Friday, December 20, 2013

2013 - A Bad Year for Gold!

As this Kitco chart shows, gold has been hammered in 2013, going from nearly $1700 an ounce to about $1200 - a drop of nearly 29% in value.  As the economy goes up, gold goes down, and vice-versa.
I have mentioned earlier in a number of posts that buying gold is a bad deal.  Why?
1.  Idiots like Glenn Beck and "G" Gordon Liddy are hawking it.   Need we say more?

2.  There is no fundamental reason why gold should shoot up in value, other than fear and greed, which are emotional reasons - and the worst reasons to invest.

3.  Gold costs about $500 an ounce to mine.   $1700 an ounce represents a 340% markup - a hefty one in any business.

4.  As demand goes up, so does incentive to produce more supply.  From the mountains of the Carolinas, to the strip-mined rainforests of the Amazon - to your grandmother's jewelry box - everyone is finding more gold.

5.  Sudden peaks in prices of any commodity are, historically, eventually followed by sudden valleys.

6.  Analyst's "projections" of $5000 an ounce were based on nothing more than wishful thinking - and no real underlying analysis or reasoning.
But of course, the gold-bugs would have none of this.  Gold would keep going up in value, well, just because it would.  We were told that gold had magical values as a "precious metal" and that it was somehow different from other commodities because of this.   There was only so much gold to go around, we were told.

Yet, millions of ounces are mined every year.

This next chart is pretty depressing, if you bought gold in recent years:

If you bought gold any time after July 2010, your investment is equal what you paid for it.   This of course, does not include the effects of inflation (minor) or the gains you could have realized in the booming stock market of the last four years.  If you bought gold after July 2010, you lost money, no matter how you slice it.
Yes, if you had the foresight to buy gold before the recession of 2009, you might be still ahead of the game - but not by much.  You see, as I noted in an earlier posting, the stock market has been going like gangbusters since February of 2009.

You might think the economy is in the tank, if you watch television.  However, the Dow Jones Industrial Average has more than doubled in the last five years.

The DJIA has gone from about 6600 in February of 2009 to nearly 16000 today.  This is not to say that stocks are the greatest thing to invest in - only that they have beat the snot out of gold since the recession started.  Gold, in contrast, has gone from about $1000 an ounce to nearly $1700, and then back down to $1200.   Even if gold had stayed at $1700 an ounce, it would still not have beat stocks.
But since it has gone down, well, the portfolio of the gold-bug has really taken a hit.

Gold is a fear metal that people buy because they are worried about the economy.  Take away the fear and the price always plummets.

Consider Stan Goldberg, who sold his stocks (at a huge loss) in February of 2009 and bought 100 ounces of gold for $1000 an ounce, for a total of $100,000 in his portfolio.  Today, he has $120,000 in his account (a gain of 20%) or a gain of less than 4% a year over five years.

Now, Fred Stockman, on the other hand, had $100,000 in an indexed mutual fund, which he left alone in February of 2009.   Today, that account is worth an astonishing $266,666  (the mark of the beast!) - a 166% gain over five years, or about 33% per year.  Not bad.

So you see the problem with "investing" in gold - at least over the last five years.

But of course, it depends on the window of time you choose.

Suppose we go back a whole decade?  If you bought stocks in 2004, the DJIA was at about 10,000, meaning you had a 60% gain over a decade, or about 6% a year.  Gold was at $400 an ounce, and about $1200 today, a gain of 200% or about 20% per year.  If you had the foresight in 2004 to invest in gold, you would have done OK.   But back then, no one was hyping gold.  The "little people" who bought gold during the recession, on the other hand, got creamed.  If you listened to the hype, you always come out behind.

Does this mean stocks are better?  Heck, no.   Only that investing in all of one thing, particularly one thing that has already shot up in value based on fear and greed which makes no sense at all is probably a bad idea.  Gold is a fear metal that people buy because they are worried about the economy.   Take away the fear and the price always plummets.  Look at the last three gold bubbles, and you will see a correlation to times of economic uncertainty - the recession of 2009, the recession of 1980, and the Arab Oil embargo of 1973.  Interestingly enough, the peak in the price of gold trails each major event by about a year - and then drops to the floor.

Diversification is the key.   Have investments in a number of things.  If one goes up, another goes down.  Overall, you may do well.   But gold?  I would not put much into it - if anything.   It is just a commodity, and predicting prices of commodities is a tricky thing.

But what about 2014?   We'll have to see, as my time machine is again out of order.   However, economic indicators are looking up.  The European monetary crises is not over by a long shot, but it appears to be on the mend.  We've had four years of growth, albeit slow.   And Congress seems to be able to even agree on a budget (and notwithstanding all the doom-and-gloom, even shutting down the government and threatening to default on the national debt seems not to affect the markets one iota).

Stocks have had a good run.  And it is possible they may level off in 2014.   But with each piece of good news about the economy, gold gets hammered.   And 2014 may be the year gold drops down below $1000 an ounce.   And once that starts, well, a psychological barrier is breached, and you may see a sell-off at the point.

Why?  Because gold is bought on emotion not analysis.  I bought my Altria stock because it pays a good dividend and because poor white trash will always smoke, no matter how expensive it gets.   I didn't buy it because Glenn Beck said it would hit $5000 a share for no reason at all.

So when milestones in gold prices are reached, you can bet that gold-bugs will panic and sell, "before it goes any lower!"

The media doesn't talk about gold much anymore.  Notice that?  Well, not the mainstream media.  A few places have noticed it.  When it was shooting up in value, the media "notices" things.   So they talk about hyped stocks and the price of gold - when they go up.   But when they quietly tank, well, that is not a story - until it hits one of those magic  numbers.  And $1000 an ounce will be a magic number.

2014 might be the year of the panic sell-off in gold.
The moral of the story?   Not that gold is bad and stocks are good.   Rather that anything hyped in the media is usually a very poor bet