Tuesday, November 10, 2009

Not Too Late To Profit From Gold

Gold has seen a rapid rise of about 300% since 2000. Despite its lack of intrinsic value or dividends, and the costs of storage, investors are wondering if they still have time to profit from gold's run before it's too late. See the following from Expected Returns.

From The LA Times, Why gold is shining brighter:
The American public has no say in Federal Reserve policy.

But the gold market might.

The metal hit yet another record high on Friday, gaining $6.40 to $1,095.10 an ounce. It jumped $55 for the week and is up $211, or 24%, year to date.

This cannot be comforting to Fed Chairman Ben S. Bernanke. The classic view of gold is that it is the best inflation hedge. That's a faulty assumption, but still: Given the record sums the Fed has pumped into the financial system -- and the fear that that money mountain could eventually power a surge in inflation -- Bernanke doesn't need rising gold prices reinforcing investors' doubts.
Gold is just about the only asset that keeps governments and central banks honest. When governments decide to debase their currency and confiscate the wealth of their citizens, gold rises to reflect this currency debasement.

Gold is no doubt an inflation hedge, but it also rises when people lose confidence in the government. Gold will rise whenever you see times of political instability and uncertainty over the future. As unemployment rises above 10% and people start to realize that "green shoots" are a myth, gold will rise as a reflection of the loss of confidence in government.

"What If" I Bought Gold Earlier?

Investors who've been swapping dollars for gold since the start of this decade are a happy lot. After declining for most of the 1980s and '90s, gold finally bottomed in 1999 around $250 an ounce.

Since early 2001 the metal has been on a bull run that has mocked the U.S. stock market. Gold has risen for nine straight years, and is up 300% since Dec. 31, 2000.

The Standard & Poor's 500 index's return is negative since that date, including dividends.

Gold, a silly artifact to many investors in the 1990s, has become the great "if only" investment: "If only I'd bought it nine years ago, or four years ago, or six months ago."

But even now there are plenty of people who can't bring themselves to consider gold as an investment. It pays no interest, and if you're buying bars or coins (versus owning shares of a mutual fund that holds the metal or stocks of mining firms), it costs money to store safely.
The fallacy that stocks are safe investments in the long run got a lot of people in trouble this decade. You still have people closing their eyes and hoping for the best in stocks when there is a raging bull market in gold that investors refuse to hop on. Expect investor regret to continue as gold reaches new heights and the supposed "bubble" doesn't burst. Gold will eventually reach bubble-like valuations, but that is closer to $10,000 an ounce than $1,000 an ounce. The past couple of weeks have shown that gold moves on its own fundamentals, regardless of dollar strength or the stock market. I'm convinced that the next 5 years will make a believer out of everyone in this gold bull market.

This post has been republished from Moses Kim's blog, Expected Returns.

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