The Gold Investing Dilemma
May 11, 2010 by Mr. GoTo
Filed under Investing for Retirement
Gold prices are again nearing a record high. Should a baby boomer buy gold now? If you own gold, should you sell? Are there easy or obvious answers to these investing questions? I think not.
But why do they need gold? Is our economy going down for the count? Will the dollar become worthless?
The pessimists think that way so they buy gold – even at record high prices – to prepare for the worst.
But let’s think about that doomsday strategy for a minute.
Let’s assume a complete collapse of our economy and currency. Now you can’t use your dollars to buy food or fuel. So someone comes to you with gold and says “I don’t have any food. Can I give you some of my gold for some of your food?” You think “What am I going to do with more gold? I need fuel and food more than gold.” So you reply: ”I don’t need your gold. I need fuel for my truck and heater. I will trade you some of my extra food for some of your extra fuel.” A deal is done with no gold involved.
My point is that if the economy and dollar collapse, gold will not automatically become the currency of choice, or at all. Instead, a barter system will evolve, with people trading their own needs for another person’s needs. You can’t eat or heat your home with gold. It will sit there in your gold vault, looking nice but unused.
The more rational gold investors will say, “I’m not buying gold to save me from economic collapse. I’m buying it to preserve my wealth.” And your wealth is measured in …. dollars?
OK, then tell me – when do you sell to get those dollars? Now, at record highs, when gold has given you wealth? Or do you wait until the economic news is good again, at which time gold prices may go into free-fall? So much for preserving your wealth for the good times.
I’ve had many people try to explain to me when and why we should buy gold. I’ve yet to hear a consistent, rational explanation of when and why we should sell it. If you can’t explain that to me, I’m not buying.
If you tell me to buy when the prices fall and sell when bad news forces prices up again, I can understand that. But that’s not what most gold investors/speculators seem to do. They think “I shouldn’t sell now – there is bad news everywhere I turn.” And so it goes.
What about you? Do you have a rational plan for using gold as part of a retirement portfolio?
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We learned our lesson in the 1980’s. We were overseas and bought silver. When we returned to the states we got short of money and decided to sell it. You are correct. People were not interested in something they could not convert easily. We finally bartered for something we wanted in trade….
I don’t think that gold will be the trade of choice in the US. The choice will be food and fuel- much like the depression era.
Mr. GoTo,
You ask some good questions. My answers, not from a “gold bug” point of view, but from the viewpoint of a former financial advisor of over 20 years and a believer in gold, is “why not have it all?” Why not grow some food via a parcel of farmland and resolve the fuel issue by natural gas along with owning some gold as currency which has a multi-thousand year record of purchasing power?
Along with this I would own silver which also has a multi-thousand year track record. I’d take both of those prima facie over a Federal Reserve Note that has 39 short years of existence without gold backing.
The problem with your example of trading food for fuel or anything like that is it’s not an easy transaction. Throughout history, a medium of exchange was needed to make transactions equal. That’s why gold and silver were used in ancient times and paper money or “scrip” was utilized in Colonial days here in the U.S.
In a true monetary collapse, like with the Argentine Peso of the late 80’s, entrepreneurs set up swap meets where something of value was exchanged for “scrip” that could then be used to purchase other things of value. Gold and silver could be turned in to receive the scrip as well.
Gold and silver never go to zero. They will always have some value.
As far as when to sell, that’s another good question. No one ever addresses that issue. I do so in my book and I’d be happy to send you a free copy if you’re interested.
I’m not conventional in my thinking which you might get a kick out of. For example, I think gold is just a shiny rock. You bury it in your back yard 10 years ago and dig it up today, wash it off and it’s still a shiny rock right? But today that shiny rock will buy you about 3 times what it could 10 years ago. Most people don’t understand that it is what the shiny rock is priced in that changes.
I do think you can answer the question of when to sell yourself though. You sell when you see something else that will grow in value compared to what you’re invested in. Diversification though is what I try and preach.
Most people have nothing that counteracts the fall of the U.S. Dollar with their portfolio. 70% stocks (mostly U.S. with some foreign), 25% bonds (U.S. Govt. and Corp.) and 5% U.S. cash (Money Market or CD’s). There is no hedge, outside of some TIPS (which isn’t a real hedge) and possibly some exposure to commodities.
Anyway….thought I would give you my two cents…which is now 4 cents after inflation
Doug – I would like to read your book. I will send you an email.
Gold price is slightly exxagerated. We are experiencing boom, but real record is still distant. Real (inflation adjusted) price of gold was around $2500 (2009 dollars) in January 1980. And some economists using alternative methodology to count inflation, like John Williams from Shadow Government Statistics, suggest there was even higher price (over $7000 per ounce). Gold will be always good commodity to counter inflation, but there is boom and bust cycle, like with any other commodity.
I don’t really understand gold as an investment either. But I’ve done a small amount of research.
From what I know, the people who do invest in it only invest a small proportion (maybe 5-10%) of their portfolio in it, just to diversify a bit. And they usually do it through a mutual fund.
If I do decide to invest in gold after doing more research, this is the route I’d probably take.
Hi Darren,
You’re like most people in that our education system doesn’t teach us about the significance of gold in one’s portfolio. Even the Certified Financial Planner (CFP) books I bought in studying to become a CFP slighted gold as part of a well diversified portfolio. This is why I turned away from the industry about 5 years ago and started to question the advice that was being pushed upon people.
I have since critiqued Modern Portfolio Theory which won a Nobel Price for its lack of hedging ability against currency decline and have openly challenged CFP’s, CFA’s, PhD professors and financial gurus as to their negative articles on gold. They never reply…
Mutual funds might be recommended by the financial media (for obvious reasons), but a lower cost way of diversifying is to buy the Exchange Traded Fund (ETF), called GDX. The fees will be lower than most mutual funds and you have instant liquidity.
However, my philosophy on the type of gold to buy is different than most advisers… Unfortunately, there’s not too many places to go and obtain good information on what to do.
I agree that our education system doesn’t put enough emphasis on personal finance in general, let alone investing in gold. When I took the investment course for the CFP program, I don’t remember them discussing it much either.
That’s why I’m doing research on my own through google, the library, and other sources.
When you suggest ETFs because of lower fees, are you not taking into account commissions? Or are there gold ETFs that trade commission-free? I know some brokerages like Vanguard now offer free trades, but am not sure if they have or include gold ETFs.
Yes, commissions for ETFs will only be around $10 depending on your broker.
Not really an issue.
The info on GDX you can find here: http://www.vaneck.com/sld/vaneck//offerings/factsheets/GDX_FactSheet.pdf
The fees are .55.
There’s a chart there showing the comparison of GDX and GLD, the ETF that tracks the spot price of gold. You can see that GLD has been a more conservative approach.
Vanguard fees are some of the lowest around. I don’t have an issue with them at all except for traders, there is a 1% redemption fee if held less than one year (I have more of a trading philosophy rather than “buy and hold” with the precious metal mining shares – - 2008 was a down year for them, and I think right now things could turn south for the precious metal shares for awhile).
Glad to see you’re doing your homework! I try to take into account all of what I read before offering opinions. I spend a lot of time digging into the research before I write an article, with the intent of putting good information out there for people to make good decisions with.
I remember you from an article you had on another site Darren. I then tried to find that article on your site, but couldn’t. I believe it had something to do with gold….anyway…I do remember your site. Keep up the good work…and reading!