Gold Investments Have Done Poorly Lately

Around the recession we heard a lot about gold as an investment.   I'm not hearing that much about it lately.

Here's why:

click for full size, source: Yahoo Finance

Gold has lost over 20% of its value in the past 5 years while the stock market is up over 75% in that same time.

If you'd bought gold almost anytime in the past 8 years you'd be losing money on it versus simply putting your money in a bank account.    If you'd bought gold between 1995 and 2005 you'd have been lucky to beat a savings account.      If you were lucky you bought sometime before 2005 and sold around 2010.   This isn't the kind of pattern for an investment that you'd want.  It takes extreme luck to do any better than beating a simple bank account.

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Home Storage Gold IRAs Are a Bad Idea

I just saw a google ad for a "home storage gold IRA".    It had a picture of a older dude grinning behind a pile of gold coins and a home safe.   My reaction was to roll my eyes and think : "oh geez".   Clearly this is a borderline scammy investment to exploit peoples fears that the world is going to crumble or corporate thieves / socialists are  going to make the stock market evaporate.   So the only solution is to have your money in good old fashioned gold.   And if that isn't crazy enough for you then why not put your IRA in your own safe too!

I really don't have to investigate this to conclude that the fees are going to be ridiculous.     Its a given.   Fees for self directed IRAs are steep and this is adding another layer of cost on top of that.   Not to mention the high costs of buying and trading in physical gold.

Worse the scheme may not even be legal as far as the government and IRS are concerned.
The Law360 article : Are 'Home Storage' Precious Metal IRAs Legit? discusses the topic and they seem to conclude that its probably not appropriate management of an IRA.    IRA funds are supposed to be managed by a trustee and putting the money in your own safe is not really going to fly.   I imagine that the self directed IRAs used for real estate investments are probably border line as far as the rules go and piles of gold in your house is not going to fly.


The way the companies pitching the deal structure it you generally have to set up an LLC to hold the investment.   Now thats not really legit if you setup the LLC then put the money in your own home.  Plus that system adds to the costs.

But thats not the only source speaking against these things.     An article from Globalnewsire :  Home Storage IRAs: Risky New Trend May Leave Retirees Liable  quotes Trevor Gerszt, investment specialist and CEO of Goldco Precious Metal saying : 
""I've cautioned people in the past about so-called 'home storage IRAs,'" he says. "Unscrupulous providers tell consumers the law allows them to store gold and silver held in their IRAs at home, when it's clear the IRS codes forbid that."   Now he may be biased since from what I gather Goldco Precious Metal helps people do self storage IRAs using a bank as the storage location which is competing with home storage.  But still.


I don't think I've hidden my opinion about gold as an investment.  Gold is not a good investment.  
But then hey, if you'd ignored me and bought gold when I called the peak in 2009 
you'd have seen your money double and then plummet and you'd still be up ~20%.

I talked about high premiums on gold coins and if you're not careful you can spend a lot more than what gold is worth.    You can do better if you shop around but even then generally you pay ~2-5% over spot prices.   Then you'd likely pay similar fee when you sell.   So between them you're looking at say 5-10% in transaction fees buying & selling.     You're better off just buying a gold ETF to avoid those steep transaction costs.Buying and selling physical gold generally has relatively high fees each way.


Theres a few good reasons to avoid home storage gold IRAs:

High transaction costs of buying/selling physical gold.

Self directed IRAs have hefty fees.

Using an LLC will generally add the cost of licensing for the LLC, and that can be several hundred dollars a year in some states.

Home storage of gold held by an IRA is probably not even legal under IRA rules.

Bottom Line:  Don't do it.  Its a bad idea and probably not even legal to boot.    If you really must insist on investing in gold then just buy an ETF.

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So Hows that Gold Investment Doin?

Not very well.

Its been about a year since I talked about gold.  In June 2013 I pointed out Another Big Drop in Gold.
Which was a bit after I asked Is Golds Run Finally Coming to an End?

Yeah I think the bull run of gold is officially over.    2013 was a bad year for gold with the prices dropping nearly 30% for the year.     2014 hasn't been very good either and so far gold spot prices are virtually flat.

Here's GLD versus SPY for the past 12 months:

(click for full size, source: Yahoo.com)

Not pretty for gold.

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Another Big Drop in Gold

I just noticed that gold prices have dropped about 5% on June 20th to down under $1,300 level.  As I write this Kitco shows spot at $1,277.  

Its been a few months since I last talked about gold with my article Is Golds Run Finally Coming to an End?


The yearly graph so far for 2013 does not look at all like a bubble or a bear market.   In fact for the year to date the prices have dropped about 25% at this point.  

Whats more while gold has been going down the stock market has been going up.  Here's how the SPY and GLD ETFs compared for 2013 so far :

(source Yahoo, click image for full size)

Ouch.


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How Much Gold Is There in the World?

This is a topic more of curiosity than any real practical use.   Recently I saw someone quite a figure in the Trillions of dollars to describe the total value of the gold in the world.   The number they cited seemed awfully high but I wasn't sure so I wanted to find the actual figure and confirm or deny it.

The article How Much Gold Is There in The World? at CoinWeek asks and answers the question by saying theres 5 billion ounces (or 158,000 tons).   But lets find more sources:   This article from DNAIndia says the total inventory is 5 billion ounces so they agree.   However a page at GalMarley says its 120,000 to 140,000 tons  (3.8 to 4.4 B oz) above ground.    The last source looks a little dated and I'm more willing to trust the 2 other sources that say its 5 billion oz.  While none of these sources are really what I'd call the authority on the question I at least have a couple sources that are citing figures that agree.  So I guess I'll just trust that.

Did you know the US Mint makes
gold coins of First Spouses?

Best estimate based on reports is that there is about 5 billion ounces of mined gold in the world.

Today we can see at Kitco that gold is trading around $1,470 per ounce.    That means that in total the value of the gold in the world would be about $7.35 trillion dollars based on current spot.   Of course that figure will range up and down on a daily basis based on the volatility of the market.     Just this year the spot price of gold has ranged from $1380 to $1693.   That would give the total value a range between around $6.9T and $8.4T. 

We could roughly say that based on recent gold prices the total value of the worlds gold is around $7-8T.



A lot of the worlds gold is owned by governments and their central banks.    The USA treasury holds over 8000 tons of gold.    The Treasury site publishes their current gold inventory.   Over half of the total or 4600 tons of the nations gold is in Fort Knox.   The US gold holdings are about 5% of the total in the world.   Other nations reserves hold at least 20-25% of the total gold inventories.   The GalMarley site claimed that 70-80k tons of the worlds gold (over half the total) is in the form of gold jewelry.   I can believe that.   The remaining 20% or so of the worlds gold would be in the form of gold coinage or privately held bullion.   I'm sure theres also some amount of gold in industrial purposes somewhere in the world but I'd have no estimate on that.   Industrial uses are probably a small % of the total since gold is so expensive.

 Photo from USMint.gov

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Is Golds Run Finally Coming to an End?

I've been stubbornly bearish on gold for several years.   For a while through 2010 I was saying that gold couldn't keep going up in price.  Then I watched as gold prices broke record after record for years.   It now seems though that golds last record is a ways in the rear view mirror.  If you look at the chart  of gold prices its no longer a steep mountain of success with occasional slight pitfalls but much more similar to a peak that has passed.

Check out the historical gold price chart for 2000 to 2013 from Kitco:

That does look like the peak might be behind us.  

I recently read a negative outlook on gold in this article
The Uptrend in Gold Is Broken, Next Stop Could Be $1000: Don Hays

If gold were to hit $1000 then that would be about 35-40% drop from current prices.  Is that likely or possible?

When I discussed the question : How Fast *Could* Gold Drop?
I looking at past drops in gold prices and I concluded then that
"In my opinion then when gold drops next then its pretty likely we could see a drop of about 30% within a 12 month period and potentially 40% losses within a 30 month timeframe."

Right now gold is around $1600 which is about 15% off of the peak it hit in 2011.   If gold continues to drop further then we could quite easily see it go down 40% from its peak or about $1150 levels within a year. 

It is quite possible gold could drop to $1000 within 12 months. 


But I'd caution you about listening to my gold related predictions.    I was expecting steep drops in gold about 1.5 year ago when I asked Gold Crashes $100 in a Day... Sign of More to Come?
Then I said :
" I'll go ahead and put myself on record with another prediction on gold prices.   I am thinking gold will drop under $1300 by the end of 2011 and then be under $1000 by the end of 2012. "

I was pretty wrong on that one.

But of course I wasn't betting the farm on my prediction then and I pointed out that
'  Its also possible that gold could recover and then double in value within 12-24 months.   We'll just have to wait and see.'

Gold could still go up today.   Look again at that chart from Kitco and notice the slump in prices from 2008 to 2009.  In 2008 the price hit about $1000 and then slid around 30% down to around $700.   That was a pretty hefty drop around the financial crisis during the Great Recession.   Gold could have dropped further then but instead it more than doubled over the next 3 years.

Gold could go either way today.  It could drop further and sink down to $1000 or even lower.   Or it could rebound and go back up again and hit another peak.

Personally I think its only a matter of time till gold takes a significant drop and then prices stay stagnant.  In that Yahoo article Don hays says
"We think of gold as nothing but a fear index," Hays says in the attached video. "It moves up when people are afraid."

I would agree with that in general.   I would also say that people currently have been buying gold because they want to be on the ride up as its value climbs.  I think that the more gold stays stagnant and people see stocks climb faster then the more people will jump off the gold bandwagon.

By the way, I'm not 100% against buying gold.  If you want to own precious metals as a commodity asset then I think its OK to put maybe up to 10% of your money in such an asset.   But If You Buy Gold then Use an ETF

Bottom Line :  I'm still bearish on gold and I expect it will drop further.   But hey, I'm starting to sound like the boy that cried wolf on this one.   Eventually though this broken clock will be right.

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Suze Orman Backtracking on Gold

Last year Suze Orman was bullish on gold.    Today she appears to have forgotten her optimistic prediction for golds value and is no longer in favor of buying the shiny metal.    I recently caught an episode of her program where she told a viewer that gold would be the last place to put money behind housing and mutual funds.  

The episode aired Sept. 22nd.  The bit in question is around the 33 minute mark of the video.   The viewer asked "What is a better investment option: house, mutual funds or gold?"

Suze said first "all of those 3 things : fabulous investments over the long run".   Then Suze said that
"gold at this point really would be my last option, I have to tell you the truth".    She did go on to say that she thinks you could / should invest in all 3 assets for the long run in some portion.

Still it seems that gold is not her favorite investment of the three therefore she must assume housing and stocks will perform better than gold.   Yet late last year she was predicting ~20-25% increase in the value of gold within the 12 month period.

Here was her previous prediction which I talked about before: 

Gold prediction by Suze Orman -- Forecast : $2100 by 11/2012.  

Money reported a tweet from Suze Orman she made in Oct. 2011 where she predicted that gold will be "$2100 by 11/2012"    and recommended having 10% of your portfolio in the shiny stuff.   I found her reiterate the $2100 target on Nov. 10th last year    Gold started the year 2012 about $1600 and hit a high of $1781 in February.    

 Today gold is trading around $1750 an ounce.   If you'd followed Ormans advice and bought gold in Oct. 2011 then you would have paid somewhere between $1617 and $1741.  Depending on when you bought you'd be up 0.5% to 8%.   By comparison in the past 12 months the S&P 500 is up over 20%.

So to sum up :
Suze Orman in Oct. 2011 : predicts $2100 price of gold
Gold hits $1750 in Sept 2012.
Suze Orman in Sept. 2012 says gold "would be my last option" versus housing and stocks.

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Tracking More Predictions from Money Magazine

A few days ago I looked at some financial predictions for 2012 that were reported by Money magazine.  It was a mostly mixed bag of failure.   I found 3 more general economic predictions in that issue and we'll talk about those today.   Keep in mind these predictions are for the year 2012 and we're only about 6 months past when the magazine was pointed.    

Jobs   -- Forecast : 8.5%   Actual: 8.1%

On page 86 the magazine indicated an expectation that unemployment would be 8.5%.  Today the April 2012 unemployment rate sits at 8.1%.

Housing -- Forecast : Sales of 4.8M homes and prices up 0.25%, Actual : sales 4.6M and median prices up 10%.

Page 74 they said that 'The median expectation among more than 100 economists and real estate pros surveyed by MacroMarkets is that home values will inch ahead by a mere 0.25%."  and that "Freddie Mac forecasts that only 4.8 million homes will be purchased in all of 2012"   The reality so far in 2012 is a bit different.  According to a Bloomberg article the sales are at a 4.6 million annual rate as of April but median prices have jumped 10% year over year from $161,100 in April '11 to $177,400 in April '12.

Gold prediction by Suze Orman -- Forecast : $2100 by 11/2012.   Actual : $1570 level as of May 2012

Money reported a tweet from Suze Orman she made in Oct. 2011 where she predicted that gold will be "$2100 by 11/2012"    and recommended having 10% of your portfolio in the shiny stuff.   I found her reiterate the $2100 target on Nov. 10th last year    Gold started the year 2012 about $1600 and hit a high of $1781 in February.  Today its back down to $1570 level.    

Generally I'd say all 3 of these predictions are wrong at least so far...

Unemployment is 0.4% better than they expected, Home prices are up 10% and gold has not gained the $500 or +30% increase per Ormans prediction.

We'll have to wait till the end of the year to make a final conclusion.   But for now the forecasts aren't proving very accurate.

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The Volatility of Stocks versus Gold

Lately the stock market has been on a fairly wild ride of ups and downs.   Some people may be thinking that they don't have the stomach for that rollercoaster and choose instead to put their money into gold.   However gold prices can be just as volatile as the stock market.

To compare volatility I decided to compare the monthly high and low prices in 2011 for both gold and the Dow.  I grabbed historical prices for the Dow Jones for 2011 on a monthly basis.   I then go the monthly highs and lows for the spot gold price off the Kitco website.

First the Dow:

	HI	LOW	DIFF
January	12,072	11,546	5%
February	12,418	11,893	4%
March	12,423	11,548	8%
April	12,886	12,094	7%
May	12,928	12,272	5%
June	12,569	11,822	6%
July	12,794	12,044	6%
August	12,321	10,589	16%
September	11,733	10,572	11%
October	12,303	10,362	19%
November	12,212	11,193	9%
December	12,357	11,728	5%

The average difference between high and low per month was 8.5%.    In October there was a 19% range between the high and low trading values of the Dow.    February had the smallest range between high and low at only 4% difference.

Here is the data for the gold prices:

	HI	LOW	DIFF
January	1388	1319	5%
February	1411	1328	6%
March	1447	1400	3%
April	1535	1418	8%
May	1541	1478	4%
June	1552	1498	4%
July	1628	1483	10%
August	1877	1623	16%
September	1895	1598	19%
October	1741	1617	8%
November	1795	1681	7%
December	1752	1531	14%

The average difference between high and low price for spot gold was 8.7%.   March had the smallest difference between high and low at only $47 or 3% difference from $1400 to $1447.     September had the highest variation and prices ranged from $1598 to $1895 in that month which is about 19% difference.

Comparing these values you can see that the volatility in prices between spot gold and the Dow were actually quite similar in 2011.   

Lets take one more look at the data.  Here is a graph showing the monthly highs and lows of gold and the Dow plotted.    Gold price is on the left axis in dollars and the Dow value is on the right axis.

Viewing it visually you can also see the similar amount of volatility between gold prices and stock prices over the 2011 year.

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Gold Crashes $100 in a Day... Sign of More to Come?

On Friday the price of gold dropped over $100 an ounce.   That is the largest single day dollar value drop in gold prices on record.

The $100 drop is a 6% drop in one day.   Gold peaked at a whopping $1895 earlier this month on Sept. 5th.   With it now trading at $1657 that is a drop of 12% within 3 weeks time.

For a while I've had a negative outlook on gold prices.   I've felt that gold was in a bubble that is going to burst sooner or later.

Last year I gave my thoughts on how fast could gold drop?  It can drop a lot in not too short a time.  Gold has dropped as much as 43% in as short as 2 months.   And over 2.5 years from Jan. 1980 to June 1982 it lost 65% of its value.

My history on predicting gold has not been great.   I first looked at gold nearly 3 years ago when I examined the Historical prices of gold  I found that gold prices have been volatile and not had great returns over the long run and decided that in my opinion that gold is not a solid investment.   Since I wrote that gold more than doubled in value in 3 years.    Later in 2009 I stated my opinion that gold had peaked over a year ago   I was clearly proven wrong when it hit a new record high just a few months after that

I also considered the question Is Gold a good inflation hedge? My conclusion was that it isn't really. 

I'm still of the opinion that gold is in a bubble and it will eventually pop and drop in value considerably.    It could drop another 20-50% this year.     Heck why not... I'll go ahead and put myself on record with another prediction on gold prices.   I am thinking gold will drop under $1300 by the end of 2011 and then be under $1000 by the end of 2012.   But given my poor record predicting the direction of gold prices I wouldn't bet anything on my predictions.    Its also possible that gold could recover and then double in value within 12-24 months.   We'll just have to wait and see.

For the record, I do not own any gold or gold investments.  My wife had some shares of a gold mutual fund but she sold it.   I'm not sure exactly what her return on that investment was.

Image by digitalmoneyworld

If You Buy Gold Coins : Shop Around

Bargaineering recently talked about plans for a company to introduce  ATMs Dispensing Gold Bars in USA
They already have the gold vending machines setup in Dubai and plan to expand.   With a little digging I found a news report that said the machines sell gold at 30% markup over the spot prices.   That is not a good deal.   But what is a good deal for markup on gold?   I realize there is going to be a transaction cost to buy bullion but I don't know if I should expect 1%, 5% or if 30% is even common.

First let me step back and say that I don't think investing in gold is a good idea.  My personal opinion is that gold prices are in a bubble that  gold prices could easily drop substantially within a year or two.   But I recognize this is just my opinion and many people like investing in gold.   I would at least caution anyone interested in gold investing against putting more than 10% of your assets into gold.    Any investment portfolio should be diversified and you don't ant too many of your eggs in one basket.   Having said all that, if you want to invest some of your money in gold either as an out right speculative investment, hedge or more for personal enjoyment reasons you should certainly make sure you aren't paying too much.

On the other hand I'm a coin collector so owning a gold bullion coin might be fun.  So lets say that I want to buy a 1 oz of gold.     Lets do some window shopping.

First I go to Goldline cause I see them advertised on TV...


Goldine
I find on their site they're talking about the American Eagle gold coin sold in 1 oz. or $50 face value.  The face value is kinda meaningless as the metal is worth much more.  I guess you could use the $1300 worth of gold as $50 in cash but you'd never want to.      They have a 'buy online' button so I click on that which takes me to a different website that is actually a Yahoo Store.    They have the proof 1 oz. American Eagle there for $2,650.   Its a 'proof' version which means that it is a more appealing collectible coin.   $2,650 for 1 oz proof American Eagle.

non-proof American Eagle prices
I don't know if I want a 'proof' coin.   If I'm shopping for gold I would like to just buy gold and not pay extra for a collectible coin.  So I shopped around for just American Eagle coins that are not 'proof' or otherwise collectible.   I found a local dealer near my city.   They sell American Eagle gold coins but they don't have collectible versions, just plan coins.   They quoted a cost of $1,365 for 1 oz American Eagle.   An online site Blanchard also sells the plain non-proof or collectible quality 1 oz American Eagles for about $1,360


Costs for proof American Eagles at Other sites
I didn't know if the $2,650 for a proof coin was reasonable or not.   It depends on how much being a proof adds to the value.   I found another online store named Golden Eagle coins selling a proof 1994 1 oz. American Eagle for $2,350.   But thats a 1994 coin and I don't know what year the Goldline coin is.  I double check the goldline site and they do not say what year their proof coin is.   Next I found American Precious Metals Exchange who has 1 oz. proof "random years" for $1,725 or a 1986 proof 1 oz. PR-69 PCGS for $1,609.

So far we've got various sources with prices all over the place ranging from $1,360 all the way up to $2,650.   But we're not exactly comparing apples to apples either.  Some are proofs some are not and they are various years.

Proof, PCGS, PR-69, MS-70 ... Whats all this Mean?

When looking at the proof or otherwise collectible quality American Eagles I ran across all these acronyms.  PCGS, PR-69, MS-70 and others.    PCGS is the Professional Coin Grading Service.   They have professionals who will give you a certified appraisal of the quality of your coin by 'grading' it.    Grading a coin refers to the different quality levels like the 'proof' level coins we can buy.  

PCGS also has a price guide for the coins at different grades.   We can see there that the MS grade coins from 1986 to 2006 all have the same prices if the MS grades are 69 or lower.   All the MS-63 to MS-68 coins are valued at $1,365 or marginally above spot.   The MS-69 coins are valued at $1,550.   Only the MS-70 coins have higher values.   For the proof coins the PR-63 to PR-68 are worth $1,650 and the PR-69 are worth $1,925 to $1,975.  The PR-70's range from $2,650 to $7,500.   Now keep in mind that these values are not what you can sell them for, but just what a grading services says they think the value of the coins are.   Proof 1 oz. American Eagles range in "book" value from $1,650 for a PR-63 all the way up to $7,500 for a 1991 PR-70.


Spot gold = $1,309

1 oz. American Eagle costs

plain American Eagle = $1,365  (4.27% over spot)
proof American Eagle "book value" = $1,650 and up
unknown year or quality proof American Eagle at Goldline = $2,650
1994 proof American Eagle at Golden Eagle = $2,350
random year proof American Eagle at American Precious Metals = $1,725
proof 1986 PR-69 American Eagle at American Precious Metals = $1,609

Couple basic comments here:   If you aren't especially interested in coin collecting or investing in collectible gold coins then theres not reason for you to pay a large premium to get a proof coin.    Second, if you are looking to buy collectible quality gold then you should definitely shop around as the prices from various vendors vary significantly with  up to a $1000 premium over book values.

Best choice to buy direct from the Mint.
Here's the kicker.   You can just buy the current year gold proof or uncirculated coins from the U.S. Mint directly.   American Eagle proof coins will be on sale October 7th at Noon.   According to this pricing grid, the cost of an American Eagle proof coin would be $1,585 if gold spot prices are $1300 to $1350.   Gold is just about at the top of that range right now as I write this.

American Eagle image from the U.S. Mint.

Gold Hits $1,300 / oz

Long while ago I made the prediction that gold had hit a high (in my opinion) .   I was proven wrong in that prediction and gold went on to exceed that level.   Now today gold hit a price over $1300 an ounce which is the first time ever it has hit that level.   It closed a little lower than that but during trading it did exceed $1,300.

I still think that gold is not a good long term investment.   You can undoubtedly make some money by speculating on gold in the short term if you're lucky and it booms a little longer.   Of course you have to time the market right and that is not easy to do.   But I still think that inevitably the price of gold will crash sooner or later.   The price of gold could easily come down 30-40% within the period of a year or less.    That means if you buy today around $1,300 then it crashes 40% it could be under $800 within 12 months.  

When will gold peak and what price will it hit at the peak?    I'm not going to go out on a ledge and predict gold prices for the future.   I tried that already and I was wrong.

Photo by tao_zhyn

How Fast *Could* Gold Drop?

I've said before that I don't think gold is a very good investment based on the historic trends.  I think there is way too much hype nowadays over gold as an investment.   It seems to me that much of the hype over gold is due to peoples fear about the economy and people jumping on a bandwagon.  In my opinion the gold market has the signs of a bubble and eventually the bubble will pop.  But just how fast might gold go down when (if) it does?   I figured that looking at past declines of gold would give a decent reference.

We can find historical data on gold values from the Kitco site.  Back in the late 1970's and early 1980's gold prices grew significantly and then crashed.   Gold also had some smaller crashes later in the late '80's and 90's.  Here are some examples of recent periods when gold dropped in value:

• Then after hitting a high of $850 an ounce in Jan. 1980 gold dropped to $481 by March that same year.   That is a 43% drop in value in just 2 months.   
• Gold then recovered and hit $710 in Sept. 1980 but the price then slid again and by July 1981 it was down to $397.   That is a drop of 44% in a 10 month period.
• Then from Sept. 1981 when gold was at  $463 to June 1982 when it hit $296 gold lost 36% in about 9 months.
• Gold hit $499 in Dec. 1987 and dropped to $395 by Oct. 1988.   Thats a drop of 20% in 10 months.
• In Feb. 1990 gold hit $423 and then dropped to $346 by June of that year.   Thats a loss of 18% in 4 months.
• In Aug. 1993 gold hit $405 then dropped to $343 by Sept. 1993.  within just 2 month period gold lost 15%.
• Most recently in 2008 gold hit $1011 in March 2008 and then sunk to  $712 by Oct. 2008 which is a 29% drop in 7 month period.

If we look at some longer periods of about 2.5 years (give or take a month or two) then we can see some fairly sizable declines.

• All together from the peak of $850 in Jan. 1980 to June 1982 price of $296 gold lost 65% of its value in a 2.5 year period.
• Then after recovering to $481 in Sept. 82 the value had dropped to $284 by Feb '85.   That is a 41% decline over a 2.5 years. 
• In Dec. 1987 gold hit $499 but by June 1990 it was back down to $345.  That is a drop of 30% down in a little over 2.5 years.
• In August 1990 gold hit $413 and then it $326 by March of 1993. This is a loss of 21% in under 2.5 years.
• Gold hit $414 in Feb. 1996 and then slid to $273 by August 1998.    This is a 34% loss in 2.5 years.
  

Here are the drops that gold saw in periods of 12 month or less:

Jan 1980 to Mar '80: 43% in 2 months
Sept '80 to Jul '81 : 44% in 10 months

Sept '81 to Jun '82 :  36% in 9 months

Dec '87 to Oct '88 : 20% in 10 months
Feb '90 to Jun '90 : 18% in 4 months
Aug '93 to Sept '93 : 15% in 2 months
Mar '08 to Oct '08 : 29% in 7 months


Drops over periods of roughly 2.5 years:

Jan '80 to Jun '82 : 65%
Sep '82 to Feb '85 : 41%
Dec. '87 to June '90 : 30%
Aug '90 to Mar '93 : 21%
Feb '96 to Aug '98 : 34%

Now of course the past doesn't predict the future.   But if something has happened in the past then I see no reason why it couldn't happen again.

Looking to the past to give us ideas of how fast gold has dropped in value we can see that gold has dropped in value by as much as 44% in a short 2 month period and as much as 65% in a 2.5 year span.

In the past 3 decades gold has lost 15-44% in separate individual periods of 2-10 months.   And we've also seen gold lose 30 to 65% in separate individual 2.5 year declining periods.


In my opinion then when gold drops next then its pretty likely we could see a drop of about 30% within a 12 month period and potentially 40% losses within a 30 month timeframe.

Photo by tao_zhyn

If You Buy Gold then Use an ETF

I'm not really a fan of investing in gold. I don't think its a safe investment and it doesn't perform well over long term periods. Thats my personal opinion on investing in gold. However I can understand the interest in gold for many people so I understand if someone might want to have some of their assets in gold.

If you are going to buy gold then buying an ETF (Exchange Traded Fund) is a good way to go. With the gold ETF you are buying a share of gold assets owned by the ETF. This is an efficient way to buy gold without having to pay a sales markup when you buy or pay a sales fee when you sell. There are however expenses in the ETF fund so you should be aware of those. ETFs have expense fees of around 0.4% to 0.5% level.

I would recommend keeping no more than 10% of your assets in gold. Gold can be a volatile investment and holding more than 10% of your assets in gold could be pretty risky.

Three gold bullion ETFs that you can buy directly are :

SPDR Gold Shares (GLD), iShares COMEX Gold Trust (IAU) and ETFS GOLD TRUST (SGOL)

Benefits to buying gold via an ETF:

Easily bought and sold. Its fairly easy to buy or sell an ETF and you can trade your gold assets on the market quickly. If you bought gold bullion or coins you'd have to physically get the gold and take it to a dealer and possibly shop around multiple dealers to get a good price.
It removes the risk and/or cost of holding physical gold bullion. If you bought some gold coins or bars and held them yourself you'd be running the risk of a burglary or paying the cost to store the gold in a safe deposit box.
Low fees compared to buying physical gold directly. When you buy and sell physical gold you pay fees to do so. I googled "buy gold" and I found a site selling 1 oz. gold coins for about $1,097 today. The price of gold bullion is at $1038. So thats about a 6% markup you're paying to buy the physical gold coin.

There are some drawbacks to be aware of with ETFs:

Be aware of expense ratios. Buying gold via an ETF does come at a cost. They charge an expense ratio of around 0.5% give or take. This is a 0.5% cut off the top of your return every year.
You can't hold the gold in your hand. If you buy an ETF its an electronic record of your ownership rights. Its not pretty shiny thing you can hold in your hands. Some people enjoy owning gold as a physical object and with an ETF you lose that aspect. But I would caution for people to think about the fact that if you're buying gold because its shiney then thats not a very good investment strategy.

To sum up: If you plan to buy gold as an investment then buying a gold ETF is a good way to go.

Gold hits new Record high - I was wrong

A few months ago I stated my opinion that gold had peaked a year ago. Gold just hit $1,040 an ounce which is apparently a record high. So I was wrong and gold hadn't peaked yet.

At this point I don't know if gold is really peaked or if it might still go up further. The article has one expert opinion that gold will hit $1,100 an ounce. I think thats pretty realistic, if it is at $1,040 then gaining +$60 doesn't seem too hard.

But long term I still think that gold is on a boom and will eventually hit a bust when the recession starts to end. The article does say: "However, the weight of near-record long positions in New York gold futures still leaves the market vulnerable to a correction."

Here is my next bold prediction : If you buy gold today it will be worth less 12 months from now. Of course this is just my on personal opinion and I'm not an expert on the precious metals market.

Has World Gold Production Peaked?

It is feasible that some day we might mine all the gold and gold will be harder to find and mining production will go down. One day the mining production of gold in the world may hit a peak. How do we know if or when gold has peaked?

Some people believe that we hit a gold production peak in 2001. In this article on Kitco the author a Dr Thomas Chaize says that they believe we hit world peak production of gold in 2001. The original article is on the author's site. He has a graphic showing the peak in 2001. Here is another article where the author feels that we may have already hit the peak in production.

You can get gold production from the US Geological Survey which has statistics on world gold production. Here is a graphic showing world gold production in recent decades:

The production values are in metric tons.

If you look at this chart alone it does definitely appear that production peaked in 2001. The maximum worldwide production was 2,600 in 2001 and we haven't hit that amount since. In 2007 the total production had fallen to 2,380.

How do we know gold production has peaked? Does six straight years of falling production mean that we'll never see an increase again?

Lets take a look at previous history of gold production. Back at the start of the 20th century there was a peak in production around 1915. Here is the production trend then:


If you compare the two graphics the peak in production around 1915 seems a bit more distinct. In the next 7 years from 1915 to 1922 production went from 704 to 481 or a drop of 31%. The drop in production from 2001 to 2007 is only down about 8% from the peak of 2001. If it was 1922 and you looked at the chart above then would you think that production may have peaked in 1915? It looks more like a peak than the 2001 peak.

Lets look at all the data from the USGS site on world gold production over the past 100+ years. Here is a graph showing the world gold production from 1900 to 2007.

There have been 4 distinct peaks in production over the past 100 years. We hit peaks in 1915, 1940, 1970 and 2001. I would assume that the peaks in 1915 and 1940 were caused by disruptions due to WWI and WWII. Long term it appears that the gold production has cycles with short term ups and downs.

In short term periods these ups and downs form peaks. If you were sitting in 1922, 1950, 1978 or 2007 and looking back over the previous 20 years of production then it might appear that we've hit "the" peak. But if you then look forward after those points we see production goes up again.

How much gold is left?

There is a limited amount of gold buried in the ground for us to find. Eventually gold will become harder and harder to find and we'll likely mine as much as we can and production will drop. But over the past 100 years the gold production has increased steadily. If you add up all the world gold production from 1900 to 2007 the total amount mined was over 130,000 metric tons. Right now the gold reserves left in the ground are estimated at 90,000 metric tones. That figure was from the USGS report in 2007.

The amount of gold left in the ground is a moving target. As technology gets better and more gold is found our estimate of how much gold is left goes up.

Back in the USGS 2001 report the reserve gold estimate was 77,000 tons. Then from 2001 to 2007 the world mined out over 17,000 metric tons. If we started with 77,000 ton reserve and mined out 17,000 tons then you'd expect that by 2007 the reserve would be down to 60,000. But it wasn't, in fact the reserve had a net increase of 30,000 gold in 6 years. This means that we were finding new gold reserves almost twice as fast as we were mining it.

Nobody can say for fact if we've hit the peak in gold production. The cycle of ups and downs in gold production over the decades and the fact that we've been finding gold faster than its being mined are two solid reasons against the conclusion that we've hit gold peak.

My 2¢ - Gold Peaked Over a Year Ago

This is nothing more than my personal opinion:

I believe the price of gold peaked in Spring 2008. Take a look at the chart of gold prices from 2000 til now from Kitco.com


Here is the reasoning behind my opinion: Gold is strong right now because it is getting interest as a safe haven during the recession. People are scared away from stocks, real estate and bonds since they've all been battered. The interest rate is at historic lows so safe investments like treasuries and CDs are not too appealing. So many people turn to gold thinking its safe and has high / increasing value. Gold has boomed for years and is due to bust. There is nothing in the market really keeping gold prices up other than high demand. There is no shortage of the metal for its normal uses. The run up and current high value of gold is based on market supply/demand inflated by speculation and high demand. As soon as the recession turns around the market for gold will drop off and the prices will fall too.

But again all this amounts to is my opinion. My opinion on such matters are really no better than anyone elses.

Another article on Gold as an Inflation Hedge

The other day I wrote asking : Is Gold a Good Inflation Hedge? My conclusion was a solid 'no'.

Today My Money Blog wrote about the same topic with their article: Should I Buy Gold Now To Hedge Against Future Inflation? They give a pointer to a video from author Larry Swedroe who discusses the topic. They have the same conclusion I did.

Is Gold a good Infation hedge?

It seems pretty common to hear that gold makes a good hedge against inflation. At first I accepted this concept without any examination. It just seemed to "make sense". But then I thought about what I'd seen gold prices do in the past and I didn't really see much there that showed gold prices correlating to inflation. There is a period in the 1970's when gold went up and inflation was high. But thats just one decade. Other than the 70's I haven't seen any real relationship between gold and inflation.

I decided to look at annual changes in gold prices versus annual inflation rates. I got inflation data from BLS and the gold prices from Kitco. I plot the annual percent changes for gold and inflation in the graph below:
Do you see a very strong correlation between those lines? I don't. Gold prices seem to bounce all over. If there were a direct correlation between gold and inflation in time periods of a few years you'd expect to see stronger correlation between those two lines.

Here is a very detailed and interesting examination of the relationship between gold and inflation: Is Gold an Inflation Hedge?

A professor looked at the relationship between gold and inflation over a 17 year period and concluded: "What the above tells you is that the widely held belief that gold goes up when the dollar goes down is not supported by the statistics: a -0.28 correlation is a weak correlation at best and is certainly within the normal volatility that these two date series exhibit."

That same article has a nice graph showing how from the 1970's to about 2000 the price of gold went down overall while inflation consistently drove prices up. That is opposite to the idea that gold is a good inflation hedge. If gold were a good inflation hedge then the price of gold would have gone up steadily decade over decade. But from 1980 to 2001 the price of gold dropped.

I don't see any strong evidence that gold is a dependable inflation hedge for any short term periods.

Gold versus Oil prices from 1970 to today

Below is a quick chart comparing the prices of gold and oil from 1970 to 2009.

The price of gold in US$ is on the left vertical axis and the price of crude oil in US$ is on the right vertical axis.



Its interesting how similar the trends are. Why the two might follow similar pricing trends is a good question that I might examine in a following post.

Historical crude oil prices were found at the Energy Information Administration website for Annual Energy Review. I used their data for Crude Oil Domestic First Purchase Prices, 1949-2007. Then for 2008 & 2009 numbers I used their short term energy outlook page.
Gold prices are from Kitco