Investing in Gold, Gold = Very Expensive

The topic is the current status of investing in Gold. My personal view is that it was expensive a long time ago and should be avoided, I will share the data. At the end is s short story titled Bubba's Loan for your enjoyment.

Vanguard

Consumers grew more cautious in August amid wild stock market swings, zero job growth, and heightened concerns the economy had weakened. While business inventories and industrial production climbed, retail sales were flat as consumer prices rose higher than expected. For the week ended September 16, the S&P 500 Index rose 5.4% to 1,216 (for a year-to-date total return—including price change plus dividends—of about -1.9%). The yield on the 10-year U.S. Treasury note rose 15 basis points to 2.08% (for a year-to-date decrease of 122 basis points).

Investing in Gold, Gold = Very Expensive

The value of Gold is all around us and a common question is should I be investing in it? It can be seen in advertisements for selling old jewelry and paid endorsements. I keep making reference to Gold as being part of the investing Tug of War with it being on the opposite side with Treasury Bonds against Stocks. Gold is a commodity that has a value strictly based upon buyers and sellers with no underlying basis.

Historically, Gold has grown at a 5% per year rate. The value of Gold in September 2001 was about $300 per ounce. So if Gold was grow at the historical rate of 5% it would be worth about $450 per ounce. The value of Gold last Friday was about $1,800 per ounce. I believe that Gold is about 4 times more expensive than it should be and the price has been driven up by political forces and the news media. I am concerned about something that is 4 times the level that I can correlate back in time.

In today's Barron's magazine on page M54, a chart shows the price of Gold and the relative price of an index of Gold minig stocks. So while Gold has risen about 40% in value during the last year the value of Gold mining stocks has grown only by 10%. This suggests a lack of confidence in the future price of Gold.

Bottom Line: While it is impossible to predict the price of Gold in the future, it is difficult to imagine it maintaining a growth rate that far exceeds it historic growth rate.

Bubba’s Loan

His name was Bubba - he was from Tennessee - he needed a loan. He walked into a bank in New York City and asked for the loan officer. He told the loan officer that he was going to Paris for an international redneck festival for two weeks and needed to borrow $5,000. He also pointed out that he was not a depositor of the bank. The loan officer noted that Bubba was wearing what would be considered his “Sunday go to meeting” clothes - bib overalls, U of TN sweatshirt and ball cap and formal black flip-flops.

The bank officer told him that the bank would need some form of security for the loan, so the redneck handed over the keys to a new Ferrari. The car was parked on the street in front of the bank. The redneck produced the title and everything checked out. Bubba did own the Ferrari and it was paid for. The loan officer agreed to hold the car as collateral for the loan and apologized for having to charge 12% interest.

Later, the bank's president and its officers all enjoyed a good laugh at the redneck from the south for using a $250,000 Ferrari as collateral for a $5,000 loan. An em-ployee of the bank then drove the Ferrari into the bank's private underground garage and parked it.

Two weeks later, the redneck returned, repaid the $5,000 and the interest of $23.07. The loan officer said, "Sir, we are very happy to have had your business, and this transac-tion has worked out very nicely. However, we are a little puzzled. While you were away, we checked you out on Dun & Bradstreet and found that you are a Distinguished Alum-ni from the University of Tennessee, a highly sophisticated investor and multi-millionaire with real estate and financial interests all over the world. What puzzles us is, why would you need to borrow $5,000?"

The good 'ole boy replied, "Where else in New York City could I park my car for two weeks for only $23.07 and ex-pect it to be there when I returned?"