The press and the commentators report on the daily fluctuation in the price of gold. In the last 5 years, the spot price of gold has risen from $450/oz to $1,250/oz. On a compounded basis, if you had bought at the right time 5 years ago, and sold now, you would have achieved roughly an 18% per annum compounded return. In other words, you would have increased your wealth from the beginning of each year – to the end of that year – by 18%, each of those years. That is impressive.
Interestingly, if you had bought exactly 10 years ago the price was roughly $240/oz. If you had held and sold now, your return would also have been 18% per annum.
All of this supposes that 1) you took possession of physical gold bars, 2) it cost nothing to insure or store the gold, 3) you are able to buy and sell at spot prices for full value without costs, 4) you were able to pick the correct time to buy and sell, and 5) you had a mattress to hide the gold under. One had to be quite determined and self-disciplined to accomplish this, but it was possible.
The next problem is determining what will happen in the next 6 months, or year, or 5 or 10 years. Gold tends to fluctuate and has had major up and down moves. If you believe, as a very large body of knowledgeable people believes, that gold has much farther to rise, then it might be a good time to buy gold now. To achieve an 18% annualized return over the next ten years, the spot price of gold in 10 years will then have to be over $6,500. This is possible, After all, who would have believed 10 years ago that the spot price of gold today would be $1,250.
But a large number of gold bears, including Elliot Wave believers who believe gold will fall or moderate, would have to be wrong. I won’t go into the numerous points for, and points against. They are widely available to anyone who wishes to Google the subject.
Our view is that we are not fortune tellers. We don’t know if the price of gold will rise or fall. We think it has upward potential, but when, for how long, and to what level, we really can’t say, nor can anyone else except by extrapolation or guessing. The only sure thing is that nothing is sure (except death and taxes).
But there are other issues. Do you buy physical gold or shares in a gold fund. If you buy physical gold, how do you protect it? Where do you hide it and what does it cost to hide it. If you buy a gold fund, do they really have the bullion that is represented by the purchases in the fund, or are they buying derivatives of gold on the assumption that whoever issued those derivatives will have the gold to deliver when called upon. We would point out that in the great financial crash of 2008-9, those derivatives sometimes were not honoured and at other times governments had to bail them out.
Perhaps you feel safe buying a bullion fund that really stores the gold. But then the questions are; what does it cost in management fees, in custodial fees, in verification fees, in storage fees, in insurance fees and so on? When all of these expenses are taken out of the pool of monies contributed by investors, how much does the value of these funds trail the price of gold?
So while we believe gold has a good upside, we believe there are far better ways to play gold than buying physical gold or derivative gold promises.
Next – How to take advantage of the gold bull market
