Tuesday, 2 August 2011

Gold: a Buy or a Sell?

Gold trades currently above USD 1,600 per ounce. The previous bull run ended in 1980 at around USD 850 per ounce, after which a 26(!) year bear market followed. The following chart is not adjusted for inflation:

There are four people I admire.

Warren Buffett:
“Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

“Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything.”

Charlie Munger:
I don’t have the slightest interest in gold. I like understanding what works and what doesn’t in human systems. To me that’s not optional; that’s a moral obligation. If you’re capable of understanding the world, you have a moral obligation to become rational. And I don’t see how you become rational hoarding gold. Even if it works, you’re a jerk.”

Jim Rogers:
"I own gold and silver, because paper money all over the world is being debased.  In a few years we will probably all have our money in physical assets, because nearly all paper money is being debased at a rapid rate by politicians who have learned how to buy votes.  It is the wrong thing to do, but they don't care.  They're worried about the next election."

Marc Faber:
“And so the question is, you know, where do you put your money if you and I go away to an island or to jail for ten years and we can’t make any transactions and we come back in ten years’ time? I think if the objective is the maintenance of purchasing power, in other words, you just don’t want to wake up in ten years’ time when you come out of jail and what you have is worthless, then I would say that probably gold is the best alternative. If the question is how do you maximize profit, probably there may be more profit in equities because, you know, we have abysmal performance of equities in the last ten years. And particularly in the US, as a result of the decline in the value of the US dollar, equities would seem to me to be not particularly expensive. I think what would be dangerous for you and me would be to put all our money in US dollar cash and in US government bonds for ten years and then come back and maybe find out that we can buy with a hundred thousand dollars just a cup of coffee — or not even that.”

He said that longer-term gold can only go higher because of negative real interest rates. Even a deflationary collapse is unlikely to hurt gold because the Fed will simply debase the dollar to get nominal prices higher.

"If the Fed gets it right and successfully re-inflates asset prices, then inflation will be in the double-digits, which would be bullish for gold," Faber pointed out.”

Marc Faber argued the following in his "Gloom, Boom and Doom" newsletter:
It took the US government about 80 years (between 1920 and 2000) to devalue the USD by 95%. In other words, it would take $20 in 2000 to buy the same item that cost $1 in 1920. The US government will again devalue the USD by 95%, but this time they will do it much faster. Paper currencies can be printed at will, they don’t even need a physical printer, they can add money electronically. The only money they can’t print at will is money supported by real items, like Gold.

For me, if these clever people have such a different opinion, then what can I add? I simply find it fascinating, such a difference of opinion by such clever people.

For me, I own some gold and some gold miners (through Blackrock World Gold Fund), I don’t intend to buy nor sell at this moment. Other good long-term inflation hedges are land, property and to some extend shares. The best is to spread risk by investing in different asset classes.

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