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« Free Money Finance March Money Madness, Round 1, Posts 57-60 | Main | More on Retiring Inexpensively Abroad »

February 19, 2010

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Good food for thought. Gold just seems to be in a bubble.

I've mentioned it before, but Peter Schiff's "CrashProof 2.0" is a book worth your time.

Huh. It's kind of disappointing to find a relatively poor article in Kiplinger, and a relatively good one in Yahoo Finance (originating from WSJ). Because, I typically find that it's the other way around. Just goes to show that you have to read everything you see with an open mind and a critical eye, regardless of the source.

The Kiplinger article disappoints me because it's quoting a gold mining trader as a subject matter expert. Right or wrong, they tend to be very bullish about their commodities of choice. Either that, or he is in possession of a genuine crystal ball capable of predicting the future.

You have to understand. I don't believe in precious metal investments either, but I'm OK with it if someone wants to buy and hold a small percentage of it in their passive portfolio.

Hmm. The Yahoo article kind of disappoints me as well. It's true that inflation-protection bonds are "pricey" at this point, but if you are a passive investor that is dollar-cost averaging, valuations doesn't matter to you.

And if you do want to talk about bond valuations, understand that it works differently from stocks. Specifically, the more a lender is in need of capital, the higher they will tend to bump up interest payout in order to attract investor money. It's a vicious spiral for the lender, but if you can handle the risk, it's a boon to us investors. The US government, facing a ballooning budget deficit, is conceptually no different in that respect.

The real reason why bonds are "pricey" right now is because "flight to safety", not because of budget deficits. Sooo, yeah, the WSJ writer shown in Yahoo Finance is wrong about this.

What's also missing in the Yahoo/WSJ article is considering the possibility that our economy can bounce back. It's working under the assumption that we will slip worse and worse at this point.

However, I can't deny that we do have a serious problem with our budget deficit. I fully agree that it needs to be addressed, and very soon, once our economy recovers.

Finally, Peter Schiff is a permabear. I don't discredit someone for being a perma-anything, but... I do wonder sometimes if thing really are that simple and obvious as they make it out to be?

Here's a peculiar example to consider:

http://www.goldstockbull.com/articles/peter-schiff-on-fast-money-calls-2000-gold-in-2009/

In it, you'll see that, in November 2008-- and on a gold bug site no less-- Peter Schiff predicted that in 2009, we will experience hyperinflation, and called for gold $2000/oz.

And for those who don't know, gold did go on a run, but peaked at around $1200, and is currently floating around $1120. What's more, we didn't have inflation, much less hyperinflation. Rather, we had DEflation.

The point is that Peter Schiff, like any other "gurus" out there are only human. They may be smart and they may even have a point. However, they do not have magical powers that can predict the future, no matter how convincing they sound. In the end, we need to be able to sift the signal from the noise, and be able to make the best decisions possible based on what we know, not what somebody THINKS they know.

I'm rambling now. Have a good weekend everyone!

What about TIPS for inflation protection?

George Soros is investing HUGE sums of money in gold.

http://news.bbc.co.uk/2/hi/science/nature/8521680.stm

I used to think gold bugs were/are crackpots, but I wonder if they are right this time.

Mashford, that's arguably the best way to hedge against inflation.

Marc, I am not entirely familiar with Soro's investment/trading style. I think he is a fast, momentum trader (seeing as how he made that famous short bet against the British Pound). As such, unless you are also a fast trader who is not adverse with a little bit of risk (as in a LOT of risk), then I would bother coattailing him.

Even in the article, he is calling gold "the ultimate bubble".

Geez, I need to proofread.

Please do NOT coattail Soros unless you are also a fast trader with a high risk tolerance.

MasterPo wouldn't sell everything and put it into Gold.

But just remember: Nations and currencies come and go, but gold remains.

My understanding is historically Governments have made Gold ownership illegal when they felt it was necessary. This has happened in the past in the U.S. and as recently as in Iraq when Suddam Hussein made possession of Gold punishable by death. Kinda defeats the purpose as a hedge.

I did own Precious Metal Mutual Funds for a long period, but it was so stagnant I sold and bought Real Estate Invest Trust Mutual Fund for diversification purposes instead and am pleased with the results.

Roy - MasterPo has heard this argument before. Anything is possible (and with the current crop of radicals and tyrants in power not surprising if it happens!). But enforcement would be the issue. They may even search your safe deposit box but how would anyone know if you have a pile of gold Eagles in your closet?

Mashford - MasterPo doesn't trust TIPS because the inflation adjustment is too open to politcal whims and fudging. As proof in 2009 the Obama admin said there was no inflation (!) so the SS COLA adjustment for 2010 will be ZERO (only the second or third time in SS history this has happened!) and has already said there will be no inflation in 2010 so is expecting another ZERO COLA for 2011! Can you look MasterPo in the eye and honestly say you think there was ZERO inflation in 2009? And won't be any in 2010 either?!

Now how can the U.S. Treasury give an inflation adjustment to TIPS when the White House has said there is going to be no inflation for 2 years?!

MasterPo, housing prices went down dramatically, gas prices went down significantly, and the food bubble subsided a little bit as well in 2009. For real people buying real things, there was deflation in 2009.

Me looking MasterPo in the eye ..... There was no inflation last year. I don't know what there will be next year and neither does the white house. And they didn't say there would be none. They said they expect there is a good chance there won't be.

And the White House isn't who determines there was no inflation. You think it was popular to give no COLA increases to SS. In fact they called for a 1 time $250 payment to seniors to make up for having no COLA increase (which they shouldn't get). The Hhite House has been handing out money like crazy to anyone and everyone. I assure you they would have liked nothing better than to give a nice COLA adjustment to SS recipients.

The Bureau of Labor Statistics determines the CPI which is what sets COLA adjustments. They have a set of formulas that are used to determine the CPI. Yes from time to time they have made slight adjustments to the formula but no such adjustment was made last year. The formula as used in previous years spit out a negative number. You might not like the formula but it's not determined what what the "White House" thinks it would like it to be. It's not determined by anyone or any group. It's determined by putting known numbers into a known formula.

Just because you can point to some things that went up in price doesn't mean there was overall inflation and betrays your ignorance of the issue.

StL Paster hit all the major reasons for negative CPI in 2009. Food, housing, energy, only about 60-70% of the typical family budget so probably kind of significant for the CPI.

MasterPo is paying more for food, energy, insurance, medical...heck just about anything!!

Is there a house for sale cheap where you leave?

(And a bridge too?)

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