Think it's time to get back into gold? Think again
It's always good to think about survival, but it makes a terrible investing theme.
I love James Bond flicks, preferably from the Sean Connery era. "Goldfinger" is one of my favorites. I am often reminded of the classic scene in which a captive James Bond is seconds away from being charred by a laser.
James Bond: "Do you expect me to talk?"
Goldfinger: "No, Mr. Bond -- I expect you to die!"
Quintessential 007: Ridiculous stunts and jams, sports cars, beautiful women and a dastardly, almost clownish villain -- in this case, one whose plan was to poison the U.S. gold supply at Fort Knox to create global financial chaos. His endgame? Simply to drive up the value of his own gold holdings.
Frankly, it sounds like walking around the block to get across the street. But hey, it's a James Bond movie.
Since the financial crisis of 2008, the global villain that seemed destined to wreak havoc wasn't a fat guy who liked to cheat at golf. The perceived villain was hard-core, runaway, Weimar/Zimbabwe-style global hyperinflation caused by central bank quantitative easing programs.
However, that scary train hasn't arrived at the station yet in the U.S., based on continued tepid economic and employment growth. There are modest signs of recovery. The country is doing better than it was four years ago, but things aren't exactly galloping.
Back in February, I gave a bear case for gold. Since then, gold has been beaten like the proverbial rented mule.
Shares of the SPDR Gold Trust ETF (GLD) have plunged more than 20% and are off nearly 30% from their 52-week high. A buying opportunity? Hardly. I'm sticking with my bearish stance.
In fact, the price of gold will probably fall further before it goes back up.
The end of the world has been postponed
When it comes to investing, fear is often a primary driver. Most individual gold investors are driven by fear. Most institutional gold investors use it purely as exposure to an asset class. But the man on the street buying shares of GLD or South African Krugerrands is frightened of something: runaway inflation, currency devaluation, governmental overreach and societal collapse. It's always good to think about survival, but it's a terrible investing theme.
Domestically, things are improving. The unemployment rate is shrinking slowly. It currently sits at 7.6%, down from 10% at the deepest part of the crisis recession. Is it great? No. But it's a considerable improvement. One positive consequence: The slower that businesses are to hire new workers, the slower the money will flow. Inflation will remain tame.
But what about the dollar being devalued? Again, the dollar is stronger than the panicky masses think. The U.S. Dollar Index (DXY), which measures the strength of the dollar versus other benchmark currencies, is up nearly 14% since 2011, despite the Federal Reserve's QE.
Gold bugs believe the shiny yellow metal serves as a proxy currency to replace weak fiat (paper) money. If market forces dictate that gold prices rise as the dollar falls, then the inverse -- gold prices falling as the dollar rises -- is inevitable.
The Fed has also hinted that it may begin slowing down or "tapering" its bond purchases. This indicates an eventual end to QE and the debased currency. If you think gold prices have a downward bias now, wait till tapering really begins!
You're still not getting paid
As I said in my earlier article, my biggest beef with owning gold is that, unlike dividend stocks, it pays you zilch.
Think about the classic gold bug argument: Invest in gold as an inflation hedge. I just can't see the logic in this outside of protecting a portion of your wealth. The simple explanation of inflation is that it takes more money to buy less.
In an inflationary environment, the value of your gold may be going up. Good for you. But don't you need more money to buy things? If that's the case, shouldn't you own assets that give you better cash flow?
Since physical gold provides zero cash flow, and in some cases, negative cash flow (safe deposit box rental, paying the markup to the coin brokers, etc.), assets with growing cash flow make more sense, especially those tied to hard assets.
Energy pipeline master limited partnerships (MLPs) have always been one of my favorite tools to accomplish this. Oil mover Buckeye Partners (BPL) is a good name to use, as is Boardwalk Pipeline Partners (BWP) in the natural gas space.
Risks to consider: Again, I could be completely wrong. Any major events in the Persian Gulf, Europe or the Korean Peninsula could send gold soaring on the fear trade. Global economies could erupt into chaos, and QE could go on forever, which means that we'd eventually use paper currency as bathroom tissue. It's always a possibility, but realistically, the chances are probably slim. U.S. GDP growth, while not stellar, has improved dramatically, surging from negative 8.9% during the 2009 recession to a positive 1.8% currently.
Action to take: As the U.S. economy continues to improve steadily, the Federal Reserve prepares to dial back its QE policy, and investors continue to rotate into stocks, the price of gold is poised to fall further. Look for another down leg in the range of $1,000 to $900 an ounce. That's another 20% to 25% loss.
In my previous article, I compared buying GLD to buying Apple (AAPL) near its topped-out price of more than $700 a share. But I've changed my opinion -- Apple may be worth a look. Shares are off nearly 40% from that bloated price. Thanks to that correction, the stock's dividend yield now sits at an attractive 2.9%. That's nearly 300% more than what gold is paying you right now -- or ever -- for that much.
Adam Fischbaum does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article
More from StreetAuthority
I've never been a fan of buying physical gold for many of the reasons stated, but I think you can still make a compelling case that the long term gold price is up. It is simply too limited in volume and there is an ever increasing physical demand due to population and household wealth growth in places like India and China. There is continual demand from the jewelry market, and many industrial uses for gold, too. Most of the world's production is controlled by big players that will reduce production until prices increase. Any dip in price will be temporary. Eventually demand will once again outstrip supply until prices climb high enough to set new highs and convince people to melt their old jewelry and heirlooms... I don't understand how these guys can talk so much about price without discussing any of the real gold demand.
IMO, the miners are the better way to play the sector. If they make a 10% margin at $1200/oz then gold prices go up 10% and everthing else stays fixed, the margin jumps to over 20%. Long term, that should be double the earnings and in theory double the share price...
"Back in February, I gave a bear case for gold....Again, I could be completely wrong"
I like how Anthony hedges his bets and becomes vague; this way, he can never be wrong!
My very first question would be how many miners go broke?...Smaller ones.
Time for you to retire after 40 some years, unless it's a hobby now.
My second point would be: Although Junior and Mid-tier Miners might be able to get Gold out and processed for about $400-500 in some areas....Overall and most "all-in" costs are approaching $800-1,200 dollars for several and bigger operations.
Therefore anyone's hopes of Gold or other Precious metals getting very cheap are almost pipe dreams....Gold for instance at $800, mine production will stop, mines shuttered, people will be laid off and some Companies will declare bankruptcy..
Therefore driving the value of Gold or others back up, if there is demand..
This has been a repititious process for years, and don't believe it is going down to those lows, and many others feel the same way.....We have touched the bottoms..
Except for one thing. The fed is NOT going to taper off the fiat printing of money [85 billion a month].
They can't!!! And if YOU think they can, you're dumber than I thought you were, or you're shilling for something or somebody. Gold may fall a bit further, but when it finally sinks in that the fiat money that the fed is printing is causing or going to cause horrendous hyperinflation, the price of gold will skyrocket!!! Besides, GLD is PAPER gold prices not REAL physical gold prices, and the difference will get BIGGER as time goes on.
If people want to sell their gold and silver now great. I'll buy it. I hope the price dips lower. This is probably the last time you're going to be able to buy it at these prices before it goes up again for good. The guy who wrote this article is a shmuck.
"The world is his who can see through its pretension. What deafness, what stone-blind custom, what overgrown error you behold is there only by sufferance- by your sufferance. See it to be a lie, and you have already dealt it its mortal blow. " – Ralph Waldo Emerson
But from what I'm hearing and seeing [and I also mean personal friends that I talk about this with] more and more people are buying gold AND silver, hell some people are even buying 999 fine COPPER rounds, even platinum. ANYTHING, rather than keep their savings in paper. so, the amount of gold on the planet may be larger than ever, [who knows governments? Yeah, right, like I'm going to let the government know if I have anything worth taking] And if I'm not saying ANYTHING to the US government, do you REALLY think people in second and third world countries are going to tell THEIR governments what they have? Don't make me laugh.
total dollar crash by sept 13 2015
be prepared folks
Bullshidt, I keep hearing this, Not True...Our miners pay 2% or better in divs..
We are down appreciation wise, but I think as it stands we will recover our investments within a few months...I believe it's going higher, but not "lofty peaks."
And we have done extremely well in the past...So if we lose a little this time Que Sera,Sera.
Buy low, sell high, just like any stock.
Gold when it was 1900.00? No thanks.
At less than 800? Load me up!
Dividend? The difference between the two!
Or the pretties who want to get up close and personal if they think ya have some!
Overall and most "all-in" costs are approaching $800-1,200 dollars for several and bigger operations.
All miners include depreciation and write downs that are complete tax reduction gimmicks. By the time Barrick gets Pascua Lama on line in 2016 or later they will have $6 billion in write offs for the 2-3 years of delays yet their cash cost will be $200-300 per ounce. They'll report all-in-costs of $900-1000 per ounce and end up with huge positive cash flows. It's a lot simpler business model the the scum bag banks like Citicorp and Bank of America are running.
Still trying to figure out the Board Clown...Ahhh, maybe I have it, may he/she be Phater..then most.??
Everyone has to invest in what they think is good for them.
Also invest in a style or have their own style of investing which again, works for them.
Different options are difficult if you are locked into a 401K..
And then when investing with or through a broker/FA, there are other issues or cost'.
Having an itchy trigger finger may work for some, but I would rather be out enjoying other parts of life then worrying about making a few nickels or dollars, sitting on the edge of my seat...
But then I use limits for buys and sells, So I am sure others do also...And just walk away.
As I pointed out yesterday...If Gold falls or stays down, miners will cue up or down on prices accordingly...At least the smart miners will, to maintain cash flows, margins and liquid assets or dividends for shareholder/owners.
This morning in our in-box...Our investment in and miner is doing just that, coincidence?
About a third of a billion is being cut through 2013 into part of 2014, keeping in mind that could change with advancement in per ounce prices..
Being cut are exploration in specific areas, upgrades on equipment that can be delayed, and early agreements or prep work such as environmental or site preparations, roads, power, gov. fees, etc.
Don't think it's being done, for major price drop in Yellow..
Only to maintain cash flows, and operating margins along with assets.
Have read where other miners are making similar moves.
Like I said before it's about production ounce cost compared to sale prices or contracts..
And margins are getting tighter...
Our goldminer has risen fairly sharply in recent days...Too bad Fatty Cakes is not a shareholder.
Copyright © 2014 Microsoft. All rights reserved.
Do it once a year. This allows the best-performing asset classes to take off and run.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.