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February 21, 2006

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Leonard

Not that I own any... but the point of gold coins is if you think it possible that the monetary system collapses, and that the government massively expropriates wealth. (Which one comes first, well, doesn't matter.) Gold coins can be hidden. Ownership of an ETF cannot.

There's a good reason why some folks think that gold will still be valuable then: because gold has always been chosen as money by all peoples that have had any of it. Gold is simply the best money there is to be found in nature. Of course, it's not necessarily true that the experience of the last ~5000 years of human existence still applies today. But how would you bet, if you had to?

Big Mike

FDR did make ownership of gold illegal, a really dark time in our nation's history when the country almost sank into communism, and we never really full recovered from the episode.

But nevertheless, I invest to get rich within the financial system we have. If everything collapses, you may find that when you try to cash in your gold coins, gangs of bandits will just steal them from you. Assuming that gold is even valued as goldbugs think it will be after a hypothetical financial collapse.

In the long long run, gold has proven to be a lousy investment. The reason to buy gold now is to take advantage of a commodity bull market that still has a long way to go. But you want to sell at the top of the bull market, and not be one of the fools who hung onto their gold in 1980 and watched all of their profits evaporate.

real1

Hi, Big Mike

Not at all ...

If you are interested in gold
I would like to invite you to visit my web log

The web log contains daily commentary, news and charts regarding the global gold and silver market.

Gold global perspective

Leonard

I invest to get rich too. And fully intend to sell my gold (GLD, more specifically) when I think it has topped. Nor do I think there will be a complete collapse of the financial system.

If I did, though, I would want to physically possess gold.

Why? Well, sure, roving bandits *could* dispossess me. But that's just could. Putting the same money into owning paper ... that's *will* dispossess me (or just see the value go to zero).

But I explained why I think gold would still have value: it's simply an observation of human action over the past thousands of years. Gold, if it is available at all, is the best money that people have found. Assuming that human nature is not changed fundamentally in the event of this hypothetical collapse, whatever it is that makes gold the best money will still operate. And it will continue to be the best money... and thus, a store of wealth that will transcend the disaster.

Chad Butler

Mike,
I agree that the ETF is a sensible way to buy gold - it mitigates the transaction costs. Or for more leverage, you could use the futures, especially the new CBOT 100 oz futures. For the individual, the CBOT's contract reduces execution risk through electronic trading (that the COMEX doesn't have). Either way, if you desired the physical gold in the end, you could always opt to take delivery on the contract (although, personally, I prefer the liquidity of staying in the futures).

I also prefer this to investing in gold stocks because when I buy a stock, I am investing in the profitability of the company. As we all have seen, companies go out of business, but physical gold will never go out of business.

tim

There is very little doubt that should the financial system collapse that a metal with the following characteristics would serve as the primary medium of exchange - not becuase it has any instrinsic value, but precisely because the failure of the financial system will derive from systemic problems unaffiliated with the following: 1) Finite supply (for all practical purposes. 2) Knowledge by users of medium that supply is finite. 3) Knowledge by users that others will accept the medium; and 4) knowledge by users that others are familiar with Points 1, 2 and 3. Gold, Silver, leaves of grass (if they were finite and not easily forged) or anything with the abovementioned characteristics could serve as the primary medium. Given the historical role played by Gold, it is the likely alternative, with silver.

Sean Berberick

gold has been currency for 5000 years . The main reason gold bugs buy physical gold is they fear fiat currency . A world that values US currency at 10 or 15 percent less then it was a year or two ago .

Ron

Gold has a lousy investment history. It is going to go up? Who says so? the sellers love to talk like that. Sorry, I was invested in gold in the early 80's, enjoyed some run up in price, sold out for school expenses, just in time. Then watched a crash at lasted two decades. Lucky me. I will not be back. Hmmm, Gold made a huge drop yesterday, how can that be?
Who will buy your gold in the financial collaspe? will you trade one coin for a meal? Get real.

Jeff

Just dug this up and was curious if any original posters have changed their minds with the recent spike in the price of gold at over $800/oz?

Ryan

I'm posting this on Jan 5, 2008 and all I have to say is enjoy eating your words. $863 and going to $2000. I have to say that I am happy that I bought all I could four years ago and it was bullion, so I guess that little dealer markup has paid for itself already. It's still cheap even now, so buy up and buy physical holdings, and a gun to protect it if your scared about a bad guy coming for it.

Sundancer

Wow! 928! I bought when gold was $253. I'm thinking $1000 might be time to bail; any thoughts?

ken

I have been a gold coin collector for over 20 years and track my financials religiously. All my coins are worth substancially more today than I paid for them to the retun of an average gain of 12%.some over 100%!!!
Additional when the time comes to sell ,it will be to another private collector so I will not pay any capitol gains tax. Not the case with your ETF.
$250 buys a safe that is practically indistructable these days.

ongrowthtrack

I cannot agree more with Suzan, Capital gains can kill the gold investment. Coins are at a different things, not so liquid as ETF.

Anonymous Coward

I contend that coins are actually *more* liquid than an ETF. With an ETF, I have to go through the process of selling the shares followed by inter-bank transfers before I see any cash from the sale. (which usually takes a week or more, in my experience.) With a coin, I can go down to the local coin shop and have cash within the hour.

Don

Ive never had any trouble liquidating gold at a moments notice

John

One can say that rare coins hold there value in a falling market and tend not to crash when the market rebounds. Gold Coins are not only an investment but a collectors item as well. Some coins run in the hundreds of thousands for dollars not because of weight but because of rarity. Collectors will continue to gravitate to this type of investment because you can actually hold and look at the coins. Lets face it Gold Coins if bought correctly are a great investment. Just keep them in a Safty Deposit box and choose wisely. Dont think about weight think about rarity and weight.

Tom

Mike,
DRD chart shows the stock at $35 in 2004 and is currently trading at $5.27? Gold has almost tripled?
Let me know if I am missing something.
Thanks
Tom

Ron

It is easy to miss the point on an investment. One type is short term--try to hit a run up and then sell. You can make money with lots of stuff that way. But if you look at gold for the long term, forget it. If one had bought gold in 1970 at $35, not much chance of that now, and sold now at $750, you would have a whopping 6% return Cool? It gets worse starting in the 80's. Gold has no long term history that suggests it to be a long term money maker.
If the world goes bankrupt--who sets the value on your gold: the one selling you something. As someone pointed out, will your double eagle be worth a $1000, $20 or the price of a meal? How is change made when you agree on a price of $20 and the coin is worth $25? Do you bite off a piece?
Speculate all you wish, just don't call it a long term investment.

Stan

Hi Mike, I just reviewed the chart for your recommended DRD Gold (NasdaqSC: DROOY), a gold mining company. A company that you mentioned "is highly leveraged to the price of gold and will increase in value many times if gold ever takes off." A company in which you mentioned you would prefer to invest your money over gold coins.

I analyzed the following 12 year period to compare their stock prices:
10/1/96: DROOY price: $84.22/share
10/1/08: DROOY price: $3.64/share

I calculated an annualized and compounded -23.04% return (yes, a NEGATIVE 23.04% compounded annual return). Of course such a return would decimate any amount of money invested in DROOY.

I am not surprised in this significant drop in stock value as the performance of DROOY over the past 10 year period has been dismal at best:

DROOY Annual After-Tax Net Income Reported Numbers:

1998: -$20,000,000
1999: -$11,000,000
2000: -$168,000,000
2001: -$10,000,000
2002: -$52,000,000
2003: $37,000,000 (the only positive after tax net income year in 10 years)
2004: -$26,000,000
2005: -$41,000,000
2006: -$1,000,000
2007: -$36,000,000
Total: -$328,000,000 (after tax net income 1998-2007)

Due to this extremely poor operating performance, DROOY had their debt increase and equity decrease over the years which resulted in a negative net worth of: -$9,000,000 on their balance sheet for their fiscal year end 2007. Yes, that is a negative nine-million dollars in equity for their fiscal year end 2007. History dictates that once a company achieves a negative net worth, it falls into a dark abyss where borrowing becomes difficult, vendors are chasing the company for payment of accounts payables, layoffs occur, etc.

Me personally, I would absolutely run from a stock like DROOY. Making an investment like this is not comparable to investing in gold. It is investing in the management of DROOY and their ability to execute as a company. Another inherent problem in investing in a gold mining company is that they there is a reasonable opportunity that a gold mining company could produce minimal results in their mining.

I personally would absolutely choose to invest in gold coins over a company like DROOY. DROOY is such an extremely poor recommendation, I am quite curious as to your basis for this recommendation and if you actually poured into their annual performances as I do in any investment I make and as I did in my analysis above.

KDUBZ

I believe that one should not invest everything in gold. However, given the fact that our current US government policy is going to lead to massive inflation in years to come, I believe that gold will prove a worthwhile investment. Also given the Madoff scandal, I think I would prefer holding my gold in hand, rather than have a slip of paper that tells me there is gold somewhere in a safe of which I am a fractional owner.

Joe Knows !!!

BUY GOLD COINS !!!!! Even buy just scrap gold, buy all you can and hold on to it... you will not be disappointed...but you will have a great investment, gold will be at $2000 an ounce just after 2010 !!!!! Buy all you can buy and remember what i say !!

Joe

Gold ETFs must be backed by physical gold. I imagine once gold takes a massive run on demand the ETFs will not be able to keep up. Yes, you hot ETF will be closed while those holding physical assets will have the power. Physical gold is recognized and traded around the world; your ETF is not. You can easily buy and sell physical gold without capital gain tax, sales tax, fines, or fees. Gold is a TANGIBLE asset; not an electronic or paper asset.

Buy Gold Coins

Gold has an intrinsic value that has been recognised and utilised by man for thousands of years. In times of economic instability, gold has maintained or even increased it's value. Gold coins are a practical and legal way for individuals to physically keep gold.

John

After I read this post I e-mailed it to my broth in law who recycles silver. He was trying to talk me into precious metals. He just e-mailed this back to me. He knows I lost 300,000.00 in really good conservative stocks funds, and a smattering of hedge.

After I read BIG MIKE's post I never looked back. Until today. OOPS If I had followed my brother in laws advice I would be 450,000 ahead. This post cost me 3/4 of a million. Not seriously. I never would have gone 100% but seriously considered 15. I ended up at 3 and that was my biggest winner the last three years. YUP. I purchased bullion and sold it last spring when I needed to save my business.

THis summer I buy 10 oz of gold and 2200 oz of silver. My brother in law will sell it to me at spot. Lets talk in three more years.

Gold IRA

The only people who make money on a regular basis by investing in gold are the brokers. Buying gold can be a hedge against inflation but not gold coins.
Watch a free video on Gold IRA.
http://www.youtube.com/watch?v=3P5oEnKMysQ

TheDude

The stock he originally mentioned seems not to be tracking the increase in the price of gold... seems like it would have been a loser...

Pete

Wow. Did the author completely miss this one or what?

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About Big Mike


  • Big Mike has a BS in Economics from the Wharton School of the University of Pennsylvania, an MBA and JD from Arizona State University. He once worked as a stockbroker for six weeks.

    His politics blog is Half Sigma.

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