When NYC Hipsters Start Buying Gold…

There is a presumably apocryphal story about Henry Ford that goes something like this: One day the elevator operator in his building told Ford that he had just bought all kinds of stocks. Ford went up to his penthouse, picked up the phone and told his broker to sell his entire stock portfolio on the theory that things have gone too far when the elevator guy starts buying stocks on margin. The great depression followed shortly.

Gold seems to be taking the place of stocks in the ’20s. Everybody wants some, even people who aren’t part of the normal investing public (link): The 29-year-old NYU graduate, who works in music production, says every three months he scrapes together enough money to buy coins directly from gold dealers in Manhattan. “I don’t have a tremendous amount of money to invest but I’d rather start off as a base owning the physical gold,” Rodriguez says.

It is not just New York hipsters either. US Gold ETFs currently hold nine years worth of US gold production (link) and various hedgefunds are buying as well. Investors like gold because it is safe from the Fed’s dollar devaluation similar worrisome trends in public finance.

However, gold is not the optimal choice for someone worried about these issues. It has virtually no industrial applications, so its value is largely determined by perception (or demand for jewelry). It makes more sense to buy industrial metals, perhaps platinum or copper, which have many real-world uses.

5 year returns: Gold vs. Copper and Platinum

The chart shows the cumulative return from holding gold (top line) vs. holding platinum (green) or copper (red). The difference between the gold line and the other two is an indication of how much gold has gotten ahead of itself thanks to Rodriguez et al.

It is easy to see from the chart that things have gotten out of balance, and they just don’t stay that way indefinitely. The bubble will pop when something triggers a sentiment shift. There is no telling when that will happen, but it is virtually certain that it will.

Posted by Martin Gremm (Pivot Point Advisors)

About the author

Marc Schindler, CFP®

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