How does investing in gold work?

More specifically, why does it work and how does it happen?

I suppose my biggest question is if gold is such a secure investment, then why are companies selling it rather then hoarding? It also occurs to me that in order to turn a profit* a company would need to either sell it's gold at above market value, or buy at below market value, and doesn't all of that buying and selling create a false demand and inflate the price of gold?

These are honest questions, I know a lot of people swear by it, but to me it feels like a scam and I would like to know more.

* edit: to turn a consistant profit. I understand that they could buy into gold all at once and then dump all at once to profit off of the increased value. However if they are selling off gold to gain capital with which to invest in more gold then they should only be able to buy the exact same ammount of gold which they just sold off if they are buying and selling at market value.

 

Here you go.

 

It is a fear mongering scam, note that mostly the FOX network is peddling it mostly for their sponsors.

They created a bubble for gold and the only people making money from it are the ones selling it now to those who believe in the failure of currency.

 

That's the humor of it. Gold mongers whip up interest in gold based on predictions of hyperinflation and monetary collapse that never come true, then they sell to weakminded and naive investors who actually think gold is somehow magical, when all it is is another commodity, subject to ups and down like any other commodity.

The gold scammers also play on the heady sense that the buyers is participating in "secret knowledge" --- something that only the scammer, and now the investor know (like imminent collapse of the dollar). It fuels the conspiratorial mentality of most gold bugs.

Nevermind that they post this secret knowledge on the internet and everybody presumably has accesss to it. It's a sad naive unempirical way to view the world. That's why most gold bugs are conservative/Tea Party types. They can't think straight.

 

Some people obtain physical gold as a hedge against monetary inflation and economic uncertainty. I think it's wise to have at least some physical gold and silver on hand. You never know what's going to happen in the future. Like the old adage goes, it's better to have it and not need it, than to need it and not have it.

Some people just use gold for purely speculative purposes. This can be accomplished in any number of ways, either by buying and selling physical gold, or by speculating on financial instruments tied to the value of gold, whether its futures, ETFs, or stocks.

Why does it happen? For the same reason people invest in anything.

A scam? I'm not sure what you mean by that. It's the same as investing in any other commodity or security.

 

There are one of two things that you want to do with gold:

1. Use it to manufacture cell phones or jewelry

2. Speculate on the price and sell it to someone in the future, hopefully when the price has gone up



Why does the price go up? Because people speculated on it, bought it, increased demand and as we know, if demand goes up, people are willing to pay a higher price etc.


"Wait- hold on- why are people speculating on it?" You say

Because they heard of this thing in the good old days called the gold standard and they think that the only way to solve the great depression junior and the *out of control inflation* that we are apparently suffering from (according to liars), is to go back on that gold standard.

OR SOMETHING. Speculators don't know what they are doing, basically.

The problem is that the price actually does go up when people buy it.

The same thing would happen if there was some irrational idea that we would go onto a "cotton standard" or if everyone knew that there would be a sudden burst of speculative investment in cotton.

 

That is more or less exactly what I was thinking, just wanted to be sure I wasn't missing something.

 

Is gold really going up or is the dollar doing down?

Gold is NOT your everyday ordinary commodity. It has 6,000 years of history as being used as money. It was/is/will continue to be money as paper currencies are not a new nor original idea and always die via hyperinflation.

Debasing one's currency has been a practice for as long as there were governments. Some of the best examples include the Roman Empire and Weimar Republic (Germany Pre-Hitler, 1920's). Both countries sought a way to pay for their massive war/public debts (for Germany it was due to the awful terms of the Treaty of Versailles). But in order for the debasing to occur the country had to detach their currency from gold/silver. In Germany they abandoned the Gold Mark, and in Rome they slowly decreased the silver content of their coins until it was almost zero.

Even though they eventually paid their debts with debased currency - the end result was the destruction of their economy and their countries.

You may be surprised to learn that paper currency is not even a new idea in the US. It has been tried twice before - 1) The 'Continental' which was used to fund the Revolutionary War effort. It died of hyperinflation. 2) The original 'Greenback' created by Lincoln during the Civil War to fund the North's efforts. It also experienced hyperinflation before returning to gold.

There are no logical arguments that I am aware of to convincingly tell me that this time will be different. That the fact the dollar has lost 98% of its value since 1913 - the fact that we'll soon be breaching 15 trillion in debt - the fact that the US has no real plans to ever stop producing a deficit....all of these things tell me that Gold will continue to grow with - not only its nominal value in dollars, but also its real value in purchasing power as more people leave the ponzi scheme that is the Federal Reserve Note.

To answer the OP's question - Gold isn't so much an investment, it's an insurance policy on the dollar (or whatever your local currency is). You didn't ask but this is why I buy gold...

I buy gold because it is my savings account. One that I know will not have its value stolen from me via inflation. A 20$ gold eagle bought a top of the line custom tailored suit in 1913, and a 20$ gold eagle will still buy you a top of the line suit in 2011. A $20 paper bill though would barely buy you lunch for 2 today.

Eventually when I have saved enough I will convert my gold in to a producer of value, mainly land, simply because of it's utility - but there are many things you could trade gold for....education, start a new business, start a fund for children/grandchildren etc.

If you want to speculate - play in the paper markets (GLD/SLV etc). If you want long haul wealth protection....pay the premium and take delivery of physical.

P.S. Sorry for the long first post!

 

My understanding has always been that collector's coins, such as the "double eagle" $20 coin are a common gold investor pitfall. I don't know what an ounce of gold is valued at, but isn't a lot of the double eagle's hefty price tag collector's value? Making it cost much more then it's actual value. A quick google search and click on the first link to pop up found one on Ebay for better then $6k for less then an ounce of gold.

 

You wait until say about now when the already overpriced commodity has been driven up beyond all logical explanation by hoards of excited investors into what might be the second largest bubble in modern history* while ignoring advice that the true value of gold is its cost of production plus a reasonable profit.

So now that you're in near or at the apex of the bubble the really big investors will sell leaving you with a very expensive albeit effective paperweight. Btw gold has no cash-flow like many other investments so you've also missed out on quarterly dividends.

*Biggest bubble being derivatives so don't sell your gold and buy some of those.

 

There are definitely collectors versions of many coins. The gold eagles I am referring to typically cost 60-100$ over spot price. I buy my bullion from APMEX - head on over there (very nice layout) and you can see what I mean.

Most coins go for 3-5% premium over the spot price (gold and silver). Use that as a rule of thumb to see if you are getting a good deal. Do not buy numismatic coins which is what you were referring to above - unless you are buying as a collector's item, it's a ripe off.

As I type this gold spot price is $1845/oz, silver is $42.05/oz. If you can't afford 1oz coins, you can try smaller amounts 1/4, 1/10oz coins etc. But those have a higher premium per oz.

 

For the record...

...on May 3, 1999...

the DOW closed at 11,014.70.

Gold was at about $285.

http://en.wikipedia.org/wiki/Closing...strial_Average

http://www.usagold.com/reference/prices/1999.html


And where are they today?

The Dow is right now at 11.240.30

Gold is right now at $1885.00

http://www.bloomberg.com/


So, in those 11 years and almost 4 months - the DOW has gone up about 2%.

But if you put it into gold - your money has gone up over 660%...a 12 year average return of over 55% per year.

 

I'm sure this trend will continue for some non-zero time period into the future. Therefore, gold is the greatest investment opportunity that ever existed! Just like houses in 2007!


When people talk about how great of an idea it is to buy gold, the one I heard on my borrowed car's right wing radio station was heavily invested in gold himself.

That spokesman will sell his gold before the bubble bursts. You, puny little individual who does not read the commodity market news every hour, might not. It most certainly is a bubble and will crash and we will not go onto a gold standard or any silly thing.

Also the dollar is not even decreasing in value relative to other currencies.

 

Where exactly did I say any of that in my post?

I simply pointed out the facts.

Ummm...yes it is...

the dollar index:



http://www.bloomberg.com/apps/quote?ticker=DXY:IND

 

Well, the fact that it is always only a silly and horrible bubble, based only on the idea that "other people will speculate more stupidly than I will" is what I was describing there. You can make a killing this market, but you'd be evil.

Yeah it is I was just being a liberal.

Also, if the dollar is worth less, this will stimulate exports, which is something that we need to happen. It will also discourage imports, which is probably good for a while during a recession. If we buy domestic goods, the cost of a dollar in euros is irrelevant.

The graph you have there probably includes cheating countries like china, whose currency values aren't really .... real... They certainly do matter, but monetary policy is not what is causing china to re-evaluate it's lazy and inaccurate currency valuation scheme ("peg it to the dollar"? how is this a plan? they are changing this)

Whatever. Dollar going down is a good thing.

Don't buy gold because you think it will save you from the apocalypse. If you do, then you are one of the sad sacks that is being taken advantage of by gold speculators.

If you're a gold speculator, I hope you sleep in late one day to find your silly investment got re-valued down to where it belongs and you couldn't sell it before all the poor people beat you to it. Ha!

DA60 is probably right though, it is a very good investment that has shown profitable growth and whatever he said is probably right.

 

Actually, the U.S. trade deficit in June (the latest figures) was the highest it has been since October 2008.

http://www.census.gov/foreign-trade/balance/c0004.html

 

Well... its a long term thing.

 

Economus, you'd actually have a leg to stand on if you could point to one...just one, fiat currency that has not died via hyperinflation.

Are you educated in the history of 1920's Germany? Do you see the parallels to today's US economy/government?

If you aren't and you don't, I suggest reading "When Money Dies." It may open your eyes to see what's really going on.

 

If you can get bullion it would be ideal.
You can also go through a broker or invesment fund, but you will pay commission and taxes weather you profit or not.

But, only a fool would buy gold at the price it is today. Last month gold passed platnum in price per OZ. Platnum is a rarer metal and is worth way more than gold. Silver is a great metal to invest in at this time because it has a lot of room to grow.

In the old days when metals were used as currency gold was a safe investment. But in todays global economy, and with price of gold being only traded virtually online, gold is not a great investment. Also, if you try to buy bullion in common forms (bullion coins, plates, bars, etc), you coulde get ripped off being that counterfit profit is high.

If this were the 1800s gold would be a great investment, but with only a selected few jewish controllers of gold, your gold investment will be at greater risk.

A better investment in the USA IMO is real estate, it is real and you can touch it when the gold market drops off.

But if you are a conservative or t-bagger, invest in IRAs, 401k, and insurance, as that industry is not regulated by the federal government, so your investment should be safe, right?

 

Real estate? Maybe in the LONG term..but certainly not (imo) in the short to medium term.

Real estate is going to need a growing economy and probably a lower unemployment rate to significantly grow.

And I see ZIP signs that the economy/employment situation is going to turn around anytime soon.

And as long as that is the case - gold/silver are going to FAR out preform real estate, imo (outside of possibly agricultural land).


BTW - you say one would be a fool to buy gold at today's price? Does that mean you think it will correct soon? Or just that you think it will not do as well as silver/platinum?

 

Well Real estate for investment in the short term is greater than gold because if you choose the area right, you can make bank on renting out flips if you put a large down I mean real large. Also, some areas that are stable will have great buys on short sales and forclosures that go for under $50K. With people struggling to get a rental with bad credit you can conjure up solid lease document to protect your investment, hold them accountable, and they will pay for all the added costs.

Think about doing a $50k investment on a short-sale paid in full, You own it and rent it out for $850 a month, no investment of $50k will give you that kind of return. And the best part is with that income, you market investment will continue to pull in profit even if the price of the property goes down a little more. At these 1990 home prices, it can't go down much more. In some areas of the nation, like Detroit, they are giving away homes for under $10K.

The broadcast media hypes the idea that there needs to be more jobs and growth before the market turns around. Fact is, the market is doing just fine, and the economy is not. Yyou and I know there is no room for the USA to grow in production and capitalist opportunity. We are just simply Petered out on job creation/innovation, and we are tapped out on capitalism as there is just too much overhead for what already exists.

IMO, if you follow the history of Platnun and gold, platnum was always two to 3 times worth the value of gold, even when gold was high. This is indication that the price of gold is nearing its peak, and it would be safer to invest in platnum because if the price of metals goes down, gold will fall more in value than platnum (3x more). In fact as we speak, people are dumping gold for profit and going with the more valuble investment metal. By the time the broadcast media shows the shift it will be too late to make the shift. Also, silver has a lot of room to grow if you can find it in bulk (storage/security is the only problem).

But then again, the metal market is just smoke and mirrors, if you do not have solid gold in you hands, than you are at risk of any other virtual investment that relies on digital data to prove it's worth. In fact, if you look at the global economy, gold is not highly valued and would not be worth much if ther was a need to use it as a currency. Why, because this is the 21st century, and nations print currency. Buing into the idea that gold is somehow safe is just an old jewstail for the old ways of gold and diamond merchants. It will only be valuable to the merchants who trade it.

Bottom line is, if you are a serious intelligent investor, the broadcast media is last thing you want to follow. They are always too late and a dollar short. You want profit you need to evaluate all factors of the investment market you are investing in, and just use common sense and factor in politics, and who has real control of the investments you are speculating on. Because the ads and the media will decive you.

Don't fall into the propaganda of marketing and ads.

No this is not Suzie Orman. Good luck with your investments.

 

While I agree 100% that one should never listen to the mass media for much of anything - let alone investment advice.

I have to disagree with you here.

I used to be a landlord and you and I both know that if you are getting $850 in rent - you do not end up with $850 in your pocket. There are land taxes, insurance, repairs/improvements and having a 0% vacancy rate at full rent is not always likely.

But let's say you do get $10K a year from a 50K investment? That is very good.
But both gold and silver have far outperformed that (49% and 119% over the last 12 months, repectively). Plus you can sell both almost immediately (depending on how you are holding them) and there is none of the hassles you get from being a home owner/landlord.

So until interest rates start to rise - I think gold/silver are far better short/medium term investment options then real estate.

As for long term?
Well, I highly doubt I will have much gold or silver in 5 years.
Plus, real estate does not seem to have that much farther that it could go down.

I just am not thinking that far ahead right now as I personally believe America is in for an extremely volatile next 5, 10, 15 years or so.

I don't know much about platinum.

But I do know that in the last year it has gone up about 22%. And in the last five years about 49%.

Whereas gold in that time has gone up about 49% and 199%, respectively.

And silver about 119% and 232% respectively.


http://platinumprice.org/platinum-price-history.html

http://www.goldprice.org/gold-price-history.html

http://silverprice.org/silver-price-history.html


But, that does not mean it could not rocket ahead.

And it certainly does not seem like a bad investment...though it REALLY took a bath during the commodities hit of 2008. It went from $2200 down to $774 in about 6 months...so it is obviously EXTREMELY volatile.

And it is still below it's relatively recent peak - which is good.


We shall see.


BTW - as long as interest rates remain so low, I do not think gold is oversold.

AND BTW - I AM NO EXPERT.

 

I want to describe to you the quality of a book I just read, a Pulitzer Prize winner called "Lord of Finance" I highly recommend.

In this book, we see how Germany was blasted with reparation payments that are way out proportion in regards to what their economy should be expected to provide.

Did you just try to tell me that post ww1 Germany is our most appropriate example of a fiat currency?

America has had a fiat currency every since the outsider revolutionary JM Keynes, after years of being ignored, finally showed everyone that we need TO LEAVE THE GOLD STANDARD

JM KEYNES IS MY HERO

MY SUPERHERO. HE IS THE OUTSIDER JUST LIKE EINSTEIN WAS. Just as heroic, even today.

 

DA60, you have a different investment strategy than I do. It appears you are seeking to just put money in and pull money ot for profit. I onthe other hand look at an income investment which is good for making money in the short, mid and long term.

I also like to follow/observe the market and predict the market based on many factors, and buy in low. Whith gold being has high as it is now, I would never buy into the metals market. If I had gold I would sell because the price is high. And if I had $50k worth of gold I would be selling now. To buy into the gold market would be like buying realestate in 2006 because everyone says the price has just gone up more and more each year with no end in sight. We all know how that turned out and today, I try to stop from shaking my head when someone tells me they bought their home in 2005 or 2006.

As far as real estate goes, there are cost factors included in the investmet of renting. But those cost's can be factored into the rent. Hence more income. way more each month than from a $50k gold investment today. Gold will not pay anything unless you sell, and gold would need to go up +$400 to +$500 to make a 20% profit. In other words gold will need to be at about $2300 to $2400 per oz. and that is virtual if you are going through a broker, where brokerage fees and conversion fees will be applied. So the take would be about 2-3% less depending on the fees. Also, the risk of gold investment is high due to the volitle market being uncertain.

If you own $50k of real estate you make income of about $10K per year, but you will continue to make steady profit even with market change, because someone is going to need shelter. And with the income you can save up for repairs and times of zero vacancy. Best of all if the price of real estate goes up (which it may someday) you also have a investment asset that will grow in value.

Just think if you owned outright 3 of these $50K homes, rent at $850 is on the low end some let rent for $1k per month. That would be about $25K net after Stae, fed, and property taxes and other insurance cost per year. However, it may be a part time job keeping up with 3 properties. No other investment can bring in that kind of income in the short, mid and long term.

Again, buy low, sell high that's my motto. If you are thinking of buying gold now, you are about 3 years too late. Don't miss out on the real estate market opportunity while the price is low.

 

You do realize that gold has been going up for 12 years and has gained over 660% in that time?

http://www.goldprice.org/gold-price-history.html

The last time I bought gold was in early April. Since then, it has gone up 27%.

I would hardly call that too late.

Gold has been going up for 12 years because America has turned to debt/cheap money to finance it's economic expansion. That has created inflationary concerns and monetary instability.

So long as those factors are present - gold should continue to rise.

And since Bernanke recently came out and said interest rates will remain low until at least 2013 - that means these inflationary/monetary concerns should remain at least until then.

Gold is not going up primarily because of speculators, imo.

Gold is going up primarily because people have nowhere else to put their money, imo.

Real estate has fallen for years, the DOW has gone up 200 points since May '99, 10 year T-bills are now returning less then 2%, savings rates are near zero and even the dollar is not the safe haven it once was.


You say sell gold now?

We shall see.

Today it is at 1882.33.