Gold strategy

[LarryS 0]

My business has a non-trivial amount of cash accumlated over 20 years that I would like to protect from the (IMHO) soon-to-be-worse financial crisis and inflation. I'm thinking of converting a significant portion from a money-market fund (Dreyfus) to GLD, an exchange-traded fund that holds gold.

Any advice on if this is a good idea? I realize this is riskier than cash due to price fluctuations, but I can't imagine what gold is going to have to do, long run, with the irresponsibility our government is showing.

Also, if it was your money, would you jump in with both feet, or dollar-cost-average (DCA) over a period of time? If DCA, how often/how long would you buy? For example, would you only switch 50% of your cash to GLD, and convert that amount 20% at a time over five months? Etc.?

Thanks,

--Larry

[Betsy Speicher 0]

My business has a non-trivial amount of cash accumlated over 20 years that I would like to protect from the (IMHO) soon-to-be-worse financial crisis and inflation. I'm thinking of converting a significant portion from a money-market fund (Dreyfus) to GLD, an exchange-traded fund that holds gold.

Any advice on if this is a good idea? I realize this is riskier than cash due to price fluctuations, but I can't imagine what gold is going to have to do, long run, with the irresponsibility our government is showing.

Also, if it was your money, would you jump in with both feet, or dollar-cost-average (DCA) over a period of time? If DCA, how often/how long would you buy? For example, would you only switch 50% of your cash to GLD, and convert that amount 20% at a time over five months? Etc.?

I have a large position in GLD and GLD options because I think that serious inflation is a certainty in the long-run. In the short run there will be large fluctuations. That is why most of my assets are in cash despite the abysmal interest rates.

I would suggest first maxing out on tax-sheltered investments like IRAs, 401Ks, and Keoghs. Then decide how much you are willing to risk and how much you want to keep safe. I have always allocated my investments according to my time horizon thusly: I take my age and put that percentage in safe investments and the rest in risky investments like equities.

Currently, 63% of my own long-term risky investments are in GLD and 10% of that in very long-term in-the-money GLD calls. I also write (sell) out-of-the-money short-term (15-45 days) covered calls on my GLD shares. If GLD makes a big upside move, I may day-trade my covered calls buying them back before they expire and then writing new out-of-the-money short-term covered calls. (To those who did not understand what I just wrote about calls, don't try this at home. Just buy the GLD.)

Since you mentioned this is business cash, look into something like Schwab's High Yield Checking accounts. While money markets are currently paying around .5%, my Schwab checking account is paying a full 1%. It is also FDIC insured, but I trust Schwab's stability and solvency much more than the government guarantee.

[jordanz 0]

I've been buying the GLD ETF for the past year. I'm old enough to have lived through the late 70s. Gold is the best hedge on inflation. Buying gold has never been easier than with the ETFs.

FYI - I had been shorting the market with the ETF "SH". But, it's been so unstable lately that I converted my SH to cash.

[jordanz 0]

I'll second Besty's recommendation of the Schwab High Yield Checking account. The only downside is that it's cumbersome moving money in and out. They have a companion "brokerage account" that holds online transfers and it's a pain. Other than that, great product.

[Joss Delage 0]

With regards to gold funds, you also need to consider the counterpart risk in a high inflation situation.

[Greggo 0]

I'd add that there is another contingency to take into account that hasn't been mentioned yet...

While everyone is feverously involved in betting red and black... every once in a while green double zero comes up and the croupier rakes all the chips off the table.

We take for granted that we live highly dependent on electronics... and that system can be extremely vulnerable under certain physical and social conditions.

So a good question to ask yourself is:

What should I do in case the internet is shut down and ATM's don't work?

Greg

[MikeMarotta 0]

... I also write (sell) out-of-the-money short-term (15-45 days) covered calls on my GLD shares. If GLD makes a big upside move, I may day-trade my covered calls buying them back before they expire and then ...

I agree that money has to work to grow. Buy and hold is not a growth strategy unless, perhaps, like Warren Buffet, you are actively buying and holding. My wife handles that for us, the options, etc. I take care of the physical assets. I agree with Greggo that some cash on hand is important because of the risk of systemic failure. I have some rolls of quarters and current dollars (presidents, etc.) in a couple of project team coffee cups on my bookshelf, about $50 in small currency for just in case. So, too, with physcial gold and physical silver: we hold just enough for just in case. I like 19th European coins, such as sovereigns and 20 francs. These prices are from the daily quotes of Liberty Coin Service in Lansing, but any ANA-member dealer will have opportunities like these. (ANA dealers subscribe to a code of ethics. The ANA was founded in 1891 and chartered by Congress in 1912. You won't find Santa Claus here, but the buying and selling is pretty much above board.)

COIN NAME WT OZ RETAIL

British Sovereign 0.2354 11.5%

France 20 Franc 0.1867 13.9%

Swiss 20 Franc 0.1867 13.9%

Mexico 50 Peso 1.2057 4.1%

U.S. 1 Oz Gold Eagle 1.0000 5.8%

U.S. 1/2 Oz Gold Eagle 0.5000 16.0%

U.S. Medallion 1.0000 3.9%

S. Africa Krugerrand 1.0000 5.1%

Australia 1 Oz Kangaroo 1.0000 6.0%

Austria 100 Corona 0.9802 3.8%

Austria 4 Ducat 0.4428 9.0%

Austria 1 Ducat 0.1107 16.0%

[Joss Delage 0]

All,

What do you think of GLD versus some other gold ETFs such as iShares' IAU and ETFS' PHAU? PHAU sounds particularly interesting as they actually hold the bars in London. I'm not sure how easy those products are to trade in the US.

Thanks,

JD

[Betsy Speicher 0]

What do you think of GLD versus some other gold ETFs such as iShares' IAU and ETFS' PHAU?

I prefer GLD because it is widely held and actively traded. For instance here is today's volume:

GLD - 12,360,110

IAU - 251,542

PHAU - 175,279

A large market is a more orderly and trustworthy market since there are more stakeholders keeping a close eye on the fund. Also it makes an active option trading market possible.

PHAU sounds particularly interesting as they actually hold the bars in London.

The only time physical gold makes a difference is when it is in MY physical possession. Otherwise it is a matter of trust between me and the people taking my money just as it is with GLD or IAU.

[Jawaid Bazyar 0]

Invest in a profitable business. As cash your assets are a sitting duck. If you turn your cash into cash-flow, you can adjust your prices and hence cash flow for inflation.

My business has a non-trivial amount of cash accumlated over 20 years that I would like to protect from the (IMHO) soon-to-be-worse financial crisis and inflation. I'm thinking of converting a significant portion from a money-market fund (Dreyfus) to GLD, an exchange-traded fund that holds gold.

Any advice on if this is a good idea? I realize this is riskier than cash due to price fluctuations, but I can't imagine what gold is going to have to do, long run, with the irresponsibility our government is showing.

Also, if it was your money, would you jump in with both feet, or dollar-cost-average (DCA) over a period of time? If DCA, how often/how long would you buy? For example, would you only switch 50% of your cash to GLD, and convert that amount 20% at a time over five months? Etc.?

Thanks,

--Larry

[C.W. 0]

I agree, gold is a safe haven. As a long-term storage, however, it has problems. Nor is it a source of profit.

On the positive side, gold has a history as a currency, as the source of stability and security. Many governments still hold large gold hoards. The market is international and is only slightly subject to manipulation, mainly in the short-run. It is denominated in dollars, which means, as the value of the dollar drops, gold will look cheaper to non-dollar holders, and attracting more buyers, driving the price up.

Very recently, however, since April of last year, gold has tracked the dollar.

The problem with looking at gold as a hedge against price inflation in our country is that consumer price rises haven’t been big. Really, we have had massive amounts of fiat money pumped into our economy for decades and what has happened? We have had a couple blow-offs in stocks, a panic in residential real estate and the financial markets, and large, constant exports of dollars. Price inflation, while bad, say 2%-3% since 1990, has at least been low enough to allow businesses to make profits and wealth to be accumulated. So, a continuing large inflation does not necessarily lead to large consumer price rises. (I know that government figures are not to be trusted. But! Profits are profits. I think that profits are the key to determining the health of our economy. I also think that each of us has a good idea what is happening because we buy stuff every day. Look at your own “inflation index”.)

Every good economist that I have read has said that the important thing about inflation is how new money is introduced into the economy. Ours comes primarily through the expansion of bank credit. At least since about 1980, in spite of a huge, steady bank credit expansion, inflation hasn’t reached consumer prices in any major way. Further, since this panic began, bank lending has all but evaporated (liquidation of all that made up money!). So there actually has been no inflation for a while, and there won’t be for a while longer.

Obama is determined to change that. I think that the programs he wants will have a more direct impact on consumer prices. We will just have to watch and be prepared.

But that part of the sky has not fallen yet. In the mean time, equities have moved up over 40% in a very short time, and continue to do so with any small positive news. Businesses are working to get back to profitability. People are resisting Obama. Frankly, I think acting as if Obama has won already is not a good thing. The sky may fall, but the pieces on the ground now are not from price inflation.

With this in mind, a strategy would be based upon what is actually happening. Since uncertainty is prevalent, a certain amount of “wait-and-see” is called for, a certain amount of safety hedge, too. This is inherently a short-term strategy. An investor lives a long life, and needs to keep that in mind. Trying to guess the short-term is generally unsuccessful. For the long-term, a radical supporter of capitalism would continue to own capital in a still predominately capitalistic country.

[softwareGuru 0]

C.W., I mostly agree with your post. I'd add the following...

Firstly, if we grants that the last couple of decades have seen a huge growth in real productivity that is a huge explanation of why prices have not risen. The productivity has come from three main sources: structural opening of the U.S. economy post 1970; globalization... China putting millions to work (i.e. structural opening of the Chinese economy, and of others two); finally, from internet and telecommunication improvements.

Second, China's huge dollar accumulation has been allowing prices to rise within China while helping keep down prices of consumer items in the U.S.

Finally, owner-occupied housing is a huge expenditure for most people but the CPI does not account for short-run changes in this expenditure.

[C.W. 0]

SoftwareGuru, regarding growth in real productivity (which Schiff says hasn’t happened, HA), to the extent that it would have reduced the retail price, I agree. My observation is that changes in productivity are not steady, but happen in different industries to different degrees at different times, which makes relating it to the fairly steady inflation and price inflation difficult.

I think that the world’s accumulation of dollars, not just China’s, has certainly helped our price levels. While the trade deficit is continuing, the decline of the dollar indicates that our price levels will begin to rise as more dollars come back. However, this issue actually does not impact the question of the relation of the growth in the number of dollars within the U.S and consumer prices.

Using the MZM as a general guide, since 1981 we have seen an increase by a factor of 10, or about 8.5% annually! That is a big difference from the price inflation we have seen. Personally, I have not seen that level of price increases. Remember, the MZM figure does not include dollars overseas, dollars wiped out in the stock market and residential real estate, or stuck somewhere.

There are a lot of things that the CPI doesn’t account for in our real lives. I use it as only a close approximation. I think that the best indicator is what is happening within your own context.

Elsewhere I have suggested that for tactical reasons, a jolt of price inflation may be what we need to drive home our point that governmental action has adverse consequences. I now don’t see that happening for a while. Maybe we’ll have to settle for a severe decline in our health care.

Back to the relation of credit expansion and price inflation, my point is merely that our experience over the last 30 years doesn’t show a strong, direct connection between the money supply and price inflation. We have seen other results from inflation that were disasters, like the mess we are in now. We shouldn’t get too focused on one thing. Pumping money into the economy is very bad, and the next mess could be something entirely different.

[Abaco 0]

I have read some grumblings that the gold ETFs may not be able to justify their shares with actual gold reserves. Is this how they are supposed to work? If so...it would be a matter of trust. I own a gold mutual fund and it has done fine.

Just recently I bought my first gold coin - the Australian Kangaroo. It's a beautiful coin. Somebody should mint a John Galt or Rearden Metal gold piece.

[bborg 0]

I recently invested in GLD, although of course I realize this is a very late decision to make. Still, I don't see the price of gold going down anytime soon. When the government starts paying off debt and stops printing up monopoly money, then I'll sell. I have had several mutual funds with American Century since 2003, which have performed pretty well considering the recession, when they all took a serious hit. I did mitigate the damage, but not soon enough. They are recovering well this year, although they still have a long way to go to get back to where they were. Also I'm planning to put money into Apple, which I noticed quickly recovered and is soaring to new highs. No doubt this is because it's such an incredibly productive company.

At first, knowing nothing, I just picked the funds which had the best history and diversified, slowly moving money out of the less profitable into those which were performing better. Anything other than a mutual fund, which is innately diversified, seemed way too risky. But of course if I'd taken more interest in the nature of the things I was investing in, not just graphs, I would have fared much, much better over the last few years. Those people who were smart enough to buy gold in the early 00s have plenty of reason to brag.

[rtg24 0]

Don't forget to ensure your gold ETF is eligible for cap gains tax.

[bborg 0]

Don't forget to ensure your gold ETF is eligible for cap gains tax.

Why's that?

By the way, something I don't understand about the market (but not the only thing) is why everything seems to move in unison. For example, stocks slid this morning and people are blaming this on a drop in housing starts. But what does that have to do with most stocks? They talk about whether the market is "bullish" as if it's some hive mind influenced by a common mood either to invest or sell. Is that really how most investors work, because I always assumed that stock value was related to the market value of the individual company, not to the emotions of people working in Wall Street. One article referred to the market getting the "willies". Huh?

[rtg24 0]

Basically, some precious metals ETFs trade in products considered collectibles, so you get hit with almost twice the tax. Quick google will pull many articles on the matter. I haven't researched it much - not my problem right now! (net worth = negative)

Markets move in pack... plenty of theories about this. If you want to understand a little bit more about the dynamics, read this:

Livermore's Reminiscences of a Stock Operator

which is the best book ever written on "trading" (as opposed to investing, although the two are far more related than Buffett etc. would like you to believe), as said by pretty much every single large hedge fund manager out there.

Short story it's about a hive mind, yes, for many reasons (mainly because evolution made the hive minders survive, and because momentum strategies are lucrative most of the time). But it's extremely complicated. You can often assume that whatever reason is given is a load of bs. Example: imagine the stock's at $100. Loads of institutionals have stop losses that are at around $80 or maybe $70 (you can even assume they are normally distributed around $80 with sd = 5 if you like). Now nobody knows this except for the brokers and the managers in question. So the underlying distribution used to price e.g. options will be a (leptokurtic, log)normal distribution that says the stock has a similar probability to end up at say $80 than say $120. For all we know they're right about $120, but if the stock hits $80 it won't remain there, because the stop losses will be triggered, massive selling will ensure, you get down pressure on the price, and bam suddenly it's at $60 and you're like "aaaah black swan"! The next morning, Jim Cramer tells you some storm off the coast of Japan caused a fishing vessel to capsize, the wife of the dead captain cashed in the life insurance, which cost some exec his bonus, he jumped out of his HK tower, landed on the BMW of the CEO of the company whose stock you were tracking, and the fear caused by the CEO being 5 minutes late to the shareholders' meeting caused the stock price shift.

My point is, don't even try to trade, unless you have access to this kind of info or have a strategy that does not rely on it (and if you were that sophisticated you wouldn't post here, but on trade2win.com or similar). And you have access to this kind of info by having a great network, which, let's face it, you don't, since you didn't work at Goldman and then Bridgewater/SAC/Renaissance. Nor do you have the sophistication to understand the behaviour of the institutionals because you didn't work there or you didn't sell stuff to them, or plain old you're not spending 4 years of your life, 16h a day, trying to make sense of the patterns (from which you can deduce what is really going on).

My other point is, the market is not "irrational" (in the sense that God decides its movement, as a Morgan Stanley guy was telling me the other day). There are perfectly rational forces at work. It's not always "emotions". The study of biases (mental accounting etc.; see James Montier) can be useful, but only to improve your own trading; commissions will eat you and smarter professional traders with better resources will always hunt ahead of you. I'm happy to be proven wrong!

[bborg 0]

Thanks for the comments. Yeah, I don't intend to get into trading, although I've thought a stop loss order might be smart.

Regarding gold coins, I'd love to own some, but isn't it a really bad time to buy unless you intend to sell in the next couple years? This spike in prices isn't just tracking inflation, it's about protection from economic meltdown. I just can't imagine that this can go on past Obama's presidency. I'm thinking about storing some of my savings in coins, but silver seems like the better deal right now for the long term. It didn't experience the spike that gold did, so it's more affordable, but it's doing well. When gold demand goes down, then I'll definitely buy some. 

[rtg24 0]

Gold is a tough one (and I have to run to the financial district right now!) but basically most big hedge funds right now are long gold even at those prices. There are so many underlying reasons for that trade, not just the inflation hedge, that it makes sense. If I have time tonight I'll post up a few good letters on the subject.

[rtg24 0]

Also my personal opinion is that unless you're willing to invest years in studying the market and/or you already have relevant experience that gives you a real edge, you shouldn't "invest" but, as far as managing your wealth is concerned, merely attempt to contain inflation. 5% per annum is enormous, when compounded. Especially compared to 20% x4 followed by -40%.

The doorman of my building got suckered into putting some of his family money into a tech startup. I can't believe the industry sometimes...

[bborg 0]

Also my personal opinion is that unless you're willing to invest years in studying the market and/or you already have relevant experience that gives you a real edge, you shouldn't "invest" but, as far as managing your wealth is concerned, merely attempt to contain inflation. 5% per annum is enormous, when compounded. Especially compared to 20% x4 followed by -40%.

The doorman of my building got suckered into putting some of his family money into a tech startup. I can't believe the industry sometimes...

I think many people who wouldn't ordinarily have any business investing money, myself included, are finding that there is no other way to get even that 5% return under the Fed's policies. All we can do is act on our best knowledge and learn along the way.

[Joss Delage 0]

Wow, gold has lost $42 an ounce so far today!

[Betsy Speicher 0]

Wow, gold has lost $42 an ounce so far today!

It's back! Net out, I'm ahead on my gold about 2% for this week.

[Abaco 0]

Wow, gold has lost $42 an ounce so far today!

It's back! Net out, I'm ahead on my gold about 2% for this week.

Yes. Like you, I just rode over that little pothole. But, it had my attention. There was a good editorial in Marketwatch today regarding people selling off gold for an "escape" back to "more secure" Treasuries. I think the most consistent economic factor in my lifetime has been the decline of the dollar.