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Old November 24th, 2008, 11:29 AM   #1 (permalink)
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Dooms - Please Educate Us All

I was going to PM you about this, Dooms, but I figured perhaps others could benefit from some info as well, and maybe others have some knowledge to share.

What should we know when it comes to investing in gold and silver? I am tired of putting my hard earned money into a currency that is paper-backed and on the verge of collapse. I'd like to invest in a hard standard, and any advice or tips would be great. Is it as simple as buying gold/silver bullion or coins? Any advantages/disadvantages to physically owning them rather than letting a third party hold onto your investment (obviously aside from theft or the company going bankrupt)?

-Jin
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Old November 24th, 2008, 12:34 PM   #2 (permalink)
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Title:
SHOULD YOU JOIN THE GOLD RUSH?
Authors:
Pressman, Aaron
Source:
Business Week; 11/17/2008 Issue 4108, p82-84, 3p, 2 color
Document Type:
Article
Subject Terms:
*GOLD
*INVESTMENTS
*PORTFOLIO management
*FUTURES
*GOLD mines & mining
NAICS/Industry Codes:
212221 Gold Ore Mining
523930 Investment Advice
523999 Miscellaneous Financial Investment Activities
523920 Portfolio Management
Abstract:
The article discusses gold as an investment. Topics include gold as a hedge against inflation, the markets in which gold futures trade, analysts' view on the short-term prospects for gold, ways in which investors can diversify their portfolios with gold, and the impact of changes in the price of gold on the earnings of gold-mining companies.
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1372
ISSN:
00077135
Accession Number:
35175810
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SHOULD YOU JOIN THE GOLD RUSH?
Contents

1. NUGGETS OF SAFETY
2. EXAGGERATED SWINGS
3. Business Exchange

Section: PERSONAL BUSINESS

INVESTING

Stock markets around the world have fallen off a cliff in the past month--and the price of gold, long seen as a safe haven in times of turmoil, has plummeted as well. After hitting an all-time high of more than $1,000 in March, gold dropped to $681 on Oct. 23 before bouncing back to $740 in early November. The bumpy ride has included three gold rallies--after the collapse of Bear Stearns, the seizure of Fannie Mae, and the failure of Lehman Brothers. But each rally was followed by a sharp sell-off.

Gold's recent gyrations were caused mainly by hedge funds and other big investors desperate to raise funds to cover losses and meet creditor demands. In order to do that, they have been getting out of deals made during the past few years to buy gold and other commodities with money borrowed in Japan and the U.S. On a more fundamental level, the dollar's recent rise and the fall in the price of oil have turned off investors who buy gold when they are worried about runaway inflation as a result of higher consumer prices or a plunge in the value of the dollar.

Despite the short-term fluctuations, gold still has a role in portfolios as insurance against worst-case scenarios like a devaluation of the dollar due to spiraling government debt, argues John Hathaway, manager of the Tocqueville Gold Fund. While most economists have supported the government's bailout plans, the moves are likely to increase the federal debt by more than $1 trillion. The Federal Reserve isn't worried about inflation now--it's fighting off a massive bout of falling prices, or deflation, such as occurred during the Great Depression. "The Fed has created more money in the past three weeks than in the previous 28 years," Hathaway says.

The crisscrossing patterns of long-term investors buying and short-termers getting out is best illustrated in the different markets where gold trades. At the Comex, where hedge funds typically buy and sell futures contracts on gold, the number of contracts in active use fell from more than 483,000 contracts in July to 319,000 in October, a 34% decline. At the same time, $2.8 billion poured into exchange-traded funds that buy gold and tend to be used for longer-term investments. Individual investors have bought so much gold directly from government mints that the U.S., Austria, and South Africa have had to suspend sales of gold coins until they can make more.

The recent moves fit with research showing that investors benefit more by holding gold over long periods to help diversify portfolios rather than moving in and out of gold only in times of stress. A review of markets around the world from 1995 to 2005 found that adding gold to a portfolio of stocks slightly improved returns with less volatility. But when the study, written by two lecturers at Trinity College Dublin, looked at gold's short-term moves around moments of crisis, they found that the benefit of buying gold ended quickly--after about two weeks. Although a variety of asset classes can help diversify portfolios, Dirk Baur, one of the study's co-authors, notes that gold's diversification benefit is strongest when the stock market is falling. Other diversifiers, like emerging markets stocks, start acting more like U.S. stocks in times of trouble.

Owning gold may provide some peace of mind over the long run, but there's no consensus among analysts about what short-term path gold's price will take. Merrill Lynch's precious metals team predicts gold will hit $1,500 as government actions to end the credit crunch eventually spark inflation. J.P. Morgan analysts think continuing turmoil in financial markets should support gold prices but predict it will trade at an average of $875 next year. At Barclays Capital, analysts reckon that a weakening dollar and a decline in hedging by gold producers will push gold to $970 by 2009's second quarter. Among the more bearish forecasters, Deutsche Bank analysts warned gold could hit $600 in the next few months and expect an average price of $750 next year because investors will continue to be more worried about deflation than inflation. And UBS has cut its 2009 forecast to $700.
NUGGETS OF SAFETY

For investors seeking diversification, the simplest way to buy into the yellow metal is to purchase shares of an exchange-traded fund that owns gold, such as the SPDR Gold Trust. The ETFs own huge amounts of actual gold stored in vaults. The amount hit a record of almost 1,093 metric tons worldwide at the end of September, according to the World Gold Council.

But some of the most ardent gold bugs are wary of owning gold through ETFs. Concerned that elements of the financial system could break down and cripple the firms running the ETFs, they favor buying gold bullion either in coins or small bars that can be kept in a safe deposit box. Jim Cook, president of Minnesota precious metals dealer Rarity Investments, says he had his best week ever in the month of October, selling $6 million worth of coins and bars. "The financial system has created so much paper that it's becoming suspect," says Cook, who has been in the business for more than 35 years. Reputable dealers offer gold coins at a markup of only a few percentage points over the value of the gold itself. Investors should steer clear of coins being sold at huge markups.

Stocks of gold-mining companies have fallen much further than the price of gold and may offer compelling valuations. The manager of the $63 billion Fidelity Contrafund, Will Danoff, who made a killing buying depressed gold stocks in 1999 and 2000, added shares of Goldcorp over the summer and, as of Sept. 30, had 3% of his fund in gold miners. His two biggest positions in mining outfits are Goldcorp, at 1%, and Kinross Gold, at 0.5%.

As you'd expect, mutual funds specializing in gold mining stocks have done poorly of late, with Morningstar's precious metals category down 53% for the year. A thirst for assets probably sparked the Oct. 31 reopening of the Vanguard Precious Metals & Mining Fund (it closed in February 2006, when gold had almost reached $600). The fund is down 59% this year, trailing some 87% of its peers, but is a top performer over 5- and 10-year periods.
EXAGGERATED SWINGS

Mining companies, which have fixed operating costs to get gold out of the ground, can see profits swing rapidly when the price of gold goes up or down, points out Michael Bradshaw, manager of the Evergreen Precious Metals Fund. So gold-mining stocks, down about 50% as a group in 2008, will see a more exaggerated gain in price from a recovery than will gold itself, he says. For example, when gold prices rose earlier in the decade from around $400 an ounce to more than $600, Goldcorp's net income shot up from $51 million in 2004 to $286 million in 2005 and $408 million in 2006. Top holdings in Bradshaw's fund, which can also own physical gold, include Kinross Gold, Rangold Resources, and Agnico-Eagle Mines.

Whether owned as coins, through funds, or via individual stocks, gold should make up just a small slice of a portfolio. Rozanna Patane, a financial adviser in York, Me., says she will be putting a small amount--under 5%--of her clients' assets in gold as a long-term hedge against inflation and dollar depreciation. In the short term, says Patane, "it may have some appeal as more bad news appears about profits worldwide."
Business Exchange

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Collapsing Mining Stocks This year's collapse in gold-mining stocks, with the Philadelphia Stock Exchange's Gold & Silver Index down 70% from March to late October, is comparable to a half-dozen similar crashes since the 1930s. Boris Sobolev of the Resource Stock Guide newsletter notes that typically the stocks hit bottom after losing about two-thirds of their value. In the wake of current turmoil, however, he thinks shares of small-cap mining companies may never recover. Sobolev writes: "Most…will never see their prior peaks of glory."
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Old November 24th, 2008, 09:57 PM   #3 (permalink)
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I'm seriously thinking of buying gold or silver coin. Even if the value of the metal stays the same over the next 20 years, the value of the dollar is most likely going to drop. So if you buy an ounce of gold for (as an example) $900 now, that $900 dollars 20 years from now may be worth half of what it is today. The gold, however, will have a much higher purchasing power.

Long term I think it is a solid, safe investment, especially in times like this when the future is very uncertain, and our entire monetary system lies in the hands of a few men who have ulterior motives.

Any thoughts of websites/companies such as Precious Metals Trading - Investing in Precious Metals - Precious Metals Quotes Is one broker better than another?

-Jin
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Old November 24th, 2008, 10:11 PM   #4 (permalink)
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I bought 300 dollars in Silver a while ago. It's gone up in value now. I think I have 20 ounces of silver or something like that, I forgot exactly.
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Old November 24th, 2008, 10:15 PM   #5 (permalink)
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I bought 300 dollars in Silver a while ago. It's gone up in value now. I think I have 20 ounces of silver or something like that, I forgot exactly.
Do you physically own it, or is it an ETF? Be careful if it's an ETF, as if the company goes under, you can lose your entire investment, despite the fact that you 'own' the silver.

-Jin
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Old November 25th, 2008, 12:55 AM   #6 (permalink)
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My grandfather gave me a 1oz Krugerrand for a graduation present, I'll probably buy a few more after I get out of college.
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Old November 28th, 2008, 12:29 AM   #7 (permalink)
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Sorry for not seeing this sooner, but I've been kind of busy lately.


Anyway, I'm not a financial advisor, nor do I play one on tv, but I can offer some info based on my experience.

Gold and silver are reasonable investments, but only after you've already got your money properly invested. Like anything, you don't want to put all your eggs in one basket. Gold and Silver also shouldn't make up a huge portion of your investments. As far as tangible assets go, it's still pretty low on the list. I'd rather spend more of my money buying land/property than gold, worst comes to worst you might be able to use your land to grow some food and/or have a place to live, you can't eat gold and if you can't sell it, you're S.O.L.

That's the main problem with gold, its value is based mostly on desire over real need (not to say it isn‘t used a lot in the technology industry, but most of its value just comes from it being perceived as a precious metal). You have to rely on people wanting it and willing to pay a high price in order for you to get a good return on it. If one countries economy goes down the tubes it might pay off for you because people in other countries will still want it, if every countries economy goes down the tubes....you could have all the gold in the world and it probably won't help you much.

What gold is good for is having a stock pile of a "currency" that is useful worldwide and is difficult to inflate or deflate the value of. Therefore, IMO, the best way to invest in gold is to make it part of your "rainy day fund." Basically some emergency money just in case. Some people treat it as a true commodities investment, trying to buy low and sell high, but that is difficult to do and the energy spent there would probably net better returns in other forms of investing.

So like I said, if you are going to invest in gold, do it a little bit at a time (where it won't effect your other investments, your well being, ect), put it aside with your "rainy day fund jar," and leave it there. Don't go crazy trying to buy it low, sell it high, and getting the best return on your money. Think of it more as, "I lost my job, the stock market is in the crapper so I don't have much money in my portfolio, the money I do have isn't buying as much as it used to, and I just need something I can sell so I can get by right now."

You also probably don’t want to buy a lot at one time because of taxes, gold can be taxed very heavily in some cases. If you only buy a little at a time you might be able to stay under the radar and not have to declare your investment and be taxed on it. Check with your accountant on that one though.

Now, as far as buying the actual gold itself. Investors prefer pure 24k gold coins, such as the new American Buffalo and the Canadian Maple leaf. However, all of the big name coins contain the same 1oz of gold, they just add in a little extra silver and copper to make it more wear resistant (which is why a 1oz American Eagle weighs slightly over 1oz). Therefore, it doesn't really matter which you buy, they're all worth at least the current spot price of gold. So, find a reputable local dealer that sells at a good price (the lowest premium over spot price) and pick out the coinage type and size that suits you best.

Another important thing to look at is the size of the coin, you can buy coins in 1 ounce, 1/2 ounce, 1/4 ounce, 1/10 ounce, ect. At the current spot price (~$800 an ounce) buying nothing but 1oz coins might not be the best option, it also might not be the best option when it comes time to sell. 1/10 ounce coins are nice because it's real easy to figure out their value (take a zero off the spot price), they're reasonably priced to buy, they're small enough to easily stash or hide, and it's easier to use in trade for items under the value of a 1oz spot price (no use selling a 1oz coin when you just need $100). Buy a few of them here and there and before you know it you'll have quite a bit of money stored up.

Otherwise, if you really want the biggest value in the smallest package diamonds are probably the way to go. That's what many Jews thought during WWII. There are many stories of them hiding diamonds on their person in order to use them later as a bribe, many going so far as to sew them into their skin. Sometimes it worked, other times it didn't. Nothing is fool proof in that situation.

On a side note, I always thought gold is a good gift for a child. A grandparent could buy their grandson or granddaughter a gold coin for every birthday. When they get older they could end up having quite a bit of money saved, a neat coin collection (that can interest both child and adult), and overall it's more interesting than bonds, and the money is better spent than on some fad toy that will break in a week anyway.

Edit: Oh, and the largest downfall to physically storing gold is it's heavy and it's an easy target for thieves. If you don't insure it and it ends up getting stolen you could be out quite a bit of money. When you invest in "gold on paper" you gain mobility and theft security, but then you loose having a tangible asset and you're basically just holding another form of paper currency....kind of defeats the purpose, IMO. If you wanted that you could just invest in some Loonies, Pounds, Euros, ect. Buy a proper safe, hide it in a good spot, put your gold and other important things in there, and see if you can insure it through your homeowners insurance. That's about the best you can do (another reason not to put all your eggs in one basket).



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Old November 30th, 2008, 10:43 PM   #8 (permalink)
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Do you physically own it, or is it an ETF? Be careful if it's an ETF, as if the company goes under, you can lose your entire investment, despite the fact that you 'own' the silver.

-Jin
Naa I have it upstairs. My sister got one too. Actually, all of my grandma's 7 grandkids got them.
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Old December 1st, 2008, 07:18 PM   #9 (permalink)
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Our currency isn't on the verge of collapse...
Silly Ron Paulians.
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Old December 1st, 2008, 08:02 PM   #10 (permalink)
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Our currency isn't on the verge of collapse...
Silly Ron Paulians.
Can't tell if this is sarcasm or not, but if you truly think that the U.S. dollar (and the economy as a whole) is not in serious trouble, I think you should re-analyze the whole situation. Basic high school economics says we cannot continue to spend money that we print up on a daily basis while we fail to increase our income.

The signs are there, but it comes down to whether or not people want to realize it. And if I turn out to be completely wrong (which I would bet against), what's the worst that happens? I have a few gold coins laying around that I can sell anytime I want.

-Jin
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Old December 1st, 2008, 11:23 PM   #11 (permalink)
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Basic NYY economics tells you that you don't invest in gold when the market has hit bottom. Stocks have slowly started to show some resistance, and the last thing you want to do is invest in gold when people will start putting their money back into stocks.

You're suggesting that gold never loses its value, which is completely wrong. A lot of people got in trouble in real estate with that attitude.

Why not put your money into a CD or an IRA?
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Old December 2nd, 2008, 12:39 AM   #12 (permalink)
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Basic NYY economics tells you that you don't invest in gold when the market has hit bottom. Stocks have slowly started to show some resistance, and the last thing you want to do is invest in gold when people will start putting their money back into stocks.

You're suggesting that gold never loses its value, which is completely wrong. A lot of people got in trouble in real estate with that attitude.

Why not put your money into a CD or an IRA?
I think you're missing the point. First off, I was jumping for joy when I saw the market head down the drain, unlike many people (especially my co-workers). Mainly because the best time for investing is when the market is doing poorly. Buy low, sell high - we all know that.

But as Dooms said, gold is a great way to diversify, and it's much more stable than the stock market, which is what I am looking for - stability. I don't want to buy gold to make a fortune, I simply want to buy something that will hold it's value over a long term. If hyperinflation occurs, I will be happy that I own gold. Truth is, in these times you cannot even guess as to what the market or economy will be like in the next year, 5 years, or 10 years. One could even make the argument that the dollar may not be around in 20-50 years. I want something secure and tangible that I know will hold some sort of value in the long term. There is a reason why gold & silver have been used as currency for so many hundreds of years.

In regards to real estate, the people got into trouble because they wanted to make a quick buck and often did it without really having the money to back their investment. Real estate (or perhaps more specifically, land) is truly one of the best investments you can make. The population is constantly growing, but new land is not being made. Land will always be in demand, you just can't expect to always 'flip' houses and get rich quick.

Finally, I already have money in a CD.

-Jin
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