- Published on Thursday, 01 March 2012 08:00
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
- Hits: 1355
Too many investors are worried about the price of gold. Gold is not an investment. It is an insurance policy.
Travel rarely goes as planned. It is especially true when those plans mean crisscrossing an "emerging" continent.
We had plans for an easy two-hour trip south and an afternoon tour of a handful of potential investment properties, but 40-knot wind and heavy rain gave us an extra six hours in the Buenos Aires airport. It's a lovely place to spend the day.
Now, instead of writing from my hotel room as planned, I get to do it five miles in the air from my iPad. Please forgive me if I'm a bit scattered.
The extra time staring at the airport's departure screen gave me a chance to finally sit and think. After four days on the road (... and seven more to go), it felt good to be trapped at Gate 6. I was finally able to digest the past 96 hours.
With inflation a popular theme in this country, gold is a hot topic. It is a subject that has come up each night this week just about the time the main course is laid on the table.
The conversation/debate always ends the same way (usually some time long after dessert)... only time will tell what happens to gold.
To me, that's not good enough.
Unlike a stock or, better yet, a bond we can accurately measure, gold is just fancy dirt. Like the greenbacks so many of us would like to replace with the shiny metal, gold is only worth something because we say it is.
That scares me.
Actually, it is one of a variety of things that scares me about gold. A few of the others: massive speculation, government manipulation and misinformation.
Before I go any further, let me say none of this means I believe gold is overvalued.
I don't know what the "value" is. That's because we can't measure the cash flow gold generates or the dividends it hands back. All we know is how much it will cost you if you want to buy an ounce... that price is going up.
But the price quoted in the headlines has nothing to do with gold's true value.
If I were to tell you gold will hit $2,500 an ounce by June, I would be speculating. I could just as easily argue it will be $1,200. Either way, it would be little more than an overeducated hunch.
I don't invest in hunches... neither should you.
Which brings us to another question. We should not ask if gold is money. We should ask if gold is an investment.
If you're buying gold ETFs or junior miners, then yes, you're looking to make a buck off gold. But if you've got a nugget or two stashed in the back of the gun safe, you are not investing -- you're protecting.
That is where gold's value shines.
A gold ETF will do you little good on the day we awake to the headlines we not-so-boldly predict.
The day America loses her reserve status, you won't be able to get anywhere close to the assets a piece of paper claims you have a stake of. Call your broker and all you'll get is a busy signal... if that.
Without access to the gold it represents, a gold ETF would be worthless. But that chunk of gold in the safe will be more valuable than ever.
So my take from 36,000 (and now descending)... Buy all the gold you want and don't mind the day-to-day price. All the true gold buyers I've talked with this week don't care what they paid for it.
The cold morning when they or their grandkids actually need it, they promise me, capital gains will be the last thing on their minds.
I agree... gold is not an investment. It's insurance.
Chart of the Day
By Adam English, Associate Editor, Inside Investing Daily
The European Central Bank is heading into uncharted waters at full steam.
The euro's version of the Fed has pumped vast amounts of money into European banks at the bargain bin rate of 1%. Its goal with the funny money is simple... boost liquidity and ultimately prop up the European economy.
On Tuesday, the ECB offered a new round of these preferential -- and dirt cheap -- loans. Once the dust settles, 1 trillion euros are expected to change hands.
Considering the 796.3 billion euro in loans already issued, the ECB's economic manipulation is reaching unprecedented levels...
ECB President Mario Draghi claims it will be temporary emergency aid to triage a temporary problem. A lot of evidence works against his claim.
By looking at the TARGET2 balances, which measure money flowing between countries, we can see this cheap cash is being used in dangerous ways.
Deposits in banks in Italy and Greece in particular simply don't exist. Banks traditionally use this money to fuel loans and large day-to-day transactions.
Greek banks are already reporting that they cannot extend lines of credit to healthy and successful businesses, let alone a worker who has to take a pay cut and needs a car loan.
Italy is in a similar situation, but it hasn't reached the same dangerous level.
At the end of 2010, Italy owed the ECB 20 billion euros. That number ballooned to 180 billion by the end of 2011 -- all to cover withdrawals from citizens who can see the writing on the wall.
Germany, the increasingly wary financier of this circus, now owns 500 billion euros of debt through TARGET2.
The ECB has responded to its critics by pointing out that collateral is required, but the quality of the collateral has gone down the tubes. Questionable loans for housing developments and wind parks are accepted.
Greek sovereign bonds are good enough to secure a massive loan too. Scary...
Countries can even take a loan, use the loan to buy their own country's sovereign bonds and pass them back as collateral for even more loans. Even scarier...
President Draghi has stated, "We have done enough," adding that, in future, the focus would be on "tightening the requirements again."
Wish him luck.
The ECB is letting banks get addicted to cheap loans. It is acting as the sole source of liquidity to prevent defaults for severely stressed banks that are making no loans and receiving no deposits.
Worst of all, it is doing all of this while accepting shoddy collateral and allowing circular accounting tricks to extract more loans.
Let's hope the ECB battens down the hatches before it goes straight into the storm it created.
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