Gold

OK. I looked. The past year constitutes September 11, 2008 to September 11, 2009 (last close). The spot price of gold on 9/11/08 was $740.75. The spot price of gold on 9/11/09 was 1,008.25. That is a 36.1 percent return in the last year.

GE, on the other hand. September 15, 2008 (the 14th was a Sunday) it closed at 24.60. Today, trading at $15.25. That is loss in the last year.

Goldman Sachs has rewarded investors who bought at various times in the last year, but you had to have been willing to gamble to get those returns. Without TARP, Goldman would have gone under the way Lehman did. And it was a company on the ropes. People understood the potential upside, but they also understood until relatively recently that buying Goldman might leave them with worthless stock certificates. It was gambling.

On September 15, 2008 (the 14th was a Sunday) Goldman closed at 135.50. Right now, it is trading at 177.26. That September 15, 2008 was very significant. It was the day Lehman went bankrupt. So you would have had to have the balls to jump in on that exact day and really take a scary roll of the dice on Goldman to get the 30.8 percent return the stock has netted since then(which is not as good as gold's 36.1 percent return over the last year). And how many people were jumping in to confidently buy Goldman Sachs stock that day when financial stocks were scary assets?

There have been periods since then -- throughout the last year, when Goldman's stock was even more in the dumper -- and you could have made a ton of money if you had bought it and sold it today (more than doubled your money). But at those moments, it looked like the company's future was in peril, so you would have been taking on way more risk than you will ever take on by buying gold on the spot market or buying a gold future's contract -- gold always retains some value, even if the price can be volatile. Goldman could have been worthless and without some political cronyism it would have been.

 

For KVV: who was cool enough to link to the Surowiecki commentary in the New Yorker. If anyone thinks inflation shouldn't be on our mind. The markets are betting on it, and not just as seen through the price of gold.

This was in the WSJ yesterday.
http://online.wSportsJournalists.com/article/BT-CO-20090913-702501.html?mod=rss_Bonds

TIPS, which are treasuries hedged for inflation are drastically outperforming regular U.S. treasuries this year. It's the difference between an 8.7 percent return year-to-date and a 2.6 percent loss on plain-vanilla treasuries year-to-date. Lots of fund managers tempering the enthusiasm are quoted in the story, but one line that stuck out to me:

If money talks, the Chinese who finance our debt have been saying what they think in volumes. They have been buying gold every time the price dips and if it is true that they are getting into the TIPs market, that would say they see inflation as a major concern. They probably have more to lose than any investor if inflation runs away on us, because they own so much U.S. debt. These actions could be small hedges or they could be making large moves. It's hard to know. Even if they are hedging, though, it suggests they are concerned enough to try to protect themselves. They appear to be souring on our debt because of this.

 

If you have seen gold in that range for the whole year, and are making your judgment based on that, why would you characterize it as speculative? Especially compared to Goldman Sachs, which was near bankruptcy and has been on a roller coaster ride.

Gold is actually a very volatile investment. There are a number of things at play. Gold is not really an investment as much as it's is a hedge against the world's financial system. It also isn't as liquid as treasuries for example, and it costs money to store and insure. And since 2000 the price volatility of gold (the standard deviation of the daily price divided by the average) is close to 50 percent.

But pretty much all of that volatility over that time has been positive -- the price has increased every year since 2001, I believe. I can't think of any other asset--stocks, treasuries, high-quality corporate bonds, junk bonds--that has had a run like that this decade. You don't have to cherry pick dates and say, "I bought it on such and such a day" to make it fit. Just from a buy and hold perspective: In 2001, the price was at $271 an ounce. In 2002, $309 an ounce. In 2003, $363 an ounce. In 2004, $409 an ounce. In 2005, $444 an ounce. In 2006, $603 an ounce. In 2007, $695 an ounce. And it ended 2008 at $871 an ounce.

Things don't go up indefinitely, so if worries about inflation or a weak dollar are unfounded, maybe the price of gold is going to crash to earth. But you hardly would have done better in any other asset if you had bought and hold for the last 10 years, if you sold it today.

Maybe you didn't mean "risky," by speculative, so correct me if I am wrong in thinking that was what you were saying. Buying gold within the last year wasn't nearly as risky as buying Goldman stock, or GE stock for that matter. Goldman has been filled with uncertainty, took political cronyism to save the company from bankruptcy and has been on a roller coast ride. Equities, such as GE--which has looked like a bloated company operating with a weight on it for a while--are ugly and unpredictable during a recession. Gold has had a nice floor under it because of the support it's been given by people fleeing to it as a "safe" place. Most people haven't't see it as risky, but as a safe haven during the uncertain times.