Sunday, August 9, 2020

Gold, Again???

Every time there is a financial crises, gold shoots up in value.  And every time this happens, little schmucks like you and me buy it at the height and ride it all the way down.  People who bought at the last peak, nearly a decade ago, are just breaking even today.   Was that a good investment?

I have written about gold again and again.   It is a great "time machine" investment, because if you had a working time machine, you could go back in time a few weeks or months and buy it and make a lot of money.   If you don't have a time machine, you are usually screwed.

The problem with gold is that when it shoots up in value, the press reports it, and the "retail investor" (read: chumps) see this and say, "Gee, something has gone up in value, I should buy it!" - not realizing that the time to buy was before it went up in value.   Again, the time machine conundrum.

And like clockwork, the gold bugs come out of the woodwork and say weird stuff about gold - that it has inherent value or that it is somehow "different" than other metals such as aluminum or zinc.   At one time, though, Aluminum was far more valuable than gold - because economical ways of processing it didn't exist.   If you could go back in time (again, the time machine problem) to 1880 with a six-pack of bud light (in cans, of course) you could make a minor fortune selling the empty cans to Tiffany's (beats that 5 cent refund!).   Today, we consider those cans to be disposable.

And like clockwork, some "analyst" will say that gold is going to go through the roof, based on.....pulling numbers out of his ass.  The last time around, it was $5000 an ounce.  Today, they are being more modest, claiming $4000 an ounce.  Bear in mind that at a production cost of $500 an ounce, this is quite a staggering figure.  At those prices, it would worthwhile to distill gold from seawater as the Germans did after WWI to try to pay back their war debts.   Yes, gold is present in seawater, along with many other minerals, in tiny quantities, of course.

Will gold go to $4000 an ounce?  Well, it never went to $5000 like they said it would.  But someday, for sure, it will, if not just due to inflation.   When that someday is, is the question.

What will attenuate the price of gold is that when the price goes up, people seek out more of it - that old supply-and-demand thing.  The last time around, intrepid gold hunters found some in my Mother-In-Law's jewelry box, while she was having dialysis (never tell the lawn guy you're going to be out of the house every Tuesday for four hours!).   They were reopening gold mines even in the Carolinas, and of course, destroying acres of jungle in Brazil.

In the short term, yes, it is likely gold will go up in price, but not in value.   Small investors - the "gold bugs" drive the market, and the current prices don't necessarily represent the value of gold, but only what the last chump who bought is willing to pay.   So Joe Chumpster sees articles like the one I linked above, and jumps in with his $500 "investment" in Gold.  Gold goes up a bit, and he congratulates himself on being a genius.    It then peaks and drops a bit and he says to himself, "Don't  panic - it is just a market adjustment, it will come back!" and maybe it does.   But since he bought at the peak, it doesn't "come back" for a decade or more.  Meanwhile, they money invested in a mutual fund would have doubled in value.

How do I know this?   Look at the chart above.  The same damn thing happened ten years ago, when we had the last recession.  It happened in 1972 with the Arab oil crises - and didn't "come back" until the late 1970's.   It happened in 1980 with the stagflation recession - and didn't "come back" for nearly two decades.   Even factoring in these sudden rises in the price of gold, it doesn't outperform the rest of the market, and in fact, under-performs it.   In many cases, it under-performs stuffing money in your mattress or burying it in a coffee can in your back yard - two other crazy things that gold bugs like to do.

So no, once again, I will shy away from parking money in a commodity such as gold.  You might as well buy zinc.  It's a metal, and has more industrial uses than gold, too!