Monday, January 04, 2010

BAGAKOAA; Jan 4, 2010 Is there Gold in them there hills?


Jan 4, 2010 Is there Gold in them there hills?

I was talking to one of our readers today who said, “Maybe Gold was a bad investment?” because they had to wait 30 years to see such a good return. This statement is a vivid example of how a buy and hold strategy hardly EVER works. I don’t know the exact numbers and it’s not really important, but I have known these people since I was 15 years old making them friends of 38 years. They bought gold in the late seventies and from the reference value of about 450 an ounce, that would peg the exact time about December 17, 1979.

Gold closed today at about 1123 an ounce. So if I bought $10,000 worth of gold in December of 1979, it would be worth $24,955 today. Which unadjusted for inflation is about 4.95% a year. When you adjust for inflation, according to the US Bureau of Statistics, you would have earned about 4.14% a year over that 30 years. The same 10,000 invested in the S & P 500 in December 1979 would be worth $103,539. So yes it would have been a better investment.

But the reason why the gold investment is poor is not because of the performance of the commodity, it was the latent nature of holding the commodity for so many years. If an investor said in 1979, “I will buy 10,000 worth of gold and sit on it till I die.”, then it does not matter what the commodity does. An active investor must have a goal in mind before they buy anything. They should have an in and an out in mind.

In 1979 the Prime rate was 20%. An investor could conceivably say I want to make at least 15% on a 10,000 investment in gold every year. So for the 450.00 dollar an ounce they invested they would be looking for a sale price of 517.00 an ounce. Guess what? They would have hit it two weeks later, the last week of the year in 1979. They would have made 1,148 dollars in two weeks or almost 400% annualized profit. They could have taken 1200 profit and let the 10,000 ride looking for another 15%. They would have had to wait another 4 days before the spot price hit 594 on Jan 3, 1980. They could have taken another 1200 profit, and waited for another 15% gain. They would have to wait all the way to January 15 to take another 1200 profit. Now they would have to wait all the way to January 17 1980 for gold to hit 786 to take another 1200 profit out. Now with each profit taking the investor should re-examine their 15% goal and their exit point. They bought in at 450 they have taken 4800 in gains, have a new profit point of 904 and say an exit point of a 10% drop to get out. So they would plan on taking more profit at 904 and getting out at 707. They would be out of gold in February with a nice total profit of 10,511 in about three months. Not too shabby.

If you were an active trader in 1980, you would soon see gold trading sideways from March till about July. You would see that the prevailing interest rates had not changed much and you still wanted to get 15% on your money. You might have bought in on the late may dip of 502 an ounce looking for 577 for a profit take or 451 for an out. You would have to wait almost a month before you would have hit 577 allowing you to take 1500 in profit and then be looking for 663 for your next profit point. You would have hit it on the July 4th weekend 1980. You would then be looking for 763 or an exit of 596. The exit would come December 19, 1980. You would have taken another 4800 in profit in 1980. By 1981 there was a lot of sideways trading in Gold so attaining 15% would not come easy but loosing 10% would not be that easy. Over the next several years interest rates would subside and so should the investors expectations. 15% gains would have to modify to 10 and eventually 5%. Trading gold over the next 20 years would provide opportunities to beat those expectations but protect gains. The reward of active trading versus buy and hold are enormous.

So what do we do with gold now? It is trading a 1123. Whisper numbers are 1300-1400 and ounce. The S & P 500 is expected to gain between 15-25% in 2010. Figure out your entry point and exit point. If you want to make 10% on your investment this year, buy in at 1123 and take some profits at 1235. Set your stops at 1023 (8% down) and see what happens.

Remember there are some special tax considerations when you sell coinage and even some hard metal versus selling ETFs like GLD. Check with your tax person. My guess is there is more upside in gold in 2010. I am adding to my GLD position in the Salve Lucrum Portfolio. If Benanke blinks and talks about an interest bump, look for a 1500 gold price and huge adjustment in the market to the tune of a 10-15% correction. Like any good Boy Scout, Be Prepared.

Salve Lucrum.


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