May 16, 2013

2 Much Cents Update

 
Some of you may remember “The Lightning Round” from fall of last year. For those of you relatively new to 2 Much Cents, “The Lightning Round” was essentially an interactive post where I asked readers to send me any financial question(s) they might have or any financial topic(s) they would like to know a little more about, and I later posted answers to five of the submissions. “The Lightning Round” seemed to go over petty well the first time around, so as promised, let’s go for round 2!

Between now and Friday night, May 31, 2013, at 11:59 p.m., I would appreciate it if you would send me any financial question(s) you may have. There is nothing too simple, and if you ask something out of my league, I’ll tell you that, too. I promise to eventually answer every question I receive, but whether you decide to submit a question or not, you will want to check it out because I can almost promise that someone out there currently has the same question, curiosity, or need that you do. Also, if you don’t want your question posted or if you would like to remain completely anonymous, please let me know when you ask your question (otherwise, your first name will appear in the next post). Feel free to contact me by posting a comment on this site, emailing me, calling me, texting me, Facebook messaging me, or any other means of communication you can think of.

I appreciate your time and your help. In a little less than a year and a half, 2MuchCents.com has received close to 10,000 page views, but I have even higher hopes going forward largely due to your continued suggestions, excellent questions, and much-appreciated support. Please keep reading and sharing your favorite posts with family and friends, and we’ll keep tackling financial mysteries one at a time. Future posts including "Investing vs. Trading," "Per Stirpes or Bust," "Letting the Tax Tail Wag the Dog," and "How to Spend it All" are already in the works as we speak.

Well what are you waiting for? Ask a question! As Pat Benatar would say, “Hit me with your best shot! Fire away!”

-Tom

May 10, 2013

All That Glitters Is Not Gold

Credit: Stuart Miles
Remember a few months ago when you kept hearing about gold, gold, and more gold? The guy on the television commercial was telling you that you needed it, the guy on the radio was telling you that you had to have it, and the talented teenager on the street corner twirling the giant sign kept telling you where you could easily buy and sell this magical metal. As the price of gold has fallen a fair amount since the fourth quarter of 2012, the “gold fever” seems to have calmed down a little as well, so I think while everyone is in a little less of a “gold rush” state of mind, it makes sense for us to closely examine gold. After all, gold is an investment, insurance, and currency, right?

  • Is gold an investment?
    • Below, please find a chart showing the history of the price of gold per ounce from 1970 to the present.
      Other than the spike in 1980, there’s really not a lot of action in the price of gold until 2005. I’ll grant you that gold looks like a pretty good investment if it was acquired around 1978 (and you sold in 1980) or acquired right before 2005, but what about all those years of close to no action? When asked why he has some reservations about gold as an investment, renowned investor Warren Buffett said, “If you buy an ounce of gold today and you hold it a hundred years, you can go to it every day and you could coo to it and fondle it, and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farmland and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years… So a decent productive asset will kill an unproductive asset.” I think Mr. Buffett has a point, and if I was a gold investor, I’d probably be looking at this historical price chart pretty closely. Also, please understand that investing in gold mining companies and gold ETFs (Exchange Traded Funds) is not the same thing as investing in gold. An investment in a gold mining company would be influenced by the company’s management and performance itself (versus just gold, the asset), and an investment in a gold ETF does not allow you to take possession of the actual gold if you are also viewing your investment as some sort of insurance against the U.S. Dollar.
  • Is gold insurance?
    • If you’re buying gold for insurance against some doomsday scenario you’re worried about, then shouldn’t it be inversely correlated with the market? In English, don’t you want gold to go down when the market goes up so that theoretically, gold will go way up when the market goes way down? Take a look at the chart below!
      Source: Yahoo! Finance
      Gold’s performance was somewhat the opposite of the market’s performance in 2008, 2011, and so far in 2013, but in 2009, 2010, and 2012, gold’s performance was very much in-step with the market. I expect my home insurance to be valuable to me should my home come crashing down, not to go down with my home’s value on the way! Maybe gold acts like insurance against the market some of the time, but you have to admit, it’s not a reliable or consistent hedge!
  • Is gold currency?
    • No, not anymore. It’s been a medium of exchange in the past, and it can still be a valuable asset, but unless you’re planning to barter, it’s not really a currency. Say you actually bought a gold brick. Where would you keep it? Who would you tell that you had a gold brick? If a catastrophic economic scenario actually played out and you needed to use your gold brick to buy bread or safe transportation, what are you going to do – scrape off a piece? Look, I know I’m poking fun at hoarding away gold, but I really feel that outside of collecting a few Canadian Maple Leaves in a top dresser drawer, if we ever get to a point where we need to use gold as currency, we will probably have bigger fish to fry! Just mute the guy on television for a second and think - if all that you owned became worthless, would the amount of gold you have, or sometimes think about acquiring, actually be enough to get the job done?
 
Look, if owning several thousand dollars worth of gold helps you sleep better (and you can afford it), go for it. Just know that’s the same advice I’d give a financially independent client who “needs” a fancy golf cart, a rare painting, or an exotic cat to feel better as well.
 
If you want to sell me some gold, I’m not buying. If you want to give me some gold, I’ll gladly take it, but I’m going to sell it. I have my wedding band, and that’s all the gold I think I’ll ever need. Many people may try to convince you otherwise, but when you get down to it, I personally view gold as a pretty metal and an unpredictable hedging investment instrument. If gold really is as grand as some talking heads try to make it, wouldn’t things have worked out a little better for King Midas, Auric Goldfinger, and Machu Picchu?
 
-Tom