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.

By StreetAuthority Jul 15, 2013 5:21PM
By Adam Fischbaum

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.

Hundred dollar bills surrounded by gold © Anthony Bradshaw, PhotographerDomestically, 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
78Comments
Jul 16, 2013 1:00AM
avatar
Inflation is much higher than the government says it is.They exclude many of the things that are going up in price.My health insurance went up 25% this year and i am in good health.Gas and food prices increase.Try getting a decent loaf of bread for less than 3 bucks.Gas is close to 4 bucks in most states.
Jul 15, 2013 7:38PM
avatar

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...

 

 

Jul 15, 2013 7:02PM
avatar
Buy it now before Ben unplugs the Obamaville printing press.  Afterwards, it will be too late.
Jul 15, 2013 10:42PM
avatar
Another thing, the people I know of that are saving physical gold, are using gold as SAVINGS, not investments. [There IS a difference] And for THAT  reason, if nothing else, They are not going to lose as much of their savings as people holding worthless paper in a bank.  besides, the government can't confiscate physical gold if they don't know where it is. [unlike paper dollars in a savings account]
Jul 15, 2013 6:25PM
avatar
Buy gold when we have our next 2,000 point correction because the US economy fails to deliver and the Fed can't offer any more QE. That will also bring down the EU and many other economies. Most people that have gold also have enough fiat dollars to buy all the food, gas and shelter they need. They can also trade gold for dollars and store gold without paying a bank to do it.  The US economy and government are totally broke.
Jul 15, 2013 8:55PM
avatar

"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!

Jul 15, 2013 7:39PM
avatar

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.. 

Jul 15, 2013 11:06PM
avatar
When the sentiment is this strong against an asset it is always worth looking at the other side of the trade. That is how fortunes are made. Buying pumped up inflated assets at bubble prices is not a good way to get ahead. Gold should not be looked at as a trade but as an alternative currency and store of value. With the central banks spitting out monopoly money as fast as they can, most paper investments have already gone to the stratosphere. When this money begins to gain velocity you'll be glad you have a store of value.
Jul 15, 2013 10:36PM
avatar

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.

Jul 16, 2013 2:20AM
avatar

   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

Jul 15, 2013 11:55PM
avatar

Hey GoBucky

 

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.

avatar

total dollar crash by sept 13 2015

 

be prepared folks

Jul 15, 2013 6:42PM
avatar

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.

Jul 15, 2013 7:01PM
avatar
Gold does have a worth but it is not worth what it has sold / traded for the past few years. The noted $800 in a recent post most likely isn't that far off from it's real worth. No question it has been way over priced and sure the traders will once again attempt to move it way beyond it's real worth.
Jul 16, 2013 2:30AM
avatar

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!

Jul 16, 2013 3:19AM
avatar
Listen up Adam and listen up well. World War II was financed via the value of Gold, not stocks and Fiat Money. During World War II Gold was KING. The biggest reason for the current state of Gold prices is the huge Bull Run it has had. Therefore it was due for a major pullback just like any other Investment that has run this far, this long, and this hard. Adam, Gold has withstood the Test of Time against all other investments for literally, Thousands of Years. It will continually do so for Thousands of Years to come. If Adams thinks fake currency backed by Nothing can keep stocks rallying to infinity, he is sadly mistaken. Don't let the current Bull Stock Run fool you as it's foundation, Cheap Money will cause consequences of Epic proportions.
Jul 16, 2013 12:57AM
avatar

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.

Jul 16, 2013 4:23PM
avatar

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.

 

Jul 16, 2013 3:00PM
avatar
The Board Clown somehow thinks that just because folks feel the Global FEDS are leading us down a path of destruction, I and others don't invest. We do. However, many of us refuse to hold to infinity and prefer trading. The Board clown also thinks that just because you believe in the long term value of Gold, you are predicting Doom and Gloom. Folks are predicting eventually a epic Collapse due to Soaring Global Debt and that the Artificially low rates that have prevented it can't stay low forever. It's as simple as Gravity and Basic Math. Meanwhile, I and other still invest, we just have hair trigger fingers compared to most others.
Jul 16, 2013 11:48AM
avatar

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.

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

104
104 rated 1
252
252 rated 2
457
457 rated 3
639
639 rated 4
495
495 rated 5
538
538 rated 6
704
704 rated 7
503
503 rated 8
350
350 rated 9
140
140 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
EOGEOG RESOURCES Inc10
TAT&T Inc9
COPCONOCOPHILLIPS9
DVNDEVON ENERGY CORPORATION9
More

VIDEO ON MSN MONEY

ABOUT

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.