Jane Bryant Quinn Hates Gold Investing

Here's an interesting piece on investing in gold where the author (famed personal finance writer Jane Bryant Quinn) says there's no reason to invest in physical gold (coins, bars, etc.). A summary:

Owning 20 or 30 coins is nice but won't protect your standard of living in a world where dollars are dust. Gold isn't even a reliable hedge against inflation. It reached $850 an ounce in January 1980, a price not seen again until January 2008. During those intervening 28 years, gold plunged and reared but lost more than half of its purchasing power. For a 1980 investor to break even after inflation, gold would have to reach $2,200. It might, but how long did you plan to wait?

Ok, so you can't buy enough of it to protect you in case of a collapse and it doesn't outpace inflation -- so what's the use of buying physical coins? Her point exactly!

Now she does offer some alternatives to buying physical gold including the following:

A cheaper way of buying gold is through an exchange traded fund. The most widely traded fund, SPDR Gold Shares, costs 0.4 percent a year in fees, plus your brokerage commission. You don't own the gold directly. A trust holds large gold bars (warehoused principally in London) and sells shares against them, which are traded on the open market.

It costs even less to buy bullion in a pool account, such as the ones offered by Kitco. Like an ETF, a pool account sells shares in a large bar of warehoused gold. You pay just a hair over the spot gold price, and sell it back to Kitco for just a hair under. There are no annual expenses. For a fee, you can redeem in gold itself. As with ETFs, you depend on the pool's trustee to support its guarantee.

Then again, she doesn't detail why buying these are or aren't a good investment -- she just tells us about them. This leads me to believe she's not a big fan of investing in gold no matter where or how you buy it.

Finally, she lists a couple tax-related issues associated with gold that I found interesting:

• Dealers have to report to the Internal Revenue Service if you sell 25 or more Maples or Krugerrands. They're not required to report your sales of American Eagles and some other coins, although some may do so.

• Gold, by the way, is taxed as a collectible -- whether you buy it in the form of coins, ETF shares or an interest in a pool account. Your tax rate on long-term capital gains would be 28 percent, compared with 15 percent on other assets. Only a significant price gain (or currency collapse) redeems your bet.

Yikes! That last one is a killer!

Anyone out there have any sizeable amounts of gold? How are you holding it (physical, ETF, pool account)? Why?

Comments

[rwh]

I have several gold crowns in my mouth.

[Apex]

You can't eat it.
You can't live in it.
You can't produce anything particularily useful with it.

U.S. money is no longer backed by it.
Fort Knox no longer holds any significant amount of it.

If times get really tough and money becomes worth very little, who is going to buy my gold from me and why would want they do so?

Why on earth would I want to own gold?

[Tim]

@Apex, I agree with you completely. Buying gold or trading gold shares are based on antiquated notions of gold, all of which disappeared with the end of the gold standard. Since the peak in 1980, the gold band has been $300-$500. Ride the shares while it is high now, but it will quickly and precipitously fall within that band again. There is no fundamental justification other than hype about hedge against inflation that is propping up the price. There isn't a sudden shortage in the gold market for gold use that justified the price.

water is a better end of the world commodity than gold.

[ekrabs]

There seems to be a swing of extremes between this post and the last one.

I personally don't care for gold, even in ETF form, but I wouldn't go so far as to say that it's a poor hedge against inflation.

I think gold will still remain viable as a hedge if only for the same reasons as to why our civilization assigned value to gold in the first place: It's a stable element that is finite and can not be faked (under scientific scrutiny).

That said, there's an perplexing phenomenon happening in the commodity world: Traders are no longer holding commodities, even precious metal ETFs. Why is that? Usually, precious metal ETFs have an inverse beta, but despite even PowerShare substantially increasing the ounces of precious metal into the fund, prices overall have continued to drop!

This is just my pet theory, but I think investors, big and small alike, are pulling out of the market completely, and is either bunkering their money under their mattresss so to speak, or they're investing it abroad. Whatever it is, the flight from the equities, even commodities ETF is undeniable.

[Kevin @ The Money Hawk]

Add me to the list of people who hates gold investing.

Like Apex said, if the world collapses, people aren't going to be trading gold. Look at Hurricane Katrina. Who was going to be buying up gold in that market? People wanted food and water, not precious metals. Gold is a luxury, not a resource. In tough times, it's resources that will inherit the most worth, not luxuries.

[Foobarista]

Gold isn't an "investment" - it's a parking place. It basically acts like a currency play.

[Financial Fellow]

I agree with most sentiments expressed by the anti-gold crowd. What I think is getting lost in all this is the fact that people flee the dollar and move into gold because the dollar is weak and offers meager returns. I have to admit that long term I am very bearish on the dollar. The government and American consumers keep on taking on more debt, the government is priting more money, and whenever times get tough the FED drops interest rates to the floor. I have little faith in the government's ability to keep the dollar strong (actually it hasn't been "strong" in a while - so I'll just say keep it from getting weaker)...

[Shaun Connell]

Yes, gold is only for someone who:
a) Thinks the economy is going to collapse, and
b) Can buy enough to make it worthwhile

However, a little gold when the price drops can't be too bad of an investment. It's just about picking it at the right time -- dirt cheap.

[Rod Ferguson]

I've already talked about gold in the last thread, so I will not repeat myself here. I do have a couple of things to say to the folks who ask "who will take gold if the end of the world comes?"

1) Owning precious metals is a hedge against bad times, not against armageddon. Yes, if we devolve into a loosely based society of peasants being terrorized by mutant zombies riding souped-up motorcycles, then gold isn't worth much. Personally, I think people who believe that we, as a species, could ever get to that point had better stop smoking whatever it is they are smoking. It is likely, however, that nations will socially and economically collapse; it's happened before and will certainly happen again.

2) We'll use whatever form of money our trading partners will accept. Historically, that means PMs when fiat collapses. Could we switch instead to a global currency that all regional currencies are tied to? Sure. Which is why you shouldn't hold but a small percentage of PMs and balance that out with pure paper plays like equities and bonds. But, to think that it is impossible that PMs will be used as money in some form at some point is being woefully ignorant of history.

Gold or other PMs aren't the Excalibur of financial assets, regardless of what some analysts will tell you. But, they do (or should) hold a place in any person's porfolio - for their lack of counterparty risk, if anything.

[GLM]

We own a small % of our portfolio in a gold ETF. )is held in a Roth account to avoid the high tax liability.

[Mike Hunt]

Ask Iceland citizens now how they would feel about keeping their Krona's (pre-crash) in gold vs Kronas? Now they can't buy imported goods with their Kronas... I'm sure the people selling would take gold though!

The US National debt is going up by a trillion dollars every couple of weeks now... although most of it is being put down as debt some will be monetized. After this disinflation there may be an abundance of dollars.

Gold is but one hedge in this environment.

-Mike