The 10 Biggest Myths About Gold

Source:http://online.wsj.com/article/SB10001424052748704394704575496200661947896.html?partner=yahoofinance
Gold has been the investment phenomenon of the past decade. It hit a new high of $1,278 an ounce this week. In the past 10 years, investors in gold have made nearly five times their money. Over the same time, Wall Street has gone sideways.

But few investments seem to attract more myths and hokum than gold and other precious metals. At the risk of inflaming those on both sides of the issue, here are 10:

1. “Gold is overvalued.”

As gold reaches historic highs, Brett Arends attempts to dispel some of the myths about the yellow metal.

How can anyone know this? Nobody even knows what gold is worth, so it’s impossible to say with any confidence that it’s overvalued (or undervalued, for that matter). Some perfectly intelligent people, such as Dylan Grice, a strategist at SG Securities, argue that when compared to the ballooning money supply, gold is still low by historic standards. And even if gold is in a bubble today, it may have a long way to go. As I’ve pointed out earlier this year, as our accompanying chart shows, at a comparable stage Nasdaq (1998) and real estate (2003) still had a couple of years to run.

2. “The smart money got out of gold a long time ago.”

Really? People have been saying that for at least five years. Yet hedge-fund honcho John Paulson has got nearly $4 billion of his firm’s money in the SPDR Gold Trust exchange-traded fund. George Soros has $650 million in the ETF. Every month Bank of America/Merrill Lynch conducts a survey of the world’s top fund managers. About six years ago, when gold was around $400 an ounce, I suggested they started asking the money managers about gold. Initially they got few responses. Few cared enough even to venture an opinion. More recently, while interest has risen, the skepticism has remained. For the last two and a half years, apart from a brief moment in early 2009, money managers have pretty consistently told the interviewers that gold was overvalued, and usually by a wide margin. During that time it’s risen from around $850 an ounce to nearly $1,300.

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3. Gold is a “safe haven.”

Remind me never to buy life insurance, or a new set of brakes, from someone who thinks this metal is “safe.” From 1980 to 2000, it lost more than four-fifths of its purchasing power. During the 2008 crash, it fell by nearly a third. If that’s safe, I’d hate to see volatile. Gold is just an asset, like anything else.

4. “Gold is ‘real’ money, while money created by government or society is just paper or ‘fiat’ money.”

What nonsense. The only thing that makes anything “money” is that other people—meaning “society”—accept it as such. A fund manager was recently telling me about someone she knew who bribed his way out of a crisis in Africa with bottles of liquor. She pointed out that, if society really fell apart, the best “money” would be the things people need—like food, cigarettes, and liquor. (My tip for Armageddon? Stock up on Charmin Ultra Soft. You’ll be amazed how valuable it becomes when we’re down to leaves.)

5. “Gold stocks are a more profitable way to invest in gold than the metal.”

The most dangerous tense on Wall Street is the perpetual present. The reality: Gold stocks are sometimes more profitable, and sometimes less so. It all depends on the price you pay. For years, many big mining stocks were overvalued. The metal was a better bet. But during the 2008 crash, gold stocks plummeted even further than the metal. That left them an absolute steal. Anyone who bought the big miners at the lows has more than doubled their money in two years, and anyone who bought the small ones has quadrupled it.

6. “Small gold-mining stocks are risky.”

Sure, any individual mining stock is very risky. (Even one like NovaGold Resources, which I recommended earlier this year. Proceed with caution.) But a broad basket of small mining stocks—such as that tracked by the Market Vectors Junior Gold Mine ETF—will be much less so. And indeed, depending on the price you pay, small miners will at times offer a much better bet than bigger companies or the metal. (See point 5, above.) Knowing the way the fund industry works, in a gold boom the small fry will probably be the last ones to get scooped up—suggesting they offer a leveraged play.

7. “Gold is a much better investment than other precious metals.”

Really? Why? Once again, it all depends on the price. Over long periods, silver and platinum seem to have marched in the same direction as gold. Over 20 years, silver has beaten gold by 25%, platinum by 5%. But it hasn’t been a steady move. At different points one metal has risen much higher, while another has been left behind. You could have made much better money taking advantage of these moves. There are now ETFs that invest in silver (iShares Silver Trust) and platinum (Physical Platinum Shares). You aren’t always stuck with just gold.

8. “Gold is a great investment because it has kept its purchasing power over thousands of years.”

Bah. It’s hard to believe serious people repeat this. We can’t even get reliable information from 50 years ago, let alone from ancient Rome. Did a toga under Caesar really cost one ounce of gold, the same as a man’s suit today? Some claim it did. But what kind of toga? And what kind of suit? I can buy a suit for $300. There is a widely circulated claim that in the Bible an ounce of gold bought “300 loaves of bread.” One hesitates to assert a negative, but I have looked, and I have asked informed sources, and no one has so far been able to produce the relevant Biblical reference. If anyone has it, please forward it to me. Furthermore, even if gold had “kept its purchasing power over 3,000 years,” that would merely mean it produced a real, inflation-adjusted return of 0%. Inflation-protected government bonds will give you inflation plus 2%.

9. “Gold mutual funds are pretty much the same.”

Not a chance. You need to look under the hood. Vanguard Precious Metals & Mining isn’t even a gold fund anymore; Morningstar moved it to the “natural resources” category, because it invests in general mining and related activities as well. Most “gold” mutual funds don’t even invest in gold itself, just the equities of mining companies—further evidence that gold is scarcely over-owned. Morningstar analyst Janet Yang says that two which invest in both stocks and metal are First Eagle Gold and Fidelity Select Gold. Other funds also vary in style. Oppenheimer Gold & Special Minerals, for example, tends to own a lot of smaller mining stocks, and to invest in silver and platinum miners as well as gold. U.S. Global Precious Minerals Fund focuses on smaller mining stocks.

10. “You should always have 7% of your portfolio in gold for security.”

This has become a shibboleth. But why 7%? If the other 93% of your portfolio collapses, that 7% isn’t going to help much, even if it, say, doubles in price. As usual, these things depend on the price you pay. Personally, if I thought the gold boom were going to continue, I’d rather bet by risking a smaller amount in high-octane, out-of-the-money call options on the SPDR Gold ETF or maybe the Market Vectors Junior Gold Mine ETF. Those give you the right to buy into the fund later at a fixed price if it booms. You only have to put a limited amount down. If prices don’t move, or fall, you will lose that small stake. But if prices skyrocket, you can make many times your bet. As an illustration: SPDR Gold Trust is at $125 a share. The $150 call options, good until January 2012, cost $6.50 per share. Your downside is limited.

Advice for the ‘Poor Rich’

Source:http://finance.yahoo.com/banking-budgeting/article/110801/advice-for-the-poor-rich?mod=bb-budgeting
Everybody hates Todd Henderson.
In case you haven’t heard, he’s the University of Chicago law professor who unwisely blogged last week about his financial woes in a post headlined “We Are the Super Rich.”

Mr. Henderson and his wife, an oncologist, make more than $250,000 a year, and apparently they’re struggling to get by. If President Barack Obama gets his wicked way, and tax rates rise for those earning more than $250,000 a year, Mr. Henderson says it will mean real sacrifice in his family.

It’s too easy to pelt Mr. Henderson with rotten eggs, as so many have now done. (He yanked the post, but way too late—and on the Internet, one’s blunders never die.) But can we, instead, give him some useful advice?

Sure.

Adjust your expectations. “I can show you a client of mine right now who lives in a suburb of Chicago, he’s a doctor, makes $350,000 a year, and he routinely racks up $25,000 on his credit cards,” says Michael Kalscheur, a financial planner at Castle Wealth Advisors in Indianapolis. The reason? Too many people have “unrealistic expectations,” says Mr. Kalscheur. They figure they should be vacationing in Italy, driving expensive cars, the whole deal. “We need to knock him upside the head. He’s got to stop spending money.” Every financial planner will tell you the same thing: The real challenge is tackling the psychology.

Refinance your mortgage. I have no idea how big and expensive your home is, but you can now get a 30 year jumbo mortgage at around 5.3%. Even on a $1 million loan that comes to $5,500 a month, and it’s tax deductible. If your home is so expensive that you can’t even afford it at these rates, you can’t afford it. Sell it and move somewhere more affordable. If you’re underwater on the mortgage, talk to the bank. Forget about “equity,” which may not exist, and look at the cashflow.

Get a grip on your discretionary spending. Carry a pocket notebook with you for a month, and write down everything you spend. Get your wife and children to do the same. It will help you understand where your money is going. Almost every financial planner will tell you that this is invariably a huge eye-opener. As Jonathan Sard, a financial advisor in Atlanta, says, you may find you spend $100 in Target every time you go in for lightbulbs, or spend $300 taking your kids to a White Sox game. With everyone it’s different, but you need to know where the losses are. If writing everything down is too much of a challenge: Junk the plastic, and just carry cash. This is instant budgeting. If you carry $500 a month, that’s all you can spend.

Stop blaming the government. According to the Congressional Budget Office, a household earning $265,000 a year is in the top 20% in the country, and one earning $395,000 is in the top 10%. (The relevant thresholds are $190,000 and $290,000, respectively. And those figures were from 2007, a more prosperous time). So you’re near the top of the tree in the richest country in history. At the same time, contrary to what you seem to think, federal taxes are not extortionate by modern historical standards. According to the CBO, families in the top 20% pay average federal taxes of 25.1%. The figure in President Reagan’s final year in office: 25.6%.

Think about relocating. No kidding. It’s not about how much you earn, it’s about how much you get to keep, and if you are paying too much to live in an expensive town like Chicago, you may be much better off earning less somewhere cheaper. You and your wife both have highly portable jobs. According to the ACCRA Cost of Living Index, someone earning $350,000 in Chicago could get the same standard of living on just $230,000 a year in, say, Austin, Texas or Cincinnati.

Reconsider the investments. You say you’re putting money into the stock market each month, even though you are paying off huge student loans. You need to do the math. If your investments are through a 401(k), they make sense: They’re saving you taxes, maybe taking advantage of a company match. But if they are in addition to your 401(k) plan, they may not make sense right now. You are probably better off using the money to pay down that debt.

Rethink the two cars. Are you leasing them? How much are they costing you a month? This is one of the biggest ways middle class families blow their cash. I can’t believe the number of people who think these moving white elephants are a status symbol. When I see an expensive car go by, all it tells me is that the owner is (a) insecure and (b) has no sense. These days you can get a decent set of wheels for a lot less than $10,000. Buy used. Pay cash. Run it till it dies.

Rethink the schools. You’re sending your children to private school. But how much is it costing you? I take your point about terrible local public schools, but can you move to a neighborhood with better public schools? Or downscale to less-expensive schools?

Talk to a tax accountant. You say you’re using TurboTax. With your income, you might benefit from some professional assistance. Are there deductions you can take that you’re not using? Are you subject to Alternative Minimum Tax? Should you make your fourth quarter state and federal tax payments before Dec. 31? You may be able to help your financial position.

Go after all the little costs. You’re hemorrhaging money. Get the kids to mow the lawn or do it yourself. Bake your own bread. Cook your own meals. Buy generic brands and bulk brands. Go to Costco, Sam’s Club and other discount clubs. Junk the landline. Junk cable for Netflix. Rethink your banking: You’re probably bleeding money through needless “fees” every month. Forget the “conspicuous consumption.” Go for the conspicuous unconsumption. Brag about how little you spend. Find new ways to avoid spending money.

Oh, and one more thing. Never, ever, ever again blog about how hard it is to live on $300,000 or $350,000 a year at a time when one middle-aged man in four can’t find a full-time job, and one in five can’t find any job at all.