Gold, Congressman Anthony Weiner, Glenn Beck and You


No doubt that you have seen ads or heard ads in the media touting GOLD!! What should you do? Are you missing something?
Congressman Anthony Weiner(D-NY), and media personality Glenn Beck have gotten into a big tiff over GOLD.  Of course, the world situation, the fiscal policies of virtually all governments, fan the flames.  It pays to look at some facts when analyzing this, and to decide if you should buy gold.

First, Congressman Weiner has posted some analysis at his website here.  Weiner is a very liberal Democrat Socialist. He has picked a fight with Beck because he dislikes Beck, and he dislikes Fox News.  His beef is with the company, Goldline, that does a lot of advertising on Fox.  Beck apparently touted gold on his show. Weiner thought that he crossed a line.  It is possible that Beck did cross an ethical line.  However, here is where Congressman Weiner’s argument breaks down.  The Congressman is very upset over the price mark up that Goldline charges its customers.  He is out of line on that point.  Does the Congressman pay 100% mark up when he orders a bottle of wine at a restaurant?  He might even be paying more than that.  Does the Congressman pay a 100% mark up when he buys an article of clothing?  Probably.  The government should not tell businesses what to charge on freely traded goods.

In addition, the Congressman uses some colorful language to illustrate what Goldline is doing.  He calls the ads high pressure.  They are television ads.  Consumers have the choice of whether to buy or not.  They also can buy from someone other than Goldline.  No one has a monopoly on the gold supply.

However, the Congressman has done a very good job of presenting a chart of different types of coins and what the price is.  Goldline happens to have a 90% mark up.  Other suppliers have different mark ups.  It’s a competitive market and if you desire GOLD, it pays to shop.

On the other hand, there is Glenn Beck.  He is an entertainer.  He is a opinion maker on the right wing, some would say far right wing.  He doesn’t like any of the Obama policies, and can make some very persuasive arguments as to why they are bad.  Certainly, some of Beck’s arguments have some basis in economics.

Look at Beck’s argument regarding the dollar and gold.   Beck makes the argument that extreme deficit spending by Obama, all the programs like Obamacare, and the continuation of things like the Bush bail out, the GM bail out, the pension bail out, and so on, will cause inflation in the US.  He is probably correct in the long term.  If the US economy doesn’t grow quickly enough to support all the government spending, the Federal Reserve will have to inflate.  In the short term, we haven’t seen inflation but a continuation of deflation.

There is a dual path of the gold supply.  There is a gold supply in the ground(GIG), and there is a gold supply above ground (GAG)in the form of jewelry and other goods. In the past year, the amount of gold available to dealers from the GAG has increased significantly.  Miners have decreased the amount of gold they are taking out of the ground.  This has lead to less decrease in supply, and puts upward pressure on price.

On the demand side, demand for gold has been up, but lately demand for gold has slipped.  Demand increased from Americans looking for an inflation hedge. The increased wealth of the BRIC countries increased demand for gold there.  Additionally, now that there are inflationary pressures and instability in Europe, demand has risen on the continent.  Increased demand puts upward pressure on price.  But with the consumer unemployment problems world wide, demand for gold has dropped.  You can’t eat gold.

Let’s look at some facts and numbers.  First of all, if you buy gold coins, you pay a big mark up.  Goldline’s is 90%.  That means that you are already behind the eight ball on your investment and are relying on gold to rally significantly to break even.  If you went to the COMEX and bought futures, took delivery, you might be money ahead.  But, you have to pay to store the gold properly.  This cost eats into your return.  You could take some risk and store the gold in your home, but what happens if someone breaks in?  The tax implications of owning gold are not quite as good either.  In 2011, you will pay 23.9% capital gains on stocks, and 28% on any increase in the value of your gold.  Only 4.1%, but it’s an extra return you have to get with gold that you don’t have to get with stocks or bonds.

Return on investment for Gold has looked really really appealing since September of 2001. 9/11 caused a spike in gold value.  While the price has gone up and down, it’s mostly been up since 9/11.  Why?  Gold’s value is related to the value of the dollar, and since the value of the dollar has dropped since 9/11, gold has gone up.  Plus the regular supply/demand relationship for gold over that time has pushed up prices.  Gold today (5-24-2010) settled at $1185.80 for 100 troy ounces.  On September 11, 2001, the price was $287.oo for 100 troy ounces.  312% ROI is outstanding in any book.  The price is very volatile.  Keep in mind, if you bought the highest price you could for gold during the inflation of the late 1970′s, you still would not be breaking even at today’s prices adjusted for inflation.

What about the future?  Will the dollar continue is descent against other currencies?  I am betting that it doesn’t.  Other governments are faced with the same choices as the US; grow or inflate. Their economies are not as strong as ours.  Countries such as Canada might see their currency appreciate because they are rich in commodities.  What about supply?  If the price starts to drop, there will be less incentive to turn your jewelry into cash.  Or, there may be a flood of jewelry that wants to be turned into cash-no one wanting to miss the existing high price.  If prices continue to stay high, mining activity should increase to sell at that price.  There is little guarantee that gold appreciates in value at the same rate it has for the last ten years.

Let’s assume that the world as we know it goes to hell in a hand basket.  How are you going to safely transport your gold?  How are you going to shave off a piece of that ingot for trade?  How is anyone going to make change for your gold coin?  Surely you will be ripped off.  In the case of world armageddon, you’d be better off investing in your farming skills rather than a piece of metal.  Trade in and out of gold according to fundamentals.  You might even buy a Gold ETF or an emini Gold contract at CME.  But, there is a good reason that Milton Friedman advocated the end of the gold standard.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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