PM's The new get rich scheme

Gold is tougher to analyze than silver. I actually got into silver first after some analysis revealed that world-wide inventories were falling because consumption exceeded production. The factor that made gold attractive was the halt in central bank sales, and subsequent purchases. Now I believe speculation is beginning to dominate fundamentals, but this isn't necessarily a bad thing, and it could drive prices much higher than anybody expects. For me it is easier to make a case that silver prices will be higher in 5 years than trying to guess where Apple stock is headed. The other factor I watch is people, and I'm not above "stealing" a good idea. I examined silver closely when Warren Buffett bought it [although I never understood his sale], and I've been a long term follower and investor in anything Rob McEwen is involved with on the gold side. I just try to understand what they understand and follow their lead if it makes sense.

 

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Great point, Cloud. I think silver gets overlooked a lot, and I've always thought it had the best potential. It'll be interesting to see where it's heading.

 

My memory is a bit fuzzy, but I think Buffet asked for the silver to be delivered. Of course this caused a bit of a panic, but Buffet let them off with a premium of $.50 an ounce settled in cash. I don't remember how many millions of ounces he purchased, but I'd love to make $.50 instantly on each and every share of any stock that I owned, simply by asking for it.

 

PM's, like all commodities, can be a very good hedge in down market years. This hedge, though, comes at a price. There is a cost of storing it, which you must bear each year. This cost is either a safe deposit box, insurance, or the risk of loss. This cost is never accounted for by PM bulls. Also, many stocks and all bonds pay a yearly dividend than can be reinvested. PM do not have those either. These are the facts, and over almost any time frame you can state, unless you are intentionally trying to pick the most favorable comparisons, stocks will outperform any physical asset. I admit comparisons are hard due to government intervention, but go back to before 1933 and do any comparison of Stock return to PM and you will see what I mean. Regular stocks will outperform gold stocks for the same reason, you pay for the safety. That does not mean they are bad investments, it depends on WHY you are investing. Money in PM is sure better than wasting money on new cars, drinking, car racing, etc, so if that is what they are replacing, then its a net good investment always.

Everyone has a different reason why they are investing, and what they are investing in, this is why markets change every day. I think what the Bears here are saying is to not ignore your normal investments, and do not go crazy with PM at these price levels. Stick a little "crazy" money in, but wait for a correction to pour more money into them as a portfolio balancing act. At least that is what I would advise.

Of course, there are many Bulls here too, and they could be right. Maybe silver will be $50 in a year or two. If I knew I would not be working for a living. My perspective is just too many people are advocating PM right now, and that is sounding the alarm bells for me, just like in 1980. I still remember the day the Hunt brothers couldn't make their margin call and the silver house of cards came tumbling down. Btw, I hear a lot of silver people pointing out that the 16-1 ratio is out of whack and that means silver has to increase. I tend to say gold is overvalued now especially since gold is the metal of choice of newly rich Asians. To them a ratio does not matter and all that matters is how much gold they can accumulate. Trust me, I had to buy 4.5 ounces of gold for my Thai wedding recently lol.

 

link to chart of dow to gold ratio.

http://www.goldprice.org/dow-gold.html#80_year_gold_price

The slope of the graphs tells all. When the slope is increasing, the dow is doing better than gold. When the slope is decreasing gold is doing better than the dow.

Analysis......1928-1930 dow is better. 2 years
1930-1933 gold is doing better 3 years.
1933-1950 flat slope both are doing the same. 17 years.
1950-1965 slope increasing dow is better. 15 years.
1965-1980 slope is decreasing gold is better. 15 years.
1982-2000 slope is increasing dow is better. 18 years.
2000-present, slope is decreasing gold is better. 10 years.

Conclusion.
Dow was better for 35 years.
Gold was better for 28 years.
both were flat for 17 years.

The times of the Dow doing better than gold or gold doing better than the Dow are about 50/50 since 1928. Of course, if you can only remember back to 1982 (Reaganomics) you probably only remember the Dow doing better, minus the last 10 years.

 

I keep seeing people say this, but for the life of me I almost never hear any large institutional investor, pension fund, or mutual fund announce that they have loaded up on PMs. In 1979-80, gold and silver price movements dominated the business press during the mania. It isn't like that now. Who is out there advocating PMs who isn't a perma-bull on metals? I have a friend with whom I have shared investment ideas for many years, and I can't even get him to consider purchasing a single gold stock or ounce of silver.

 

Good analysis. Not many people realize that gold outperforms stocks a large part of the time. I agree with those who say that stocks will outperform gold over 100+ years, but that doesn't do me any good because my holding period is much shorter and I can't afford to wait out a 15 year bear market in stocks.

 

True, but a couple years ago I was hearing and reading people advising 5% of your portfolio in PM, and now every once in a while 10% pops into the discussion..maybe not a big leap, and maybe these people have something to gain by pushing Pms...

 

I agree with Sweeper. There still are a lot of people who have faith in the stock market. I advised a friend to purchase a few hundred ounces of silver. He talked to his regular investment adviser who told him, "you can make any money on silver or gold. If you make money on silver and gold, it means the rest of the market isn't doing well and there are other problems hurting the market." I repeated that back to my friend and asked him, "what, you think the stock market is healthy right now? Ok, invest as you see fit."

I do see a lot of cash for gold places popping up all over the place, but these are actually counter productive. They divest people of their gold. What you need to see is, "WE SELL GOLD!" Then you know mania is here.

 

I agree that the mania will be here when people are in a buying panic. We aren't there yet. But I would never badmouth the stock market since I still believe it's just about the best way for the average individual to make their savings grow if they take the time to learn what they need to know to be successful. I have been in the market continuously since before I graduated from college and I never expect that to change. It's just that sometimes gold and silver can be as good as a good stock.

 

Its not the same yet, and probably won't be without another Hunt Brothers cornering. UBS just advocated more positions in PM, and they are just the latest. You are right it is not near 1980's level yet, and I doubt it will be, but it will be something softer and a less dramatic selldown when it occurs. I would be a buyer under 11, holder until 20, and a seller above 20.

 

I am calling a great big BS on this one. There are liars, big liars, and statistics. I do not know what this graph is trying to represent with their gold to Dow ratios, but I do know ANYONE trying to compare gold versus stocks and saying they are equal is just telling one great big lie.

Doing just a simple calculation, compounding $35 from 1926 at 7%, (and stocks have been more than that), gives a price today of $12,602.60 versus gold price today. True, if you know the compounding factors and the fact losses are proportionally worst than gains, you could argue with this a little. This is why I discounted the compounding to 7%.

The source you listed is the Bullionvault.com. I would suspect they are twisting something to try to get you to buy gold. There is simply no mathematical way gold has come close to stocks in the listed time frame. I am not saying in the future they couldn't, since there has been an incredible increase in multiples in the market the last 30 years, but to try to say they are equivalent from 1926 to today is simply not true.

Edit: On thinking about it, the chart could be true on years where one beat the other. What is untrue or not stated is the SCOPE of one beating the other, and the inferred investment potential. If gold beat stocks one year by 3%, but lost the next year by 23%, it would be 1 to 1 right?

 

Take this into consideration.

 

The strange thing about this thread is, your comment that stocks do better with no statistics of evidence to prove it or otherwise. Then I come up with a chart that shows the performance of both and the data is poo pooed. But people on here are always saying "OH yeah, prove it." Or they are saying, "you haven't done any research or analysis."

Come on guys, can't have it both ways.

 

Its a good point. I have always said PM's are safer than most other investments, but you pay for that safety in lower return. I doubt 15 years it would take anyone to have to wait out a market correction, but yes PM's are safer. I just vehemently disagreed with that site trying to infer gold was as good an investment as equities historically. Could they be in the future? Of course. They just haven't been in the time frame discussed. All discussion of investments are made with the caveat that everyone is on their own time horizon, and need to determine when they need the money out of the investments, therefor their own need to stability and security.

My MBA was in Finance, and one of the first things you notice is that most financial numbers are twisted to fit the persons desired outcome. Most numbers are half truths at best, which is disconcerting to me. I just really object to people twisting numbers to fit what they want to sell. The bottom line is, unless someone could time it just perfectly, historically you were better off to put money into equities versus PM. Much better off.

 

Of course, we could limit our discussion to the last 10 years, and then it's all cut and dried.

 

http://www.crossingwallstreet.com/archives/2006/10/gold_vs_stocks.html

Here's another chart. This one comes from CrossingWallStreet. This one advocates stocks to gold. This chart is a bit deceiving as it is logrithmic. But again, the slope of the graph tells which is doing better.

'73-'80 gold did better.
'80-'99 stocks did better.
'99-'10 gold did better.

Seems to be telling me the same thing. Different source.

You can poo poo this if you want, but please support your believe with some data that comes from a source besides your own opinion.


P.S. you can tell this site is pro stocks. Here's an excerpt. "If there’s one thing I can get across to investors it’s that gold is an asset, but stocks are equity. This is a huge point. By it, I mean that gold only has value for what people can do with it. Stocks, on the other hand, represent claims on real assets."

So, stocks are claims to real assets. Hmmm, what is gold, if not a real asset???

 

Yes, but then you are picking and choosing dates that make your point, somewhat like the link did. Why did they choose 1928 and not an earlier date? Because an earlier date would have made the comparison less favorable to them. They chose a date just before a huge correction, minimizing stock returns by maximizing stock pricing at the beginning of their comparison.

How about I choose a starting date of 1979 or 1980? Then PM returns would be completely destroyed. That is the danger of picking an arbitrary time period instead of the whole data set. Any argument can be supported by arbitrarily choosing your data. We are talking right now after a major market correction. This is when all of the gold bulls come out of the woodwork and "prove they were right. Then the market goes back up again, and they go back into the woodwork waiting until the next market correction where the numbers again look not so bad for them.

 

But you are playing the same game. You could also assume that a person bought gold when it became legal to do so in the early 70s at a price of about 40. That's a 29X gain to today while the stock market has gained about 12X [based on the DJIA from 1971 until today]. Of course, the stock investor can earn dividends, but a large gold holder can also earn a risk free return by basis-trading on the Comex.

I don't think the point is to "prove" gold is better, but only that there are time periods when one investment outperforms the other. No investment is always best.

 

This one is fine. The one problem with this graph is it starts with the MASSIVE correction of 1973 and 1974. It is the same as if I start a graph for PM starting with 1980. You are starting at the highest price point you will see for a long time, so of course you will look unfavorable. You cannot look at a chart and see which one did better by year and count them and think it means anything. Compounding of the returns is what counts the most, and that is what you miss by just counting how many years one did better than the other. I don't disagree that gold may have done better than stocks equal number of years, but that is meaningless compared to the level of outperformance.

Btw, my number set and compound return function of the market is not mine, but has been evaluated and used by investors for 30 years. If you wish a link, I can find one. I used the data set so much in teaching Finance I have it memorized, both the 1926 to date and 1904 to date data. BTW the 1926 to date data is juiced, and I use a more conservative annualized return calculation for the comparison I made earlier. I can explain if you wish.

Saying that stocks are claims on real assets is true enough, but to not point out gold is an absolute real asset, that is absolutely in your control and not subject to market, financial, and management risks is absurd. I agree with you.