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July 29, 2010


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Hmm, I'm afraid I do not agree with your definition of speculation because, regardless of what kind of investor or trader you are, everybody invests somehow in the hopes that their portfolio will grow over time.

Rather, speculation is a timing. That is, you think it's low right now and it's going to go higher in the future. So, you buy now with the plan sell later. That's speculation. It doesn't matter if it actually does go higher later. That's the risk of speculation, but not speculation in and of itself.

This is important because there are also people who view gold as a stabilizer in their portfolio, and as such, there are people who do buy gold passively, through dollar-cost averaging. In this case, it is NOT speculation, because no timing is involved. Otherwise, gold speculations is indeed more volatile than even the stock market in general.

Buying gold mining companies is an interesting twist to the gold bug theme though. They are typically available through certain ETFs and yes, they do pay a dividend (although it's typically a very small yield and actually should not be considered from a valuations perspective).

If you're looking for stable commodities company that pays dividends, I personally prefer power companies (DUK), or better yet, waste management (WM). These are the things that all contemporary civilizations need, minus the controversy over gold. Of course, dividend stocks also come with their own set of risks as well, so it's important to analyze your portfolio and investment preferences before buying.

You need to screen your guests a little more carefully; granted you're obviously far from an expert on these matters, but statements like the following are just laughable and easily disproved:

"Gold mining stocks are a safer way to indirectly invest in gold than physical gold bullion."

Some quick things that are missed-

you are exposed to company management risk.
hedging risk.
S,G and A risks- operations.
fraud risk- "enron, a great way to invest in oil"
valuation risk.
Regional/political risk (where are the mines?)
You dont own gold, you own a company.
Many gold stocks have underperformed the physical gold price.
Financial leverage risk/ firms wacc/ balance sheet risk
I'm sure I can come up with more if I think about it.

Not saying one shouldnt own gold stocks, only its not apple to apples.

Generally gold producing stocks are considered to be more volatile than actual gold as they involve using leverage. This should theoretically cause them to increase or decrease at greater rates than gold prices.

Gold mining stocks also do not track gold prices that well (or at all at times). The better advice is likely to be funds such as ALU or GLD, or possibly GTU. They each have issues, but they're better ways to track gold than mining stocks IMO. Gold is best as a stabilizer in the portfolio, as it has low correlation to other types of assets, and can be used in certain climates to...stabilize the portfolio.

First, let's be straight about one thing. All investment is speculative. A capitalist system requires some level of inflation to operate (note how hard the world's financial systems scrambled to avoid deflation, with the jury still very much out). As a result, the investor must speculate with his or her money in an attempt to receive a return above the level of inflation.

Gold's speculative potential derives from concerns about inflation, meaning concerns about the the purchase power destruction of fiat currencies. Additionally, and importantly, precious metals like gold are on the very short list of financial assets that are not simultaneously someone else's liability. In short, gold is first and foremost an inflation hedge. Closely following its hedging value is the fact that--held in physical form--it is not something that someone else can default on.

Gold mining stocks are nothing like gold itself. The author of this article is all wet: such stock plays are highly speculative. Many gold companies are exploring for gold, not actually mining gold. Only a few actually produce gold, and even the biggest producers are highly volatile, because the price of their product fluctuates constantly and strongly. Most importantly, these stocks can be defaulted on by the mining companies. They can suspend their dividends. They can go out of business.

If you have any interest in investing in precious metals you should hold them in physical form. If you are instead interested in purchasing stocks, there are far less speculative stocks to purchase than gold mining stocks.

The safest way to invest in gold is to not invest in it at all.

IMO you don't buy gold for the same kind of investment return as you would stocks.

Gold is truly a buy&forget investment. You buy it now (physical gold), put it someplace safe, and forget about it until some significant national or world event happens. Maybe never, in which case you just hand it down to the next generation.

If you do trade it and make money consider yourself lucky.

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