With gold getting sold off significantly now is a good time to take a look at gold and real values.
One of the most amusing things about investing to me has been the flight to gold. Most people who own gold tend to consider it a storehouse of value when inflation heats up or when the government collapses. These same people also tend to be big buyers of US Treasuries too. Does not make sense does it? The late great Louis Rukeyser used to have a pet name for gold traders and buyers calling them "gold bugs". His purpose was to point out how people who are attached to gold as an investment are like bugs attracted to sweet or light. No matter what happens, no matter what evidence arises gold to them is just that gold. Sorta reminds me of Ron Paul followers:)
One other thought and if you get nothing out of this posting take this thought and ponder for awhile. People tend to be emotional buyers and sellers and therefore flock to buy stocks and commodities like gold and silver when prices are going up, of course it is at that point they are the most expensive. Usually they tend to sell them later when they have gone down in price or either hold them praying for something to save them by pushing up the price again. Bonds buyers are similar, they tend to flock to buy bonds when fear is in the air then see their principal erode when inflation heats up either via having to sell the bond at a loss or hold them when everyone else is buying bonds with coupons much higher. Therefore bond buyers now are buying EXPENSIVE bonds. Expensive bonds are bonds with low rates of return. Obviously the correct purchasing decision is the other way, buy bonds when coupons are high and hold on until times are bad and sell with a nice capital gain. You win on both ends.
I can see the attraction to gold on the assumption that currency becomes less valuable gold goes up in price and offsets any loses in value. If the government collapses you still got gold that will hold whatever wealth you might have. The problem I have is that if the government collapses who, if anyone, is going to pay you for your gold. Where would you sell it, what would you sell it for? Frankly in a situation like that you are better off owning farmland or a nice homes to live in as a storehouse of value. The only way, in my opinion, that gold holds value is if the government does not collapse. Then you can use your gold holdings as value against currency value declines and sell it as needed since there will be someone to sell it to. Even then it does not pay a dividend and since it is an emotional buy you can see days like the last couple where the bubble bursts and the price falls rapidly.
I own copper mine stocks as my hedge against inflation. Same lack of supply and absolutely essential to modern society to operate with all the new technology. Try building something like a cellphone or computer without copper and you can not do it. Gold does have uses, but beyond a few like places where guaranteed connection without corrosion it is not an essential metal. Yes, we use it in jewelry and such, but again these are non essential purposes. Oil also has some inflation protection value. However there is always the risk that if supply gets constrained too much by silly government and environmental regulations the politicians will give in to voters and regulations will be reduced. There are also huge deposits of oil out there just waiting to be tapped and once tapped oil prices will come down quickly.
My personal preference for inflation protection is good old common dividend paying stocks. Ownership in a corporation. When inflation heats up companies can raise prices and not lose a single dollar of profit in their business. In fact if profits are a percentage of price then you actually will benefit from inflation since companies just raise the price of their goods to offset inflation costs in their expense of operations. You also will get inflation protection from rising dividend income if inflation heats up. Finally if government collapses US Treasuries could be frankly worthless. On the other hand you stand a better chance of having something of value in owning a share of a corporation in this scenario, even if that chance is quite small. Now selection of stocks are essential as if you own something not absolutely needed by consumers when things turn bad consumers can stop buying your product. However look at what people do not give up in times like right now. Telecom, electricity, gasoline, medical supplies, and yes cigarettes. So safe investments can be found in these stocks for bad times. You can also find some select commercial real estate as well. Lastly and most importantly when markets are in a tailspin, solid dividend stocks have a floor in their price where people consider there is bottom level value due to the dividend. You will note the vast majority of holdings in the STI Hedge Fund is in precisely these common stocks. In late spring I began exiting positions that did not meet these criteria and will finish it off at year end 2012 with a selling of more I do not expect will perform long term in the current environment.
So reconsider your holdings here and maybe include good dividend paying stocks as part of your portfolio.
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