Why gold can make you poor

[SamAdams]

I'd be interested to get some input on this article - isn't it all dependent on when you cash out?

Why gold can make you poor

Ian McGugan, Financial Post Published: Friday, November 20, 2009

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• Reuters Group plc
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• Rolfe Winkler

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Getty Images If you had bought gold for, say, US$350 an ounce in the early 1980s, you would have made no money on it for close to 20 years. Factor in inflation during that time and you would have lost close to ...

Rolfe Winkler of Reuters has an interesting piece about gold in which he thoughtfully explores the case for a boom in the metal's price and comes to the conclusion that gold won't make you rich, but it may protect you from becoming poor.
Here's why I think he's wrong.
Let's imagine that you had bought gold at its peak in 1980, when it was trading near US$850 an ounce. You would have lost most of your money as gold prices slid back to around US$350 and stayed at depressed levels for the next two decades. Twenty years after the 1980 peak your investment would be worth less than half of what you paid.
So, with all due respect to Winkler, gold can make you poor.
While this may be an extreme case, the point holds up even if you take a less dramatic starting point. If you had bought gold for, say, US$350 an ounce in the early 1980s, you would have made no money on it for close to 20 years. Factor in inflation during that time and you would have lost close to half your purchasing power.
Again: gold can make you poor.
This is the point where gold bugs usually start muttering about gold's 5,000-year history as a store of value. "Gold may be volatile," Winkler writes, "but at least it maintains its real value."
Problem is, Winkler also reproduces a chart that shows seven-and-a-half centuries of real gold prices. At least to my eyeballs, it appears that if you had bought gold between 1415 and 1765 or so, you would have to wait until around the mid-1960s to be back to even in terms of purchasing power.
Call me crazy, but I like my investments to pay off in a century or less.
Freelance business journalist Ian McGugan blogs for the Financial Post.

[ASH]

Re: Why gold can make you poor

I'd be interested to get some input on this article - isn't it all dependent on when you cash out?

I think the article is pretty vacuous. It is a given that for any particular asset, there is a right time to buy/sell and a wrong time to buy/sell. Maybe the obvious needs to be said, but I don't personally need an article that points out that if you buy and sell at the wrong entry and exit points, you will lose money. So yeah -- I'm agreeing with you. Maybe this article is of help to the same people who bought real estate because "real estate only ever goes up." Investors in gold need to understand why the price of gold changes over time so that they can gauge their entry and exit points. End of story.

[jiimbergin]

Re: Why gold can make you poor

I'd be interested to get some input on this article - isn't it all dependent on when you cash out?

Of course gold could make you poor under the right conditions. I did buy gold in the late 70s and early 80s at a fairly high average price of $600 and silver at around $10. I was perfectly happy to keep it all and I never felt it had made me less wealthy. I believe that all of us (not sure about jtabeb ) will sell at least part of our gold at some point, just not sure when that will be.

[idianov]

Re: Why gold can make you poor

Gold does not make you poor - but governments will. The Soviet government made my grand parents poor 2 times during their life time in 1947 and 1993 because they kept all their savings in paper currency. The only thing that held the value was several 5 Czar Rubles Gold coins they kept at home.

[unlucky]

Re: Why gold can make you poor

I think the article is pretty vacuous. It is a given that for any particular asset, there is a right time to buy/sell and a wrong time to buy/sell. Maybe the obvious needs to be said, but I don't personally need an article that points out that if you buy and sell at the wrong entry and exit points, you will lose money. So yeah -- I'm agreeing with you. Maybe this article is of help to the same people who bought real estate because "real estate only ever goes up." Investors in gold need to understand why the price of gold changes over time so that they can gauge their entry and exit points. End of story.

In terms of timing, my guess is that we are in the mid-stages of a gold bull run that is currently being fuelled by the perception that private sector credit-worthiness has been trashed and government sector credit-worthiness is in the process of being trashed. When everyone accepts that neither banks nor governments are worthy of credit, the price of gold will surge to a peak .. and you should probably sell. Or maybe hold out for a good war to start.

[grapejelly]

Re: Why gold can make you poor

stocks can make you poor, from 2000 to the present, or from 1969-1982, or 1929-1946...

every asset class can make you poor. Duh.

[ASH]

Re: Why gold can make you poor

In terms of timing, my guess is that we are in the mid-stages of a gold bull run that is currently being fuelled by the perception that private sector credit-worthiness has been trashed and government sector credit-worthiness is in the process of being trashed. When everyone accepts that neither banks nor governments are worthy of credit, the price of gold will surge to a peak .. and you should probably sell. Or maybe hold out for a good war to start.

That is my take as well, but I see this as subject to the possibility of a second "sell everything" market crash in the middle. If a market crash occurs, I expect the price of gold to dip -- but I don't expect it to dip as far, or stay down as long, as the previous case. However, I have a trailing stop loss set on half my paper gold/silver position, for this reason. I figure half my total position is insurance, and half is a trading position. Maybe I get stopped out of my trading position by volatility rather than a crash, or maybe I can pull a hat trick and buy back in at a lower price. Either way, I'm not fully exiting my gold/silver position until we get sound fiscal and monetary governance. That's not on the horizon yet, as far as I can tell.

[ThePythonicCow]

Re: Why gold can make you poor

If a market crash occurs, I expect the price of gold to dip

So long as the monetary unit (e.g. the dollar) remains trusted, then gold, like many physical things, is a modest inflation hedge. In such times, if the stock and other markets crash (i.e., if the monetary unit spikes up) then gold (its price in monetary units) goes down as do other trade-able assets.

But when the very existence of the monetary unit is cast in doubt, then gold becomes the fall back, just as life boats and life preservers become the fall back if the ship starts sinking. In such times, a man will trade all his life possessions for a seat on the life boat.

If we repeat the dollar up, stock market down scenario of last year again, it could be that gold spikes up, not weakens. This could happen if by that very crash, the continued existence of the dollar is cast further into doubt for some potential large gold buyers (e.g. several major non-Anglo nations.)

[ThePythonicCow]

Re: Why gold can make you poor

Either way, I'm not fully exiting my gold/silver position until we get sound fiscal and monetary governance.

I hope you are a young man in fine health, sir, else I doubt you will live to see such sound governance .

[WDCRob]

Re: Why gold can make you poor

If I bought stocks in 1999 would I be poor?

[ASH]

Re: Why gold can make you poor

If we repeat the dollar up, stock market down scenario of last year again, it could be that gold spikes up, not weakens. This could happen if by that very crash, the continued existence of the dollar is cast further into doubt for some potential large gold buyers (e.g. several major non-Anglo nations.)

This is the attraction to me of a trailing stop-loss. I may have an expectation about what might happen, but also doubts. Gold won't go up in a straight line, but as long as my trailing value is large enough to deal with normal volatility, I would stay in my position if the price of gold spikes upward rather than down.

[ASH]

Re: Why gold can make you poor

I hope you are a young man in fine health, sir, else I doubt you will live to see such sound governance .

At the risk of being circular, I figure that if fiscal and monetary governance doesn't improve within a time period that I care about for investing, then I may well not live long enough to see sound governance.

[sishya]

Re: Why gold can make you poor

One of the greatest friends of International Gold Bugs is Indian Females. They buy less when Gold is high and buy more when Gold is low. When everyone is panicking and get their stop loss taken out, the Indian female buys more and removes the panic. I think they are the only folks Wall street/Central banks cannot control since they are not buying Gold to profit alone but for other beauty, status, store of wealth, exhibition, social reasons etc. This is not like Chinese pig farmers buys copper pipes to make profit. The underlying reasons are totally different.

[ThePythonicCow]

Re: Why gold can make you poor

This is the attraction to me of a trailing stop-loss. I may have an expectation about what might happen, but also doubts. Gold won't go up in a straight line, but as long as my trailing value is large enough to deal with normal volatility, I would stay in my position if the price of gold spikes upward rather than down.

I don't have stop losses on my gold investments (GTU, CEF). I have limit orders. If the price falls enough, buy more.

[Jay]

Re: Why gold can make you poor

It's so simple to me, is government going to F things up even more than they have, and has this been factored into the price completely. I say a huge and resounding NO, the amount of government stoopidity hasn't been discounted at all. It doesn't need to get more complicated. Why gnash teeth, we know the long term answer. Buy gold until you can sleep then buy a smidge more to be greedy. Have enough cash to pay your bills. Live beneath your means. Have a brew with your neighbors. We are going to have a smoldering wreck out of this and that means gold.