Author Topic: New Investor - Learning Lessons on Gold  (Read 5819 times)

Koastie57

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New Investor - Learning Lessons on Gold
« on: November 16, 2016, 02:59:39 PM »
Hey Everyone,

Little background: 25 y/o living in Texas. Discovered MMM about 6 months ago and have been making positive adjustments since then. However like one would expect I'm still learning lessons too.

Back in July I invested 10% of my portfolio into Gold. I invested $5,000 into 4 different stocks, $1,250 in each. The stocks are IAG, ABX, GFI, and GOLD.

Today the $5,000 investment has dropped to $3,337. It appears I jumped into gold at the wrong time. From what I've been taught, gold is typically volatile so a swing like this is probably not too surprising.

Now since i'm a new investor a 33% drop in value is a bit of a shocking experience for me. I still have the new investor syndrome of checking my trading account every single day, which can be stressful when you're checking an account only invested in volatile stocks. FYI, I have a separate 401K and a mutual fund that are much bigger and they're doing fine. My point is this isn't the only investment I've made in the market.

Anyway, given that gold has been a form of currency since civilization basically existed, I figured I'd be safe and just remaining in my current position and ride it out. The rational part of me wants to believe that eventually gold will swing back and since I haven't actually "realized" the losses yet i'm fine. Then the irrational part of me is a bit worried and thinks I should get out now before it drops lower.

Any advice? I feel like I'm about to get a good amount of "calm down, your fine" comments. After all I'll be the first to admit that i'm probably being a bit over the top posting this.

Look forward to your responses.
Thanks,

Koastie

JumpInTheFIRE

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Re: New Investor - Learning Lessons on Gold
« Reply #1 on: November 16, 2016, 03:27:24 PM »
I wouldn't worry too much about it.  I think gold is silly as an investment but you have already bought it, no reason to panic now.  Presumably your portfolio will continue to grow and over time the holding will be a tiny part of the portfolio.  If you bought this as an investment you should just keep it, successful investing (at least from a mustachian perspective) is long-term.  Over the long term gold tends to follow inflation so yes, at some point it is likely to at least hit the price you paid but given the nature of gold it's hard to say if that will be in 1 year or 20.  Generally gold is part of a portfolio (like the PP or golden butterfly) to hedge against a massive deflationary environment - what purpose does gold serve in yours?  For most portfolios it is at best dead weight and at worst a large loss. 

I still have the new investor syndrome of checking my trading account every single day, which can be stressful when you're checking an account only invested in volatile stocks. FYI, I have a separate 401K and a mutual fund

The larger question is: why are you only invested in volatile stocks?  When you say "mutual fund", what kind of account is that?  IRA/Roth IRA?  My advice for new investors (and old investors) is to fully diversify your stocks - there's no reason for amateur investors to own individual stocks, you should be investing in the entire market (i.e. index funds).  You should create an Investment Policy Statement (https://www.bogleheads.org/wiki/Investment_policy_statement) commensurate with your goals and risk tolerance.  Once you have an IPS you can live with, then don't worry about market conditions and just follow your IPS.  If you determine gold should be a part of that then so be it, but you should know the reasons you are buying it -- don't just buy it because it seems popular (in fact, that's a reason NOT to buy it, popular == expensive).  I don't see a great need to sell your small gold holding right now, but for future contributions my advice is to look to diversify and stay away from volatile holdings.

Mighty-Dollar

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Re: New Investor - Learning Lessons on Gold
« Reply #2 on: November 16, 2016, 04:18:20 PM »
Why put the entire 10% in gold? Why not go with a natural resources index fund? Personally I wouldn't put more than 5% in natural resources, if any.

Syonyk

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Re: New Investor - Learning Lessons on Gold
« Reply #3 on: November 16, 2016, 04:29:16 PM »
IMO, gold shouldn't be considered an "investment" so much as a "value store" - and if you're treating it as a value store, paper gold (which is what you have) is worth exactly as much as the paper you got with it.  Digital only?  Yeah... about that.

If you want to hold some gold as a value store, it's reasonable to obtain physical gold (you know, coins and such), and store them in a fireproof, well secured safe, onsite.

Brokefuturedoctor

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Re: New Investor - Learning Lessons on Gold
« Reply #4 on: November 16, 2016, 04:42:04 PM »
If you really want to keep gold in your portfolio, you could check out this site, https://portfoliocharts.com/portfolios/

It's also a good site for just seeing the different balances of certain common portfolios. There are also a bunch of calculators and sheets that you can run back testing scenarios with if you want to have some fun. Sometimes its fun to run some numbers, not that back testing is by any means perfect or indicative of the future.

Spork

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Re: New Investor - Learning Lessons on Gold
« Reply #5 on: November 16, 2016, 04:44:11 PM »
I'm going to be nitpicky.

You didn't invest in gold.  You invested in stocks in the gold sector.  There is a difference.  The difference is the difference between "I'll just hold my money in cash" and "I will buy shares of Bank of America stock."

The question I wonder is: why are you investing in gold stocks?  Is this a market timing pick where you expect some portion of the economy to tank and gold-bugs to rush and want more gold mined?  That's pretty speculative, IMO.

You probably won't find a lot of folks around here that are into speculation... or individual stocks... or precious metals.  I don't necessarily think they are awful things.  I own a little bit of individual stock (about 7% of my stash) ... but it is in more mainstream blue-chip companies that pay pretty large dividends.   I also own a small amount of precious metals (about 3% of my stash)... but they are actually precious metals, not stocks in precious metal companies.

I also don't expect my precious metals to amass a great return.  I expect them to be (relatively) stable over time.  I expect them to be not a lot different than cash.  If, by chance, a huge run up happens, I will likely sell some.  If the market on them tanks, I don't own enough to be overly worried.   

I might also mention: Stock in a company that mines gold can go to $0.  The company can go out of business entirely.  An ounce of gold can vastly lose value, but it seems unlikely it would ever lose ALL of it's value.

Syonyk

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Re: New Investor - Learning Lessons on Gold
« Reply #6 on: November 16, 2016, 04:52:47 PM »
The question I wonder is: why are you investing in gold stocks?  Is this a market timing pick where you expect some portion of the economy to tank and gold-bugs to rush and want more gold mined?  That's pretty speculative, IMO.

Probably would have happened with a Hillary win, realistically...

Quote
I also don't expect my precious metals to amass a great return.  I expect them to be (relatively) stable over time.  I expect them to be not a lot different than cash.  If, by chance, a huge run up happens, I will likely sell some.  If the market on them tanks, I don't own enough to be overly worried.   

You're guaranteed to lose value with cash over time due to inflation.  Metals should, on average, hold with inflation.

Quote
An ounce of gold can vastly lose value, but it seems unlikely it would ever lose ALL of it's value.

Yup!  Though at this point in time, either silver is underpriced, or gold is overpriced.  I hold some gold, but most of my metals are silver.

Spork

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Re: New Investor - Learning Lessons on Gold
« Reply #7 on: November 16, 2016, 04:57:54 PM »

I also don't expect my precious metals to amass a great return.  I expect them to be (relatively) stable over time.  I expect them to be not a lot different than cash.  If, by chance, a huge run up happens, I will likely sell some.  If the market on them tanks, I don't own enough to be overly worried.   

You're guaranteed to lose value with cash over time due to inflation.  Metals should, on average, hold with inflation.


That's what I mean by stable: approximately the same buying power over time.  I consider them "cash" in the sense that they are cash of a different currency than dollars.

Spork

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Re: New Investor - Learning Lessons on Gold
« Reply #8 on: November 16, 2016, 04:59:22 PM »
The question I wonder is: why are you investing in gold stocks?  Is this a market timing pick where you expect some portion of the economy to tank and gold-bugs to rush and want more gold mined?  That's pretty speculative, IMO.

Probably would have happened with a Hillary win, realistically...


Yeah... it probably would have.  I don't know that I would bet 10% of my stash on the outcome, though.

Syonyk

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Re: New Investor - Learning Lessons on Gold
« Reply #9 on: November 16, 2016, 05:06:30 PM »
That's what I mean by stable: approximately the same buying power over time.  I consider them "cash" in the sense that they are cash of a different currency than dollars.

That's fair, though I think a better term for that would be "currency" instead of "cash" - the second implying $100s.

Yeah... it probably would have.  I don't know that I would bet 10% of my stash on the outcome, though.

I've gambled with more than 10% at times on things I thought had a good chance of succeeding.  More "quick business opportunities" than currencies, but... yeah.  I wasn't going to effectively bet on this election, since it seemed like it was going to be a coin flip.

Vagabond76

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Re: New Investor - Learning Lessons on Gold
« Reply #10 on: November 16, 2016, 07:01:18 PM »
Given this information, OP talks about investing in gold but actually owns $0 in gold.

Syonyk

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Re: New Investor - Learning Lessons on Gold
« Reply #11 on: November 16, 2016, 07:11:09 PM »
Given this information, OP talks about investing in gold but actually owns $0 in gold.

Yup. Worth the paper it's written on.

Radagast

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Re: New Investor - Learning Lessons on Gold
« Reply #12 on: November 16, 2016, 11:04:31 PM »
I decided to start contributing 8% of my tax sheltered accounts to a gold miner fund about a year ago. I did my first ever rebalancing sell on July 11, so you might have bought mine :). The question is why did you buy it?

I felt at the time (last year) that gold miner stock was at an a generational low, and that disciplined dollar cost averaging into it plus its low correlation to my other investments likely would be beneficial over the course of the next 5 to 15 years. However, I would be very concerned about buying gold miner stock as a lump sum. It has an annual standard deviation of something like 45% which seems to be the case for the last 30 years. That means losing that kind of money in a few months is exactly what you should expect, especially buying into individual companies. Gold mining is a very risky business involving taking out loans to send crazy people with explosives and big equipment out to the middle of nowhere to dig up a rare metal that virtually nobody needs. You just have to hope that the crazy people find it, and that everyone doesn't realize they don't need it before the loans come due.

So the only real decision is hold or sell? That is up to you. I think July gold miner stock prices were not over valued by historical standards, but who knows what future standards will be. You will probably find many chances to kick yourself whatever you do. Why did you buy it? If you bought because it was going up, then that was not really a good reason. Simply given a 45% annual standard deviation, which implies the price goes both up and down, I would guess at some point in the future those four companies will be worth more than they are now. But if gold drops below $400 they may all become worthless.

MustacheAndaHalf

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Re: New Investor - Learning Lessons on Gold
« Reply #13 on: November 17, 2016, 02:49:10 AM »
Adding to the nitpicks, individual gold mining companies could hedge their risk.  If they expect to mine a certain amount of gold, they could lock in the future price now to avoid business risk.  If they hedge their risk in this manner, you have less exposure to gold than you expect.

Rubic

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Re: New Investor - Learning Lessons on Gold
« Reply #14 on: November 17, 2016, 07:11:53 AM »
Not to be harsh, but since you're asking for advice, please read:

http://jlcollinsnh.com/stock-series/

If you'd invested in index funds, you may have still experienced
short-term losses, but you wouldn't be second-guessing your
investment decisions now.

Car Jack

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Re: New Investor - Learning Lessons on Gold
« Reply #15 on: November 17, 2016, 07:33:19 AM »
Gold is not an investment.  It produces nothing, throws off no dividends.  Investors go to gold when they get scared when the market is crashing.  That raises the price of gold.  What's the market been doing lately?  Hitting new highs.  What's that going to do to gold?  Make it drop in value.

Cut your losses.  Dump the gold stock and buy something that follows the market.  SCHB, VTI, IVV, SPY are all good, market following ETFs at various places.  You can do the same with mutual funds but you don't have enough money to get into the lowest cost shares.  Only buy ETFs when the market is open.

AlmstRtrd

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Re: New Investor - Learning Lessons on Gold
« Reply #16 on: November 17, 2016, 07:42:57 AM »
I think what you are missing is that buying gold mining company stocks is a leveraged bet on the price of the metal itself. If the value of gold bullion goes up a litttle, they can do very well. If it goes down a bit (currently off its recent highs by 5% or 6%), you should expect the mining stocks to take a bigger hit than the metal itself.

Koastie57

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Re: New Investor - Learning Lessons on Gold
« Reply #17 on: November 17, 2016, 12:26:15 PM »
Thanks all for the responses. I'll be the first to admit that it wasn't my smartest move but then again I got a lesson out of it that cost me $1,700 dollars. To answer a few of the questions in the responses I received:

What was my motivation for the purchase?  To buy into something that maintains value and POSSIBLY make a profit given election results. I had never speculated before and thought i'd give it a try. 10% wasn't a smart % to bet with but it's over now. Forward looking.

I read along time ago that Gold stocks were not the same thing as gold but chose to try it anyway. It was a costly decision that lacked a lot of planning but hell if this is one of the few mistakes I make in my 20's, I'm okay with that. Back to index funds.

jjcamembert

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Re: New Investor - Learning Lessons on Gold
« Reply #18 on: November 17, 2016, 04:42:46 PM »
Investing in gold funds isn't a bad thing. It's one of least-correlated assets to stocks; you might add it to decrease your overall portfolio volatility. That doesn't mean you're going to outperform stocks. For me, the non-correlation is good enough. I don't care if it's mining companies or precious metal, just like I don't really care what individual stocks are in VTI. I just bought some GLD, but I have no idea if it's going up or down, nor do I really care.

Yeah, speculating by buying stock is a 50/50 shot; wouldn't recommend it. I did a speculative election bet on gold using options: made $50. Closed it immediately the day after the election. If you're speculating, you need to take small positions and have a strategy.

MustacheAndaHalf

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Re: New Investor - Learning Lessons on Gold
« Reply #19 on: November 17, 2016, 07:32:14 PM »
Some see gold as insurance against market turmoil - but you already have that, in your future paychecks.  If the market drops, you keep buying.  Gold's long-term performance is poor.  During a market crash, it's short term performance can be good - and opposite of stocks sometimes.

If you were retired, and looking at gold to help smooth your portfolio withdrawals, that would make sense.  If the market drops, and you have no future paychecks, gold might rise when stocks fall.  You could sell the gold for living expenses or to rebalance into stocks.  But when you have most of your contributions in front of you, historically it's been better to invest in stocks.

swamimeister

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Re: New Investor - Learning Lessons on Gold
« Reply #20 on: November 21, 2016, 01:58:55 PM »
I swing trade gold miners and presently on the bull side but the intermediate trend is down. You shouldn't be in gold or miners unless you know what you are doing. Diversification is good as long as you are diversified in things that are going up, otherwise, you are going to lose money in something. Same thing with hedging unless you are skilled with options trading.

JetBlast

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Re: New Investor - Learning Lessons on Gold
« Reply #21 on: November 22, 2016, 11:22:25 AM »
I'm going to be nitpicky.

You didn't invest in gold.  You invested in stocks in the gold sector.  There is a difference.  The difference is the difference between "I'll just hold my money in cash" and "I will buy shares of Bank of America stock."
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I might also mention: Stock in a company that mines gold can go to $0.  The company can go out of business entirely.  An ounce of gold can vastly lose value, but it seems unlikely it would ever lose ALL of it's value.

This isn't nitpicky at all. You're right and it is a fundamental principle that any investor needs to understand. 

When you buy a company like ABX or you aren't buying gold. You're buying an operating company that digs holes in the ground to get gold, which they then sell.  That company may own land or rights to mine certain lands with gold, but they can still go out of business if they take on too much debt, operate too inefficiently, fail to secure mining rights when current mines are exhausted, etc....  Think about another commodity industry, oil.  Saying you own oil because you own shares in XOM or CVX would be just as incorrect.  Ask BP shareholders about how their "oil" investment tracked crude prices after the Deepwater Horizon accident. 

If you want to own gold as a kind of economic hedge, then own physical gold not miners.  The only silver lining I see in the OPs approach is that by buying a basket of four companies there's a decent chance part of the portfolio will track with the commodity prices since they're not likely to all be mismanaged or have some sort of black swan event at the same time. 

Livewell

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Re: New Investor - Learning Lessons on Gold
« Reply #22 on: November 22, 2016, 05:03:58 PM »
For me, this always summed up why not to invest in gold


mathjak107

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Re: New Investor - Learning Lessons on Gold
« Reply #23 on: November 23, 2016, 03:56:08 AM »
this year GLD up  13.80%      spy up 9.87%   hmmmmmmmmmmmmmmm 

arebelspy

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Re: New Investor - Learning Lessons on Gold
« Reply #24 on: November 23, 2016, 04:03:53 AM »
What you need is an Investment Policy Statement.

Then you wouldn't have to ask us what to do (which we can't even begin to tell you, based on the limited information you posted), but you'd just follow that.

In other words, you need a plan, because right now you're acting randomly (or with whatever justification strikes you as valid at the time).
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2Birds1Stone

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Re: New Investor - Learning Lessons on Gold
« Reply #25 on: November 23, 2016, 04:15:57 AM »
I own gold, the real stuff though.

If you had purchased gold on June 10th, you would be down 9% instead of 30%+

this year GLD up  13.80%      spy up 9.87%   hmmmmmmmmmmmmmmm 

Indeed! GLD/SLV have treated me very well this year.

Interest Compound

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Re: New Investor - Learning Lessons on Gold
« Reply #26 on: November 23, 2016, 07:12:46 PM »
There are some possible issues with this chart, to be sure, but it's just so pretty, and inflation-adjusted too!



I think about this whenever someone brings up Gold as an investment.

arebelspy

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Re: New Investor - Learning Lessons on Gold
« Reply #27 on: November 23, 2016, 07:31:49 PM »
There are some possible issues with this chart, to be sure, but it's just so pretty, and inflation-adjusted too!



I think about this whenever someone brings up Gold as an investment.

It's definitely not an investment, it's a hedge for other investments.  Many people don't understand this (and, if they don't, shouldn't  be buying gold).

Amazing how long the dollar held its value (or was worth even more than a dollar) in that chart.

Even then though, compare it to investing it in stocks.  Yeah, your purchasing power stayed the same, but you didn't gain any.
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Syonyk

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Re: New Investor - Learning Lessons on Gold
« Reply #28 on: November 23, 2016, 08:12:57 PM »
Amazing how long the dollar held its value (or was worth even more than a dollar) in that chart.

Given that the US was on a hard gold standard for a good chunk of the chart... yes?

In 1933, the standard was relaxed a bit, and was entirely abandoned in 1971.  You can find those points on the chart.

Quote
Even then though, compare it to investing it in stocks.  Yeah, your purchasing power stayed the same, but you didn't gain any.

Sure, but you didn't lose that much either.  It's a reasonably stable wealth store over the course of history.

And you'll notice there are some rather steep drops in the stock valuation - yes, given sufficient time, it goes up, but sucks if you live during one of those downturns and need the money.

theolympians

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Re: New Investor - Learning Lessons on Gold
« Reply #29 on: December 11, 2016, 11:29:54 AM »
As was stated further up on these posts, you are not investing in gold, you are investing in companies that deal with gold. All the traditional concerns with any company also apply to the COMPANIES you are investing in (leadership, track history, debts, ability to grow/sell etc). This is primary.

Secondly, you must also consider the gold market. Gold has sky-rocketed in recent years. Ask yourself why.....The reason was mostly due to the market crashes, and the concern of a WEAK DOLLAR. In other words FEAR. If the dollar strengthens (economy improves), it follows the price of gold will drop.....


RentSeeking

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Re: New Investor - Learning Lessons on Gold
« Reply #30 on: December 11, 2016, 08:43:46 PM »
Anyway, given that gold has been a form of currency since civilization basically existed,

If you ever want to read ~500 pages on how this is completely incorrect, I'd highly recommend Graeber's "Debt: The First 5000 Years".

steveo

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Re: New Investor - Learning Lessons on Gold
« Reply #31 on: December 11, 2016, 11:41:52 PM »
Looking at that chart from Interest Compound I think stocks are little more important to have in your portfolio than gold. Just saying.

mathjak107

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Re: New Investor - Learning Lessons on Gold
« Reply #32 on: December 16, 2016, 03:30:02 AM »
i remember seeing an article that was interesting . what is interesting is lets pretend you bought   an equal mix of gold and the s&p 500  and bought it on the worst day for gold when it hit 800 bucks back in the 1980's  .

if you rebalanced that mix once a year  , when gold hit its highs a few years ago your gold would have actually beat the s&p 500 by a fraction of a point over that time frame .

so a major part of golds roll is how it interacts in a portfolio , not just sitting there as an inactive lump of gold .

every asset eventually cycles around , some just take longer than others so it is what you do with that asset while waiting that makes the difference .

without actually rebalancing that lump of gold would have not done nearly as well as it did when it interacted with the rest of the portfolio  and was rebalanced adding decades of lower cost gold . eventually the reinvestment outweighed the original investment .

unlke stocks which tend not to have a whole lot of down time  and is questionable as to whether rebalancing can help ,gold has cycles that run much longer and offers more of a chance of getting cheaper and cheaper buys in before the next cycle .

with that said , i am still not a gold lover  although i do speculate with it .
« Last Edit: December 16, 2016, 03:37:21 AM by mathjak107 »

TomTX

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Re: New Investor - Learning Lessons on Gold
« Reply #33 on: December 16, 2016, 06:24:40 AM »
this year GLD up  13.80%      spy up 9.87%   hmmmmmmmmmmmmmmm

Now GLD is up like 6% for the year while SPY is up 13%.


Car Jack

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Re: New Investor - Learning Lessons on Gold
« Reply #34 on: December 18, 2016, 08:12:32 AM »
Gold has sky-rocketed in recent years.

I see you're choosing your historical periods pretty carefully here.  What do you consider recent years?
5 years?  Gold down from $1600 to $1100 an ounce
6 months?  Gold down from $1300 to $1100 an ounce
(see, I can pick historical periods too.  There is no standard time frame)

From a historical standpoint, from 1933 until 1974, Americans could not legally own gold.  Because of this, charts during this time period are pretty much useless.  The dollar was no longer tied to gold by 75, so that's where "real" gold value begins in the US.

It's easy to get in your Delorean, fire up the flux capacitor and buy in the past.  Not so easy going forward.  In general, gold goes opposite stocks so you know that when the stock market is "skyrocketing", like now, gold is dropping like a rock.  When you see stocks dropping, investors flea to gold and it rises.  Once stocks level out, though, those same investors go back to stocks and gold again drops.