GOLD or COMICS - Which will be the better investment?

[comicdonna]

If the world crashes, I will teach everyone here how to survive in the wild at a measly cost of 1 ounce of pure gold per month.

 

Sign me up. I will write you an IOU for this amount payable after the world recovers.

Payment would have to be in advance at the beginning of each month. 1 pound of gold will get you a 1 1/2 years. A couple of extra months on me!

[Agent 007]

What are gold and the dollar telling us?

BY Jurrien Timmer, Director of Investment Research, Co-Portfolio Manager of Fidelity Dynamic Strategies Fund, Fidelity Viewpoints — 11/25/09

Editors' note: The editors of Fidelity Interactive Content Services (FICS) chose this story because it is a thoughtful analysis of the message the falling dollar and rising gold prices are sending investors and the government.

 

The rally in gold and the related decline in the dollar have been hard to miss these past few months. What is this telling us about monetary and fiscal policy, and what might an investor do?

 

The Federal Reserve (Fed) has an incredibly tough job these days. It deserves credit for helping prevent a second Great Depression a year ago, which it did by not only lowering short-term interest rates to near zero but also by expanding the monetary base. But now comes the even harder part: What is the exit strategy? Withdraw the stimulus too soon and the Fed risks triggering another economic relapse, but withdraw too slowly and it risks raising inflationary expectations, not to mention renewed asset bubbles. It's like threading a needle.

 

Complicating matters even further is that the same thing is playing out on the fiscal side. Congress responded to the crisis with a huge dose of fiscal stimulus. But when does it stop the cycle of deficit spending? How many years of trillion-dollar deficits will our foreign creditors tolerate? Is the United States inflating its way out of trouble by printing money and debasing its currency, as so many countries have unsuccessfully tried to do throughout history?

 

These are difficult questions indeed, and there are no clear answers right now. This is why gold is rallying and the dollar is declining: they smell a policy error.

 

Lessons from the Great Depression

To help understand the choices the Fed is facing, it's instructive to take a page from past crises, especially the Great Depression. Doing so is especially relevant because Fed Chairman Ben Bernanke is known to be a student of that period in our country's history. So, if his decisions at the Fed are influenced by what he has learned from the Great Depression, then it's important for us to know about it as well.

 

The Great Depression was actually two depressions. It started with World War 1, which essentially bankrupted Europe in the 1920s. Via the Fed, the U.S. lent a helping hand by extending easy money to Europe from around 1925 to 1927. However, in a classic example of the "laws of unintended consequences," some of this easy money ended up in our own stock market, thus contributing to the massive bubble that burst in 1929. This episode shows that the concept of "moral hazard" is not new. It existed as far back as the 1920s.

 

When the bubble burst in 1929, it unleashed a wave of deflationary debt deleveraging onto the U.S. economy, much like that which occurred in 2008 after the housing bubble burst. However, during the 1930s the Fed was on the gold standard, which made it impossible to just open up the liquidity spigot like it did last year. In fact, the gold standard acted somewhat like a straight jacket and the Fed actually raised rates for a while, which is obviously the last thing one should be doing during an economic crisis. This policy error undoubtedly contributed to the 87% blood bath in stocks from 1929 to 1932.

 

Bernanke knows this well, which is probably why he responded with such overwhelming force in the fall of 2008 following the collapse of Lehman. Not only did the Fed lower rates to zero, but it expanded the monetary base. We call this "quantitative easing" or, more simply, "printing money."

 

The idea behind quantitative easing is that the Fed creates (out of thin air) excess banking reserves. These reserves end up on the balance sheet of banks, which are then supposed to lend out these new reserves to consumers and businesses. That triggers what is known as the money multiplier, which then expands the money supply and brings the economy back to life, and creates inflation (which under these circumstances is a desired outcome).

 

The problem in the early 1930s was that the gold standard prevented the Fed from doing this, until Franklin D. Roosevelt (FDR) came into power in 1933. FDR realized that the gold standard was limiting his ability to respond to the crisis, and in April of 1933 he changed it. He did this by making it illegal to own gold. Holders of gold had to turn in their bullion, receiving the stated conversion price of $20/oz. FDR then changed the conversion price to $35/oz., and with the stroke of a pen he increased the money supply and devalued the dollar at the same time. That was the catalyst for a 150% rally in the stock market and several years of very strong economic growth.

 

Today the Fed doesn't need to worry about the gold standard. While that gives the Fed more freedom to expand its balance sheet and print money, it also has a consequence. The dollar can go down in value, which is of course what is happening now. And when the dollar goes down, gold goes up. After all, gold is the ultimate currency because unlike a fiat (paper) currency, it is not someone else's liability. Consequently, it may be useful to view gold less as an inflation barometer and more as a hard currency. This is especially the case because other countries are doing the exact same thing in terms of monetary and fiscal policy.

 

Inflation or deflation?

So here we are with the printing presses running at full speed. Is that inflationary? Not necessarily, or at least not yet. Printing money is only inflationary if the banks end up lending it out via the above mentioned money multiplier. That isn't happening right now. This is a liquidity trap, because banks haven’t been increasing their lending. As long as we are stuck with this liquidity trap, the velocity of money will stay low and the risk of deflation will outweigh the risk of inflation.

 

What if the banks do start lending out some of these excess reserves at some point? After all, that is what banks are supposed to do for a living. If and when that happens, the money multiplier will start multiplying, which could set the stage for both growth and inflation. At that point, it will be important for the Fed to start withdrawing some of this unprecedented stimulus.

 

To give you a sense of just how high the stakes are, the chart below shows declines in GDP in the bottom panel and the monetary policy response in the top panel. The latter is defined as the ratio of excess banking reserves to required banking reserves (as a proxy for how fast the printing presses are running).

 

 

 

 

Take a look at the left side and then at the right side of the chart. There is no question that the current degree of policy response relative to the decline in the economy is far greater than that which occurred during the 1930s. Whether the current policy response is excessive or necessary is beside the point right now. The question: How do we get out of this when the time comes?

 

Gold and dollar are on the move because some investors are wondering whether or not the Fed has the willingness or ability to exit qualitative easing at just the right time and by the right amount. It's not so much an issue of inflation, as an issue of confidence in our policy makers. In a way, gold is providing a hedge against mismanagement in Washington.

 

If the Fed is able to thread that needle when the time comes, and that's a big "if," then the run-up in gold and the corresponding decline in the dollar could reverse very quickly. If that happens, the dramatic rally in gold will be seen as nothing more than a one-off bubble.

 

But if the Fed finds itself unable or unwilling to exit when the time comes, especially if at the same time Congress continues to run massive deficits, then the moves in gold and the dollar could still have a long way to go.

 

What's an investor to do?

So how do you play this potentially binary outcome?

 

The immediate impulse might be to buy gold, either physical gold or a gold mutual fund or exchange-traded fund exchange-traded fund (ETF). If you believe we're headed for a fiscal train wreck, then allocating a small portion to a well-diversified portfolio may make sense. But what if the Fed pulls it off? Then gold could come crashing down. A tough call indeed.

 

Another option might be to allocate a small portion of your portfolio to stocks and bonds of emerging market countries (like China and India) and natural resource-rich countries (like Brazil, Canada, and Australia). This might buy you two things: geographic and currency diversification. As the dollar falls, the appreciation of foreign currencies can provide an extra boost in return to U.S. investors. That's because foreign securities are worth more when translated back to dollars.

 

 

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© 2009 Fidelity Investor's Publications

 

 

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Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus containing this information. Read it carefully.

 

Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets.

 

The information presented above reflects the opinions of Fidelity director of investment research Jurrien Timmer as of November 24, 2009. These opinions do not necessarily represent the views of Fidelity or any other person in the Fidelity organization, and are subject to change at any time based upon market or other conditions. Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund.

 

Past performance is no guarantee of future results.

 

Investing involves risk, including risk of loss.

 

Diversification does not ensure a profit or guarantee against loss.

 

#537232.1

 

[VintageComics]

If the world crashes, I will teach everyone here how to survive in the wild at a measly cost of 1 ounce of pure gold per month.

 

Sign me up. I will write you an IOU for this amount payable after the world recovers.

Payment would have to be in advance at the beginning of each month. 1 pound of gold will get you a 1 1/2 years. A couple of extra months on me!

 

Please PM me your address. I might just have to take you up on that offer.

 

[scottish]

If the world crashes, I will teach everyone here how to survive in the wild at a measly cost of 1 ounce of pure gold per month.

 

Sign me up. I will write you an IOU for this amount payable after the world recovers.

Payment would have to be in advance at the beginning of each month. 1 pound of gold will get you a 1 1/2 years. A couple of extra months on me!

 

Please PM me your address. I might just have to take you up on that offer.

 

 

If the world crashes to such an extent that I need to live in the wild - gold would be the least of my worries. Pay me in chickens or fur.

[comicdonna]

If the world crashes, I will teach everyone here how to survive in the wild at a measly cost of 1 ounce of pure gold per month.

 

Sign me up. I will write you an IOU for this amount payable after the world recovers.

Payment would have to be in advance at the beginning of each month. 1 pound of gold will get you a 1 1/2 years. A couple of extra months on me!

 

Please PM me your address. I might just have to take you up on that offer.

 

 

If the world crashes to such an extent that I need to live in the wild - gold would be the least of my worries. Pay me in chickens or fur.

If people go with my service, nobody will be cold or hungry. (thumbs u

 

Just bring me your gold.

[Beau]

If people go with my service, nobody will be cold or hungry. (thumbs u

 

Just bring me your gold.

 

That you, Jed?

 

 

 

 

 

 

 

 

I'm not gonna urinate in the radiator, though.

[comicdonna]

[Excelsior!-migration]

I am just curious how people are going to get those non-hybrid seeds they bought off that radio commercial from the storage place located in the arctic after civilization collapses?

[mlovest]

Gold prices are hitting new highs every day, but is gold just the latest bubble after tech stocks, real estate, and oil?

 

Are CGC comic prices in their own price bubble?

 

 

Money is like dieting: burn more than you take in, and you'll lose weight; spend less than you make, and you're wealth will grow. Lots of variables that very few will agree upon. Diversify, but keep in mind your tollerance for risk, etc. What's important to you now? What's you spouse's goals and tolerance? So many variables. Spend less than you make, save at least 10% in diversified funds or assets, have an emergency fund, insurance, and live a happy, and long life!

 

V/R,

Mike

[Hamlet]

Barring that worst case scenario, gold is still the best hedge against the confiscation of wealth by the government.

 

It is certainly the most straightforward, but I don't know that it is necessarily always the best hedge against inflation.

 

Other options as inflation hedges--

 

Purchasing real estate with a 30-year mortgage. With interest rates currently so low, and a depressed real estate market (although depressed off of bubble prices may still not be cheap), buying real estate acts as a powerful inflation hedge. I have a 30-year mortgage on my house. My housing payment will not change for 30 years (aside from tax and insurance increase). If the government prints too much money, I get to pay the bank back with dollars that are worth less and less.

 

Buying stock in strong international companies with a proven ability to raise prices. Think Coke, McDonald's, Pepsi, General Mills, Proctor and Gamble, etc. Regardless of how much money gets printed, people will continue to buy Coke. Each Coke may end up being $10, but ultimately that won't change Coke's value as a company very much. The international reach of these companies will help protect against a dollar specific decline.

 

Other commodities-- It is remarkable how much the value of commodities fluctuate in relation to each other. It is a useful exercise to occasionally check the prices of other commodities compared to gold. How many ounces of silver or lbs of copper will an ounce of gold buy? How many barrels of oil? How much frozen concentrated orange juice? Some of these ratios fluctuate dramatically, even though in theory they should be fairly stable.

[conditionfreak]

As I understand it, silver is a far better investment than gold. Silver is not being mined anymore (hard for me to believe but I understand from a radio commentator that is the case), and has a lot more uses than gold.

 

I know gold is the standard and has been "forever", but I still don't understand why. Tradition? Glitterness? We had to pick something, so we picked what we could find the least of at the time?

 

There are so many things more useful than gold. Heck, why isn't the "standard" women?

 

(oops, there he goes again)

[Hamlet]

Gold tends to be used as currency over silver mostly because it is much rarer. You can carry a lot of wealth if you convert it to gold. You might need a truck to carry your wealth if you converted it to silver.

 

That doesn't mean silver might not be a better investment, though. Like you said, there are a number of industrial uses for silver. The price of silver is likely to fluctuate with the fortunes of those uses. I have no idea if that is good or bad for silver's prospects, though :>

 

 

As I understand it, silver is a far better investment than gold. Silver is not being mined anymore (hard for me to believe but I understand from a radio commentator that is the case), and has a lot more uses than gold.

 

I know gold is the standard and has been "forever", but I still don't understand why. Tradition? Glitterness? We had to pick something, so we picked what we could find the least of at the time?

 

There are so many things more useful than gold. Heck, why isn't the "standard" women?

 

(oops, there he goes again)

[qualitycomix]

As I understand it, silver is a far better investment than gold. Silver is not being mined anymore (hard for me to believe but I understand from a radio commentator that is the case), and has a lot more uses than gold.

 

I know gold is the standard and has been "forever", but I still don't understand why. Tradition? Glitterness? We had to pick something, so we picked what we could find the least of at the time?

 

There are so many things more useful than gold. Heck, why isn't the "standard" women?

 

(oops, there he goes again)

 

Gold is:

1) durable (also doesn't oxidize in air or water)

2) it is scarce

3) it requires great effort to mine/acquire

4) it has industrial uses (currently in electronics/dentistry)

5) generally chemically unreactive

[delekkerste]

As I understand it, silver is a far better investment than gold. Silver is not being mined anymore (hard for me to believe but I understand from a radio commentator that is the case), and has a lot more uses than gold.

 

 

Not only is silver still being mined itself, but it is also a common by-product of copper and other base metals mining. Given that base metals production has gone through the roof, so has the production of silver - mine production has been on a long-term upward trend and hit an all-time record last year. One friend of mine derisively calls silver "a by-product metal", not even worthy of the "precious metals" moniker, as there's just so much of it (no matter what the hypesters would have you believe).

 

Don't believe everything you hear on the radio.

[qualitycomix]

As I understand it, silver is a far better investment than gold. Silver is not being mined anymore (hard for me to believe but I understand from a radio commentator that is the case), and has a lot more uses than gold.

 

 

Not only is silver still being mined itself, but it is also a common by-product of copper and other base metals mining. Given that base metals production has gone through the roof, so has the production of silver - mine production has been on a long-term upward trend and hit an all-time record last year. One friend of mine derisively calls silver "a by-product metal", not even worthy of the "precious metals" moniker, as there's just so much of it (no matter what the hypesters would have you believe).

 

Don't believe everything you hear on the radio.

 

Correct. It is being mined currently.

 

Silver is a different proposition. There is a gold/silver ratio supposedly. So when gold goes up, silver does trail it to some extent. But I think silver still is tied more to the economy due to the industrial uses it has. It is not a pure precious metals play like gold is, and is far more common.

 

% wise, I've seen more upside in silver in the past year actually. Mostly due to the economic "recovery" and partially due to commodities rise and the dollars fall.

[dekeuk]

 

Silver has never had the "bling factor" like gold has

 

 

[conditionfreak]

As I understand it, silver is a far better investment than gold. Silver is not being mined anymore (hard for me to believe but I understand from a radio commentator that is the case), and has a lot more uses than gold.

 

I know gold is the standard and has been "forever", but I still don't understand why. Tradition? Glitterness? We had to pick something, so we picked what we could find the least of at the time?

 

There are so many things more useful than gold. Heck, why isn't the "standard" women?

 

(oops, there he goes again)

 

Gold is:

1) durable (also doesn't oxidize in air or water)

2) it is scarce

3) it requires great effort to mine/acquire

4) it has industrial uses (currently in electronics/dentistry)

5) generally chemically unreactive

 

So?

[conditionfreak]

As I understand it, silver is a far better investment than gold. Silver is not being mined anymore (hard for me to believe but I understand from a radio commentator that is the case), and has a lot more uses than gold.

 

 

Not only is silver still being mined itself, but it is also a common by-product of copper and other base metals mining. Given that base metals production has gone through the roof, so has the production of silver - mine production has been on a long-term upward trend and hit an all-time record last year. One friend of mine derisively calls silver "a by-product metal", not even worthy of the "precious metals" moniker, as there's just so much of it (no matter what the hypesters would have you believe).

 

Don't believe everything you hear on the radio.

 

Nor everything you read on the internet forum sites.

[He11blazer]

Silver has never had the "bling factor" like gold has

 

 

Except among goths. Gothic bling.

 

Hey maybe silver is due for a price hike due to a generation of Twilight fangirls?

[delekkerste]

Nor everything you read on the internet forum sites.

 

Right, so you should check with a reputable source to verify your facts. May I suggest the leading trade association for silver miners, refiners, fabricators and manufacturers, The Silver Institute, which reported all-time record mine production of 680.9 million ounces in 2008:

 

http://www.silverinstitute.org/production.php