Tuesday, October 28, 2008

The Midas Malarkey

I am sure that you've all seen those "buy gold" commercials on TV that hype the "yellow stuff" as a means to protect your savings and investments. I especially like the one with G. Gordon Liddy where he snaps a dollar in his hands and declares that it has lost 27% since the year 2000. Of course, Mr. Liddy neglects to tell you about the roller coaster ride that gold has taken over the last 30 years which has left many holding the bag with losses. While it is true that gold has shot up from around $255 a troy ounce in the year 2000, to a high of $1,033 in March of this year, it has fallen by 30% to today's price of around $730 in just 7 short months (See Full Story). At the same time that gold has been going down, the U.S. dollar has been strengthening against other currencies by a factor of almost 20 percent (See Full Story); thus making Mr. Liddy's argument about the dollar losing so much value to be very much a distortion.

In 1980, gold hit it's previous all-time high of about $855 a troy ounce. From that high, gold fell to a low of $253 an ounce in 1999 and bounced around from that price to a little over $300 an ounce until 2001. If you had bought the precious metal in 1980, you would have had to wait until January of this year, or 28 years, before gold was, once again, even close to being profitable for you.

The truth about gold is that it is a commodity like wheat or oil. TV ads, like those which use Mr. Liddy as the spokesperson, are designed to pump gold prices up by stimulating an artificial buying interest. Gold, as it did in 1980, reached a bubble this year that could not be sustained and, subsequently, has fallen nearly 30 percent. My guess is that $500 a troy ounce is not out of the question within the next two years. Maybe, even lower.

Nothing can ever go straight up and the price of gold is no different. Gold coins are actually the better bet because, depending on the specific coin, you can benefit from both the market value of the inherent gold and the value due to a collector's interest in the coin itself. However, like buying art, you can't cluelessly buy gold coins and expect to automatically make money. You have to know what you're doing.

It is naive to believe you can just buy some gold and automatically make profits by investing in this noble metal. Also, with gold's current price drop in the face of so much economic angst, there is absolutely no guarantee that it will provide protection of your savings during times of trouble. It is not some kind of "bridge over troubled waters" as those commercials would have you believe. Some of those same gold commercials that you see on TV, today, have been running nearly unchanged for two decades because the premise for buying gold, a looming world and economic disaster, has been nearly a constant in every generation and for every decade over the last 100 years. From the crash of 1929; to World War II; to Korea and the Cold War; to the fears over the new millennium (Y2K); or, to today's possible depression; there has always been enough "fear" for the chicken-little-TV-commercials to get you to buy gold. The reality is that those people buying that commercial time, own gold and want you to buy for their own selfish reasons.

Additionally, people don't really understand that there are a lot of expenses associated with gold. If you buy gold, you need to store it somewhere and insure it. Dealers will do that for you but, at an additional cost. If you want to take possession of it and store it yourself, the stuff is heavy and costs a lot to move around and, again, insure it and safely store it.

You don't have to actually buy and own gold to play gold. You can buy and sell a market-traded ETF (Exchange Trade Fund) which has the market symbol of "GLD" on the New York Stock Exchange. Those shares are intentionally selling at roughly 10 percent of the value of an ounce of gold. For example, if gold is at $800 an ounce, the GLD ETF shares will be selling around $80. Like any investment, there is no guarantee of success or failure in buying these shares; especially in this market. You should definitely consult an investment adviser in making any investment decisions. Buying gold or it's ETF's is no different than buying any stock and you could lose much of your investment if the timing is wrong.

So, to me, the buy gold info-mercials are just a bunch of malarkey. As with any other investment, gold has risk. The fine print on those commercials, which is so fine and shown so briefly, clearly states that there is risk. Believe me, there is no Midas touch in buying gold; especially right now.

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