Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

Tag: Gold

Buffett Doesn’t Like Gold

Warren Buffett, the world’s most famous and richest investor, wrote the following in his annual letter to his stockholder:

“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

“Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

Steve Beck’s has some interesting points in his answer to this in an article at Marketwatch.com.

“To explore this question, simply exchange gold for cash in this comparison. Would it be wise to own a huge $9.6 trillion pile of cash over $9.6 trillion in diversified corporate value? The answer is the same, no. The wise investor would select the diversification and compounding of corporate productivity every time. What can cash do for you other than sit there, produce nothing and deflate at an historic rate of approximately 3% a year.

Should you then draw a conclusion that cash does not belong in your portfolio? Obviously not. Even Buffett himself would acknowledge that cash, stocks and bonds are fundamental building blocks of a portfolio. Cash is useful on several levels including liquidity, security, fixed value, and simplicity, to name a few. Therefore, although you may not want your entire portfolio to consist of one asset class, you may in fact want some of that asset class represented in a globally diversified account.”

Read the whole story here: http://www.marketwatch.com/story/buffett-rebuffs-gold-but-inflation-says-buy-2012-02-29

Related articles:
Gold Weekly Buy Signal
Gold Sentiment Among Market Analysts
Platinum and Silver vs. Gold
Should I Buy gold?

Gold Weekly Buy Signal

Gold finished last week bullish and gave a buy signal in the weekly chart.

I call this signal “Buy The Dip” and it gives us a good buying point. But no buying signal is ever good without a proper exit strategy. But if you are being long-term bullish on gold like I am, you should widen that stop loss. So please remember to always define your exit signal before you take on a trade or investment.

A wider stop loss means you also need to take a smaller position on your trade. But I hope most readers already have gold in their long-term portfolio as insurance as I have written about before.

The last local low point was $1,535 so that will be my stop loss unless sentiment changes.

[Edit: Added the following paragraph on Nov 1st]

Mark Hulbert who is tracking sentiment in his Financial Digest wrote on the 25th of October that “[…] gold market exposure among the short-term gold market timers […] dropped to its lowest level in two and one-half years — minus 13%.” This will really help to give the positive signal above a kick-start.

gold buy signal chart buy the dip

Gold Sentiment among Portfolio Analysts

In this short article I will follow up on the ways to look at gold sentiment to judge whether it is a good time to buy or sell gold (or sit on your hands). This time we see how portfolio analysts look at gold to see if they are too enthusiastic or too negative.

According to Hulbert at MarketWatch, “that huge two-day drop in late August did scare a lot of erstwhile bulls into becoming almost stubbornly bearish — which, from a contrarian point of view, is bullish. As a result, even though gold bullion is now back within shouting distance of its August highs, gold market sentiment remains remarkable subdued.”

They write that the average recommended gold market exposure among a subset of the shortest-term gold market timers currently stands at 40.3%. While it stood at a much higher 67% in late July.

So even though gold has climbed $300 and 18% since July portfolio managers are more negative (or less positive) now. Since the typical pattern is for gold timers to become more bullish as the market rises, and vice versa, this development is bullish from a contrarian point of view.

gold sentiment bullish chart

 

Gold Sentiment

There are many ways to measure market sentiment for gold. One way to do it is by checking Google Trends to see how many have searched for the term “buy gold”. That way you get a very broad definition of the positive sentiment in gold

From the chart below we see that we just have had a top in sentiment in gold in the beginning of August. Last time before that was in October 2008. The price of gold took a deep three-week dive right after the October top before the strong trend continued.

What seems to be a bit stretched in the picture though, is that the news references just made a huge spike in august. More notable than the spike in October 2008. This spike, however, totally died out for the last days which could make gold bulls relax a bit.

I am not very found of doing quantitative research with so few observations (the peeks), but this is one of many tools about how to look at quantitative-, technical-, or sentiment analysis.

Enjoy!

gold positive sentiment trend

Related Articles:
Should I Buy Gold?
Platinum and Silver vs. Gold

Platinum and Silver vs. Gold

Balancing your portfolio for stability by adding platinum and silver to your investments of precious metals.

Both platinum and silver have a lot of industrial use. Much more so than gold and thus they are more sensitive to the growth of the economy. According to Adrian Ash, head of research at BullionVault.com, industrial use accounted for 11% of total gold demand, but accounted for more than 60% of silver demand worldwide. The whole article can be read on marketwatch.com.

But even if you buy gold as an insurance (read my previous article) you might also add a part of platinum and silver, both which have been lagging gold for the last weeks.

Platinum has almost always been a much more expensive metal than gold, but today it is priced at parity with gold.

Silver had a few extremely strong years and has even been outperforming gold the last years.

gold platinum silver

80% Gold, 10% Silver, 10% Platinum, seems like a reasonable balanced mix of precious metal if are aiming at portfolio stability, rather than risk-taking. So if you want a portfolio total of 20% precious metals you buy a 16% gold, 2% silver, and 2% platinum.

Benefits of adding platinum and silver:

  • Might be better for a long-term investment since it contains metals that are more sensitive to a growing economy. So if gold is underperforming other investments, silver might do better in times of higher economic growth.
  • There is less chance that you buy at the wrong time, since these three commodities vary a lot both from other financial instruments and from each other.
  • The more expensive gold gets the more chance of other precious metals to compete to take a share of its place to store value and for its industrial use.

Drawbacks of adding platinum and silver:

  • Silver has much higher volatility than gold,
  • Silver has a higher correlation (higher beta) to the stock market, which is negative when trying to balance your portfolio to get less risk.
  • Gold has historically been the number one asset to own in the worst financial crises.

Good luck with your investments and trading!
Johan Lindén

Shortage of Physical Gold

How to handle the shortage of physical gold? 

I got my first reader questions yesterday.

gold shortage

I would like to own 25% gold in the next months, since I believe that a real market crash will occur that will ruin most of our financial markets. But first I think there will be a rebound so I only want to own 10% gold now. But as I already can see today, there are bottlenecks in how to get physical gold where I live. Do you have any suggestions?

A very good question! In fact there is a way to get around this problem, so the answer is yes!

With all the financial turbulence and buy recommendations we now get on gold from everywhere, the Swedish gold retailer, Tavex, as of yesterday, announced that they, were out of gold.

However, these alarming signs usually means that we are coming to a temporary plateau for the gold price, and that you will most likely have plenty of days to buy your physical gold. But I want to stress the word usually. But do not panic and see what I would have done in the example below:For example let us say:

  • You want 1000 oz. of physical gold as a maximum.
  • Today you think that the gold market has overreacted, but just to be sure you want to own 500 oz.
  • So you buy that 500 oz. today electronically.
  • When you get hold of your 1000 oz. of physical gold you will have a total of 1500 oz. of gold, which is 1000 oz. more than you want today so you go short/sell 1000 oz. of gold electronically.
  • Now you are 1000 oz. invested in physical and minus 500 oz. in electronic gold for a net of +500 oz.
  • Finally when you think that you want to be fully invested you buy back those 500 oz. that you shorted in the market.
  • Then you own 1000 oz. of physical gold, but zero oz. of electronic gold. You are safe!

 

If there is to be a real panic. Let say the stock market crashes 10% three days in a row. At that time there may be a real shortage of physical gold for some time and you may even have to buy it significantly above market price to get it.

The only downside to this strategy is that this will add a slight transaction cost, but it guarantees me that I will own the right amount when the time comes without having to think about where and how to get it. And at the same time it will let me have some room to ease my position when I think that the market has overreacted.

 

By hedging my physical gold with electronic gold I will:

  1. Easily always have the amount of gold that I want at any time by regulating it in my trading account. 
  2. Be fully secure in case of that my bank or brokerage firm goes down.
  3. Have instant access to my gold at all times.

Keep those questions coming.

See my previous article about investing in gold in general

Should I Buy Gold?

gold investmentShould one buy gold today?

The short answer is, yes!

Nowadays, as always, when a commodity enters new all time highs, many recommendations shows up for that commodity. But for reasons given below one should always own gold.

Any person who wants a diversified portfolio, a.k.a a well-balanced healthy portfolio, should always own gold! It has been a trustworthy holder of value for mankind for thousands of years and will probably be that for the remaining of yours and my life. It may not always have been the best investment, but that is not what you are primarily looking at when buying gold.

Do you have a home insurance? Yes? Well, that is not a good investment either for the average insurance buyer, but you still want it for security if something goes really bad. Same thing with gold.

If the currency, banking or financial market, that we so much depend upon will crash, and it will someday, people will seek the most long-lived currency available. And that is gold.

But the gold price has risen so much, is gold still worth buying?

I do not agree that a certain investment is bad because it has risen a lot, but I agree that when things look gloomy it is a good time to take on risk, and when things look good you should be more risk avert. Those times are when you get the best prices for each of those investments. And looking at the media for the last year or so, things look pretty bad, and for that reason people may have overinvested in gold.

However, I do not think that the economical damage is taken as seriously as it should be by the majority of todays actors. People still have a deep belief that governments and the whole system can heal our financial markets by known measures, such as bail-outs, interest rates cuts, lending, spending, and now, paradoxically, saving. So yes, it is always important to have gold in a balanced portfolio, especially since this post is about owning gold as a financial insurance.

How much gold should one own at any time?

That is totally depending upon your risk aversion or your need for safety. Somewhere between five and twenty percent of your wealth should be a good estimate. Note that when we talk about these percentages of a person’s wealth one most include real estate and other illiquid assets, such as partnerships/businesses.

Note that this is about buying gold as a financial insurance. So do not wait until you think you can buy it cheaper, buy it because you want safety and want to be ready if something happens quickly.

If you still feel secure about your wealth and income and only want, let us say, a 5% long-term investment, but still want a 10% speculative holding, you may of course buy that 5% percent now and wait until you get your trading signals or whatever you use to buy the speculative holding.

How can a small gold investment of 10-15% be good enough if things go bad?

It is impossible to give a scientific value. Because in economics you cannot do that most times. That is the downside of economics, but also the reason the be cautious when taking financial decisions. But let us say that things go really bad and currencies all over the world run into hyper-inflation, then gold may not raise a hundred or two hundred percent it may well increase tenfold. That is not unlikely at all if people lose their faith in fiat (paper) money.

Example:

Pre-crash you own:
Money, Stocks, Bonds: 850
Gold: 150
Total investments: 1000

Boom! A financial crash occurs! Your investments are down 75% in just a few days. All people seek the best storage of value. Gold quadruples.

Post-crash you own:
Money, Stocks, Bonds: 213
Gold: 600
Total Investments: 813

Even if you have a slight decrease of your wealth it still looks a lot better than if you have not have owned gold, and more importantly compared to your neighbors or society as a whole you are not ruined.

Can one not buy a house instead of gold to preserve wealth in an inflationary environment?

Sometimes you can, but a house is not a liquid asset someone can bring with him. And that is a real disadvantage in times of financial crises. Economical and political turbulence may make people want to relocate. Maybe your country is going down harder than others. Maybe there will be tough to get a job where you live. Even if that will not be the case, your presumed house buyer may have these doubts and that will be reflected price.

Should I buy real physical gold or can I buy it electronically?

Some people reason that if you want to be really safe, you should buy physical gold and hide it in a safe place. That is good if things goes bad quickly and you do not have a few days to cash out your electronic accounts. Fine, then buy it and dug it down in your garden. But be sure to make a pirate map for your kids if you should get a sudden heart-attack. If you are careful you can buy it on the financial markets first and then change to physical gold when you think that it is not safe to trust your broker.

How can one easily invest in Gold?

You buy gold on futures through Comex (only big professional accounts for traders) in the US, or you can buy through LMAX if you click on the banner on the top right side of this page or click here.

Remember, as a long-term investment, it may not be the best. Actually it have not been good for many decades as you can see in this inflation-adjusted chart below. But as an insurance for the smart investor, it as a must-have.

gold inflation chart

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