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What You Can Learn From The Rise And Fall Of Gold ?
The only thing you can learn from rise and fall of gold is not to read bloggers on gold, bears OR bulls. Gold, through history, has a way of making people irrational and this applies to people who write about it.
I have no position in gold or gold stocks at the moment but have been long or short in the past without getting caught in the "narrative". This article has a bit of BS for the bear narrative. You will find similar nonsense in gold bull writings as well.
Leverage is Always Dangerous
Tell that to the millions of homeowners with a mortgage. All of them own leveraged assets. Such broad statements are meaningless.
Physical gold (like all commodities) is purchased via futures contracts.
Huh? Physical gold is bought as physical gold. Gold futures contracts are purchased as futures contract. This is like saying physical oil is always bought as futures contract. Don't think aircraft would run on futures contracts! Airlines may hedge using futures contracts, of course.
If you buy Gold coins, you are buying physical gold. If you buy GLD, you are buying into pooled physical gold held by ETF.
If you buy leveraged ETFs like UGL or GLL then you are buying instruments based on futures contracts and are leveraged.
He is confusing price discovery of commodities in the futures market that sets the price for the physical commodity that one might buy.
That entire section is nonsense.
Gold tends to frustrate people with a fixed bull or bear view because it is cyclical and cycles can be long where they are on the wrong side.
Smart investors don't buy what they don't understand. Smart bloggers shouldn't write about what they don't understand.
Reply to @cman: Boy ! with a subject knowledge as in depth as yours, it might be wise to change your MFO Discussion Board name to this----- Regards, Ted
Good article. Gold and mining funds behave as highly leveraged investments no matter how you slice and dice it. Perhaps similar in volatility to a 30-year zero coupon Treasury?
Like any investment, when it's rising gold's adherents look like geniuses. But it is perhaps the least "analyzeable" of any investment. I think it's best left in the hands of a manager who attempts to deal with the inherent volatility by hedging that risk with other off-setting assets.
I've had good and bad with gold. On the way from $300-$500 sometime after 2000, I made a little. But when I drank the Kool Aid a year ago and placed a small bet, the fund went south fast and I lost a chunk before bailing.
Reply to @hank: Leveraged is the most misunderstood and abused word in investing.
There is nothing leveraged about Gold. It goes up and it goes down and frustrates both buy and hold and performance chasing strategies. It doesn't fit the "keep going up over long term" assumption of equities on which traditional investment thinking is based on making most investors look like geniuses. It is like betting on a baseball team. Hence, the religious views on both sides, each thinking they are right!
Gold miners, on the other hand, can be seen as a "leveraged" play (in the literal sense of magnified, not leveraged in what you buy it for) not on the price of gold but on the difference between gold price and cost of gold production which is roughly about $1200 and falling recently. The higher or lower gold prices go from the cost of production, greater the acceleration in gains or losses in the miners.
Understand what you buy and buy what you understand. Articles like this one don't promote understanding, not anymore than the gold bug articles.
Reply to @cman: Sorry to abuse this word and appreciate your correction. My thinking was that gold often tracks inflation expectations, dollar weakness, or other commodity prices - but in an exaggerated over-amplified manner. That's what led to my misuse of the word "leverage". (Obviously, "COLI" did not increase 5Xs over between 2000 and 2012 as gold bullion did. So that was my underlying thought - poorly expressed as it was.) Thanks again. Regards
The rise and fall of gold taught me to make money on both the long and short sides of the market. I own physical gold (purchased in 2004) and at times I buy SPPIX to hedge and capture downside moves in gold. SPPIX shorts the gold miners, so it is a leveraged play, as cman described. Last year was a good year for hedging, and this year is looking good for gold longs.
Comments
I have no position in gold or gold stocks at the moment but have been long or short in the past without getting caught in the "narrative".
This article has a bit of BS for the bear narrative. You will find similar nonsense in gold bull writings as well. Tell that to the millions of homeowners with a mortgage. All of them own leveraged assets. Such broad statements are meaningless. Huh? Physical gold is bought as physical gold. Gold futures contracts are purchased as futures contract. This is like saying physical oil is always bought as futures contract. Don't think aircraft would run on futures contracts! Airlines may hedge using futures contracts, of course.
If you buy Gold coins, you are buying physical gold. If you buy GLD, you are buying into pooled physical gold held by ETF.
If you buy leveraged ETFs like UGL or GLL then you are buying instruments based on futures contracts and are leveraged.
He is confusing price discovery of commodities in the futures market that sets the price for the physical commodity that one might buy.
That entire section is nonsense.
Gold tends to frustrate people with a fixed bull or bear view because it is cyclical and cycles can be long where they are on the wrong side.
Smart investors don't buy what they don't understand. Smart bloggers shouldn't write about what they don't understand.
bloomberg.com/news/2014-01-17/deutsche-bank-withdraws-from-gold-fixing-in-commodities-cutback.html
Regards,
Ted
lol.
http://www.apmex.com/category/1150/gold-bars-gold-roundsall-sizes-manufacturers
http://www.bloomberg.com/news/2014-01-16/metals-currency-rigging-worse-than-libor-bafin-s-koenig-says.html
Like any investment, when it's rising gold's adherents look like geniuses. But it is perhaps the least "analyzeable" of any investment. I think it's best left in the hands of a manager who attempts to deal with the inherent volatility by hedging that risk with other off-setting assets.
I've had good and bad with gold. On the way from $300-$500 sometime after 2000, I made a little. But when I drank the Kool Aid a year ago and placed a small bet, the fund went south fast and I lost a chunk before bailing.
There is nothing leveraged about Gold. It goes up and it goes down and frustrates both buy and hold and performance chasing strategies. It doesn't fit the "keep going up over long term" assumption of equities on which traditional investment thinking is based on making most investors look like geniuses. It is like betting on a baseball team. Hence, the religious views on both sides, each thinking they are right!
Gold miners, on the other hand, can be seen as a "leveraged" play (in the literal sense of magnified, not leveraged in what you buy it for) not on the price of gold but on the difference between gold price and cost of gold production which is roughly about $1200 and falling recently. The higher or lower gold prices go from the cost of production, greater the acceleration in gains or losses in the miners.
Understand what you buy and buy what you understand. Articles like this one don't promote understanding, not anymore than the gold bug articles.