A Gold Investor's Paradox

[argent_pur]

Does this exist?

We all know gold thrives on bad news. Those of us who are heavily invested in this metal obviously want to make a profit sometime in the future. This would require more bad news about the state of our economy. Don't we essentially have to look forward to bad news so that we gain? I really don't want to be a pessimist, nor do I want to rob myself of the chance to be happy at news that really is good. But I'm also a realist...I recognize the structural problems with our economy. Would silver give someone a chance to look forward to good economic developments, while still being protected from an inflationary scenario? What do you guys think?

[jtlee321]

Does this exist?

We all know gold thrives on bad news. Those of us who are heavily invested in this metal obviously want to make a profit sometime in the future. This would require more bad news about the state of our economy. Don't we essentially have to look forward to bad news so that we gain? I really don't want to be a pessimist, nor do I want to rob myself of the chance to be happy at news that really is good. But I'm also a realist...I recognize the structural problems with our economy. Would silver give someone a chance to look forward to good economic developments, while still being protected from an inflationary scenario? What do you guys think?

I think that silver can have gains based on both good and bad economic news. If the economy pulls a 180 and industrial demand picks up there will be a physical shortage, hence price increase. If the economy continues the nose dive, investors hoard the metal to protect against inflation there by causing a physical shortage and prices to rise.

Gold on the other hand is primarily a monetary metal and tends to go against the grain of the economic situation. If the economy recovers people sell their gold for fiat and buy other things (such as electronic toys that use silver), if the economy crumbles people buy to gold to preserve wealth until there is a recovery.

This is obviously an extreme over simplification, but you should get the point. Just my two cents (adjusted for inflation) worth.

[Lemon Thrower]

at the risk of sounding like a jerk who gets technical, allow me to point something out to you.

buying gold is not an investment. gold is money. you are simply preserving your purchasing power. to some extent its a speculation that gold is undervalued compared to FRN's. the destruction of the economy to which you refer is why you are trading paper for gold. if the dollar were still as good as gold, there would be no need to do this.

an investment is where you contribute capital with the expectation of a return above your contribution due to the efforts of others. a gold mine is an investment. gold is not.

it is important to have the right expectations and understand these subtle differences in order to have realistic expectations.

if you are young or inexperienced, one of the most important rules of investing is not to lose money. that is why holding gold, even in a form that will not increase in ounces, is prudent. on the other side of the crisis assets like cars and homes and businesses will be much cheaper in real terms.

[68Camaro]

What LT says is true. About gold.

And it is partially true about silver.

But silver is a bit different (as has been pointed out many times) in that it has significant industrial usage that takes it out of use, isn't easily recycled, making it gone forever. That's why some think silver is so undervalued. Of course as the price goes up there will be push to find other solutions for some of the industrial uses, so it will find a balance, but I think at a much higher price that we have even now.

[Country]

For a number of reasons mentioned already, that is why I am strong beliver that you need to acquire both GOLD and SILVER. How you balance the two is a measure of how you perceive the world; SILVER having more industrial uses, and GOLD as your fundamental store of wealth. If the fiat currencies are decimated, those who are rich and sovereigns will gravitate to GOLD, since there is 2 trillion dollars of it and it is much easier to store and move to vaults than SILVER. Even now, many people cannot afford GOLD, and they will seek out SILVER as their store of wealth. So, there is no paradox - obtain both GOLD and SILVER should be ones goal.

[Copper Catcher]

Gold and Silver Price Points

Is it the simple economics, as some would suggest, caused by supply and demand that drives market prices or is it more out of emotion and fear?

Let's say tomorrow Silver went to $50 an ounce... How many people that are holding silver claiming it as an investment versus seeing it as a safety blanket would dump their holding for paper profits? How many real buyers would there be at $50 an ounce? At that price do you think there would be a shortage or a flood?

If food costs continue to rise and double or triple as well as gas cost zoom past $5 a gallon and keep going up, life as we know it is America will quickly get very different.

Hang on guys this roller coaster ride is just starting......

[Sheikh_yer_Bu'Tay]

I see what you are saying about the gold paradox, but it is the other way around on silver.

I see silver as a can't lose investment. It will never go to zero value. It is intrinsic. It is money. I prefer it to gold.

If the economy grows, you will need silver for a whole host of uses. From electronics to microbial tech.

If the economy tanks, you will need silver for it's monetary values.

It's a win-win!

I keep thinking when I get enough silver, I will look into other investments. The only thing is... I can't get enough silver!

[BullionStar]

Like Lemon thrower says, precious metals for me are a preservation of capital play rather than a profit making exercise. Its all very well having a $100k in "profits" but if a loaf of bread cost you $50 those profits might not go too far.

[argent_pur]

I shouldn't have used the term "profit"--it connotes a short-term view. I buy PM's as a long-term preservation of value as many of you do. I just meant that we're hoping that the currency-value (U.S. Dollar or whatever is in vogue at the time) will increase with time. I don't think anyone here would want PM prices (in Dollars) to stay flat, or decline for that matter, for a long period of time, for that would mean that more people are trusting the paper currency and when people trust the system, the economy moves right along. I'm not really considering the antics of politicians or bankers for this scenario, just because the paper dollar could function just as well under their management as a currency and store of value as gold could if we had monetary authorities disciplined in its issuance. But, of course, the nature of paper and people, being what they are, the temptation of easy money is just too great for mere mortals to resist. I think I'm correct in saying that if our economy were on a sound footing and folks trusted the system, even with the paper dollar, there would be scant need for gold. So, how can gold buyers cheer for the economy to recover (a true recovery now, not a fake, papered-over one) knowing it would mean a decline in the value of their gold in terms of that same currency, for the two moneys are competitors.

Bottom line: Is buying gold akin to a CEO shorting stock in his own company---thereby preventing him from being glad when his company profits (or making decisions that would aid in that endeavor?)

And I would say the gold price is driven primarily out of fear--investor interest always goes up during economic turmoil and there's plenty of the stuff in vaults and around necks and fingers all over the world that could be dumped if the price were high enough. No such luck with the cell phones and keyboards and any other small device containing silver sitting in the trash heaps of the world.

Also, buying both gold and silver wouldn't eliminate the paradox, just lessen it---the gold part of the portfolio would still have the paradox attached to it.

Is any of this making sense....I JUST DON'T KNOW ANYMORE! It's like being a parent with two kids on different teams playing each other...who does one root for? And don't say "both" Country

[68Camaro]

Gold has always had value. More at some times than at others. Where are we as far as price point? No one can know for sure, except in distant hindsight. But with gold your holdings will never (as long as there is a society at all) be worth zero. More than I can say for Enron stock, for example; I had some, and it lost all of its value.

Are you "overpaying" if you buy now? No one knows. Some will say yes, many will say no. It's your call.

Is there a part of the current gold "bet" that depends on fear and bad news? If you're not buying to hold, no matter what, then that's a yes. Certainly some part of the price rise is due to fear.

[IdahoCopper]

My friend does not really get silver. He says, why would you buy that?

I told him.... Its like traveling to Russia. When you get there, you convert your dollars into rubles...so you can get what you need. I'm not buying anything. I'm not spending my money.... I'm just converting my money into a different currency.

I told him to buy $100,000 of silver when it was $20, just a few months ago. He could have easily done that, but he did not.

'Cest la vie.

[Sheikh_yer_Bu'Tay]

I shouldn't have used the term "profit"--it connotes a short-term view.

What's wrong with the term "profit"? And who says it's short term? If you saved a $1.40 (one ozt silver) in Rosy dimes in 1964, today the melt value of those dimes has grown 2,580%. That is a nice long term profit! Or, do you want to flip it around and say the FRN has depreciated that much???

And don't say "both" Country

Both. Diversify your money.

[Know Common Cents]

I believe silver has more upside potential than gold. Only downside is its weight. If my house is on fire, I'm grabbing the gold and getting out. Silver won't disappear and I guess it'd be one big blob that'd still have intrinsic value. I could do without the fire regardless, so won't think about that anymore.

[68Camaro]

I believe silver has more upside potential than gold. Only downside is its weight. If my house is on fire, I'm grabbing the gold and getting out. Silver won't disappear and I guess it'd be one big blob that'd still have intrinsic value. I could do without the fire regardless, so won't think about that anymore.

Well, if my house is on fire, I'm just getting out, period... In that event the gold can just turn into a puddle as well as the silver, as far as I'm concerned. Not going to try to open up the safe during a fire...

[psi]

I guess precious metals can be an investment or a store of value (or both) depending on your approach. Sure inflation drives the dollar prices of PMs over the long term, but their inflation-adjusted purchasing power doesn't just remain constant from week to week or year to year. If the spot price doubles or triples over a few years then chances are it's not just from inflation, your holdings really have increased in purchasing power.

Of course the minute you convert back to paper money you're dealing with inflation again, but land is pretty undervalued in some places and also stores value... on the other hand that can be seen as another cynical play where you're benefiting from economic distress. Maybe the best way to "give back" to the economy through investment is to start a business where people can make a decent living, that way everyone wins. Hard to do that unless you've saved some money yourself though.

[Mossy]

The paradox only exists if the economy recovers, and we are only going to know that when gold loses value against beans and rice. (Heck with the dollar. Does anyone think we are going to be able to buy a pound of beans for a dime again, ever?)

Fedgov public policy is to maintain inflation, to avoid deflation. The "cost of living" is always going to take more dollars to meet. Beans and rice might cost a little less in dollars now and then, but the cost of that mythical food basket is never going to go down enough to matter, no matter how much it goes up.

Gold is _not_ money (for now), but the governments have been able to keep gold low against the dollar for about as long as they can and they are running out of tricks and lies. In balance, I don't see how gold can drop below $800, absent an inexpensive method of extraction from sea water.