A New Chapter for Gold

[HereWeGo]

If jewelry dominates gold demand then its price will correlate positively with economic cycles, not inversely.

That has indeed been the case over the past few years. Note that a great deal of the demand is in the Asian countries, where economies have boomed the last few years. That said, it appears gold has found a relative equilibrium in the past year, although in one of his only lucid posts, Shedlock did show that gold has had a strong seasonal component of late. I suspect that’s due to the wedding season in India and the gold festivals in the April time frame.
I do believe it’s likely a good time to “buy the dip” on gold.

If there is a global recession, people will sell it and some will melt the jewelry for cash to buy necessities.
Good point.

[mixxalot]

Gold and Silver as a hedge against deflation or inflation

Is good to add to a portfolio for diversification. While, I would not put all of my funds in gold, it does not hurt to add some to a gold or precious metals mutual fund or ETF for retirement. I do collect some gold and silver coins as a hobby and must say that Morgan Silver dollars are beautiful coins!

[rseiser]

Just a few notes on the gold ETFs. You should ask a tax professional, but as far as I know, one has to pay up to 28% collectible tax on the capital gains. So you might try to own these in your IRA. CEF is apparently the only one on which to pay regular capital gains taxes (but often trades at a 10% premium).

Also, the collectible tax might be necessary on coins, bullion, or storage programs. Some of these you might never sell and keep it for emergency only, or when the law changes, or you leave the country, etc.

Futures have advantages with taxes as far as the 60/40 long-term/short-term capital gains tax treatment, but I think one is taxed yearly on unrealized gains, or when rolling over to the next contract. These paid taxes are then not be able to be compounded any further. Contracts can go out a few years but might have higher premiums than just the inferred interest rate.

That leaves to discuss goldmoney.com which they claim is a currency, so maybe there is no capital gains tax if you use it to pay for something, use it abroad, or only import small amounts. I would like to know myself. It is fairly respected, but who knows what can happen.

From all this it follows why gold mining shares are so popular. You pay capital gains taxes on transaction, meaning long-term rates when you keep it longer than a year. You also own gold in the ground minus production cost. If you have an inefficient management that means it could be worth less, but if they produce consistently below the market price, you often get the gold at a discount compared to buying actual gold. And it is fairly safe as far as the legal instrument. Owning a share of a company has historically been honored even in bad times or wars.

This leads to the role of physical gold as insurance. Think about it as AAAA credit rating, because there is no counter-party owing you. You have the gold yourself. That’s what they mean when they say gold is nobody’s liability. The only second best instrument might be a AAA treasury bond where the government prints dollars to pay you.
The counter-party risk is substantial if a crisis arrives. It depends only on one little detail: Does the other party have the money (or gold) to pay? It doesn’t matter how good their reputation or intent, if they lose money on their own, they cannot pay! It can happen to anyone out there. Getting sued, speculate wrong, getting cheated, natural disaster, too many people to collect from, …
If banks, insurances, or companies fail, you will not get your money’s worth back, or your instrument will trade well below the spot price of gold.

Just take a look at some of the instruments depending on bonds depending on derivatives depending on mortgages. If people’s houses drop in value, they don’t pay. Then the holder of the mortgage can’t pay. Then the fund owed the money can’t pay. Result: Somebody might not get paid! And hopefully it is not you!

[34f3f3f]

From all the well argued comments above, one clear impression emerges …you either like gold or you don’t …a kind of respectful ambiguity. It’s bewitching aura either lures like a nostalgic waltz, or deters like a anachronistic utensil misplaced in today’s financial cosmos.

[Author]

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