Tuesday, April 16, 2013

Gold Got Crushed

Gold got crushed this past week dropping to $1386/troy ounce today versus $1586 on Wednesday and a high of $1693 this year.  What does that mean?  Should I sell all of my holdings?  Should I buy more?

In a nutshell the gold bugs are uneasy and Goldenfreude (the delight in gold bugs’ collective pain) is up to 11.  Gold has gone down.  It could go all the way to $35/ounce or could recover back up its record high of $1900 or higher.

In 1934 the value of gold went from $20.67/ounce to $35/ounce and remained the gold standard until 1970 when the US dollar was no longer backed by gold.  The price quickly climbed to $615/ounce in 1980.  The price than languished to around $300/ounce for the next two decades before climbing to its current price point.

As it has been discussed before, gold is not an investment.  It is a store of wealth.  Ritholtz put it best “Gold is not, and can never be, an investment.  It has no true intrinsic value, no cash flow, no earnings, no coupon, no yield.”  Commodities in general have intrinsic value, you can eat corn, wheat and orange juice or generate power with oil and natural gas.  Gold has no intrinsic value, however it has been a store of wealth longer than fiat currencies including the British pound, Japanese Yen, US Dollar and Euro.

Macroeconomic factors affect the price of gold.  Some advocate that a percentage of one’s assets be in commodities for the sake of diversification.  My perspective is slightly different.  I just like it.  I don’t plan on changing my holdings because of the price changes.  If I have the means, I would like to continue to buy a couple of ounces per year.

As an investment, I would rather trust the S&P 500.  As a store of wealth, I would rather have vaults of gold around the world rather than shares in an S&P 500 Index fund.

Over the past 5 decades a 400 ounce bar of gold could buy you a house in the United States.  I expect that trend to continue.

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