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Gold? Bitcoin? Stocks? Bonds? 3-card Monty?
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(December 2, 2013) Gold had a disappointing November, losing over $50 in price. With gold now trading at nearly $450 less than when this year started, 2013 will be the first year in the 21st century in which gold lost value. How bad is it for gold? As of a couple of days ago, an ounce of gold and a unit of Bitcoin virtual currency were both trading at around $1242.
The controversial virtual currency Bitcoin has out-performed gold (and just about everything else on the planet) since its launch in 2009. So today, for the same price you can choose between a hefty 31.1 gram gold coin in your hand, or a Bitcoin registered in your cyber-wallet, via a made-up Mt. Gox.

From Techcrunch.com November 28, 2013:

(Fun fact: Mt.Gox is an acronym for Magic: The Gathering Online eXchange. Mt.Gox was originally a place for people to trade Magic: The Gathering Online cards. They switched to focusing on Bitcoins in 2010. Best pivot ever?)

For more about this virtual money phenomena, see bitcoins.com

But returning to reality, let’s acknowledge gold’s stunningly bad performance in 2013. The year began with gold trading just under $1700, and by June 28th it had fallen $1192, a loss of some $500. The second half of 2013 saw prices rally somewhat, bounce around a bit, but now they seem to have lost all energy again.

So, 2013 will end up as gold’s worst year in terms of dollar value lost.

Ever. Worst year ever.

No two ways about it. In 2013, gold received a total and brutal bashing. Done, and done.

That being said, let us now defy all rationality, and consider gold as just another potential investment.

In doing so, the first, natural comparison is to the most common and traditional investments, stocks and bonds. US stocks, measured by the Dow Jones Industrial Average and the S&P 500, are trading at record levels. Bonds, with interest rates at multi-generational, off-the-chart lows, yield mere pittances compared with historical norms.

Stocks may continue upward for quite a while longer, but their gains this year have been based primarily on expansion of their ratio of price to earnings, rather than on any dramatic increase in corporate earnings. It should also be said that economic growth in the US is barely 2% annually, a factor which doesn’t lend much support to the prospects of the companies represented by equities. Yet, despite all the ‘stock bubble’ talk, there are few signs of anything resembling a broad and popular mania for stocks – at least, so far. Although stocks don’t appear a screaming deal on a value basis, there’s no denying the current momentum in the market.

Bonds – well, what can you say about bonds? Long-term government and blue-chip bonds pay a steady income, but today’s long-term interest rates are a fraction of where they were ten, thirty, or even a hundred years ago. Sure, inflation is said to be low today - but making an investment in financial instruments that promise decades of historically low fixed payments denominated in a fiat currency, still looks like a sucker’s bet.

Of course, there is a world of other financial alternatives out there, and new ones being dreamed up and marketed every week. Today’s low interest rate environment, part of an economic experiment on our country being conducted by the Federal Reserve Bank, invites the creation by Wall Street of many new and tempting financial novelties to entice the (mostly) unsophisticated investor who desires income and a respectable yield. The best of these alternatives are like casino games – participants have a fair chance to win, but in the long run, the only sure profit goes to the house. The worst of these alternatives are pure fraud.

But investors also have the option to buy what are often called ‘real assets’- that is to say, ‘stuff.’ This would include such things as farmland, modern art, diamonds, mining companies, rental properties, collectibles ranging from antique furniture to classic cars to vintage watches to rare stamps and ancient coins. Each of these markets comes and goes, rises and falls, and an individual’s investing success depends on a combination of research, expertise, timing and luck. An advantage is that “stuff” can also be fun to acquire, if you have a real interest in the field. However, ‘stuff’ is often illiquid, and may turn out to be not so much fun for you, or your heirs, when it’s time to sell.

Which brings us to the ultimate in ‘stuff’ – gold itself. Gold is universal, timeless, and an absolutely liquid store of value. However, today the trend is not gold’s friend. Its price, and the prices of most commodities, have been slipping since mid-2011. Gold has actually lost a third of its price in dollar terms since its peak at $1,895 in September of 2011.

How long will the gold price downtrend continue? That’s hard to say. The fact that vast quantities of dollars are being created at a record pace argues that this trend will reverse soon. But a look at our current low price inflation rate raises the simple question: what’s the hurry?

All you can really say about the downward trend in gold is that it will continue, until one day it ends.

The good news is that, just like everything else that is on sale this time of year, today gold is something that you can buy for 33% off its 2011 high price!

But don’t forget: This offer could end at any time, without prior notice.

 

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