading the tape but in sizing up
the entire market and its trend.</p>
<p>And right here let me say one thing: After spending many years in Wall Street and after
making and losing millions of dollars I want to tell you this: It never was my thinking
that made the big money for me. It always was my sitting. Got that? My sitting tight! It
is no trick at all to be right on the market. You always find lots of early bulls in bull
markets and early bears in bear markets. I’ve known many men who were right at
exactly the right time, and began buying or selling stocks when prices were at the very
level which should show the greatest profit. And their experience invariably matched
mine that is, they made no real money out of it. Men who can both be right and sit tight
are uncommon. I found it one of the hardest things to learn. But it is only after a stock
operator has firmly grasped this that he can make big money. It is literally true that
millions come easier to a trader after he knows how to trade than hundreds did in the
days of his ignorance.</p>
<p>The reason is that a man may see straight and clearly and yet become impatient or
doubtful when the market takes its time about doing as he figured it must do. That is
why so many men in Wall Street, who are not at all in the sucker class, not even in the
third grade, nevertheless lose money. The market does not beat them. They beat
themselves, because though they have brains they cannot sit tight. Old Turkey was dead
right in doing and saying what he did. He had not only the courage of his convictions but
the intelligent patience to sit tight.</p>
<p>Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can
catch all the fluctuations. In a bull market your game is to buy and hold until you believe
that the bull market is near its end. To do this you must study general conditions and not
tips or special factors affecting individual stocks. Then get out of all your stocks; get out
for keeps! Wait until you see or if you prefer, until you think you see the turn of the
market; the beginning of a reversal of general conditions. You have to use your brains
and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy
cheap and sell dear. One of the most helpful things that anybody can learn is to give up
trying to catch the last eighth or the first. These two are the most expensive eighths in
the world. They have cost stock traders, in the aggregate, enough millions of dollars to
build a concrete highway across the continent.</p>
<p>“… trying to jump in and out was fatal to me.”</p>
<p>Well sure, jumping in and out is bad medicine. And sure, over a fifty-year period one expects an investment to grow. But twenty-year periods are problematic (eg, 1918 to 1938 in stocks … or 1979 to 1999 in gold). Most individuals have to liquidate their investments at some point. Wouldn’t having an exit scenario be basic investment planning?</p>
<p>Our personal experiences are more about our circles than they are about the greater picture.</p>
<p>I don’t see anyone pawning or selling their valuables. I do see people going on vacations, buying stuff, paying tuition bills. The stock markets are at three-year highs too. Who’s buying all of those stocks?</p>