Monday, July 25, 2011
Last month, when I wrote about how I was raising the prices of my jewelry because of the record-high price of gold, I promised that I would answer some frequently asked questions the next day, including the one that’s straight out of Dumbassville: “Why don’t you buy cheaper gold?” (Apparently people think I love overpaying!)
I started a new post and got as far as writing: “Gold is basically the same price everywhere in the world. Why would anyone sell it for less than they can get?” Then I thought, “Fuck it. Not only have I explained raw-material costs many times on this blog, but I’ve also patiently answered the ‘cheap gold’ question in person. Some folks just don’t want to hear what I’m saying.” Fortunately, I remembered Saturday Night Live’s Weekend Update in the ’70s, when Garrett Morris played the Headmaster of the New York School for the Hard of Hearing.
I realized that, like SNL’s Chevy Chase, I needed to call in experts to help me shout enlightenment. First, I got in touch with Juan Carlos Artigas, the investment research manager of the World Gold Council. The World Gold Council is the market development organization for the gold industry. Its 22 members include the world’s leading gold mining companies, which represent about 60% of global corporate gold production. I asked him to start with the basics and explain the “spot price” of 24K gold, which is the price people refer to when they say, “Gold is trading at $1600 an ounce.”
Artigas said, “Think of what it is not. In many commodities, sometimes people refer to the futures price … they would get delivery of a particular commodity in a future time. Spot price refers to immediate transaction, right here, right now. It’s the actual price of the transaction at that moment.” He added, “Gold is a 24/7 market. There’s no closing price. It trades all the time every day, like currency … the only thing you see are snapshots of the price at any given point in time.”
However, the spot price doesn’t include extra charges you may have to pay when you buy gold, such as broker commissions, transaction and storage fees, delivery fees, and seller markups, so it is very likely that if you want to invest in gold, you will pay more than the spot price. I asked Artigas if there was any way to reduce those fees and, in that way, buy “cheaper” gold. “As with any market it works on an economy of scale,” he said. “When you have small quantities, the transaction fee is going to be higher. The more you buy … the markups are smaller.” In other words, it’s the same situation I described in my posts Get Smart (About Manufacturing) and Get Smart (About Quantity) — the people who can spend the most money get the best discounts.
Okay. So the small investor is going to pay the spot price plus transaction fees. But how about going to another country and buying gold in the local currency? Every once in a while, I see people online claiming that gold can be purchased more cheaply in Sierra Leone or Saudi Arabia. “A bar of gold … will be the same in another part of the world,” Artigas said. “In terms of the base price, there shouldn’t [be a difference]. Any difference would be whatever commission or transaction fees are charged. The base price, the price per ounce, should be roughly the same.” In other words, the cost in local currency will be adjusted to equal the dollar price you’d see on Kitco.com, Bloomberg or any other source of gold spot prices.
I was relieved to know that I don’t need to go to Sierra Leone to save money. “But why is gold so high now?” I asked Artigas. (Since I spoke to him, gold hit a new high of over $1600 an ounce.) He said that though people tend to focus on what is happening in Western markets, “Gold has had a measured appreciation in part because of how emerging markets are growing. Gold performance over the past 10 years has been very linked to India and China.” He noted that in those markets, gold is often purchased in the form of 22K or 24K jewelry as an investment. “It’s worth noting in many of these regions, there’s no hard distinction between what you would buy for adornment and what you would buy to preserve capital and save.” That’s different from what we do in the U.S., where people generally buy 14K or 18K jewelry to wear and invest in 24K gold separately. The 24K gold is pure gold, which most fine jewelers here don’t work with because it is too soft to hold its shape. Customers tend to complain if their rings wind up looking square after a few wearings. Therefore, we mix the gold with other metals to make it more durable: 18K gold is 75% pure gold and 25% other metals, while 14K gold is 58.3% pure gold and and 41.7% other metals. That’s why 18K and 14K are less expensive than 24K — because you’re getting less gold. If gold is just an investment for you, you want only the gold, not a bunch of other metals.
It’s not just India and China driving gold prices up. Artigas said, “The other story behind gold’s performance has been that of central banks,” which are the organizations that regulate monetary policy for specific countries or regions. “They’ve experienced a structural shift over the past several quarters — especially since 2010. Central banks around the world were net sellers — the majority would be selling gold — for the previous 21 years till 2009. 2010 marked the first year that central banks became net buyers. Little by little, European central banks which were the primary source of gold selling started to slow down their sales. Little by little, emerging markets started to acquire gold for their foreign reserves. As emerging markets were buying and Europeans were slowing down their sales, central banks became net buyers.” We all know lots of demand drives up price. If you have something everyone wants, you can charge more, right? Like if you stand out on a street corner with a bottle of ice-cold water, and it’s 10 degrees Fahrenheit out, you might able to sell it for $1, or not at all. You might just watch people rush into Starbucks to buy hot coffee. But if you stand on the street with a bottle of ice-cold water and it’s 100 degrees Fahrenheit, like it’s been in New York City, you might be able to get $2 or even more. That raises the question of why gold is to central banks like a bottle of ice-cold water on a hot street corner. Well, it’s similar to what gold is to individual investors: a way to diversify holdings with a universally recognized commodity. As Artigas said about individual investors, “We are in a new world order … the economic recession marked a change in attitude among investors about the assets they’re interested in. Risk management [is] so important in the investors’ psyche, and has made gold a main component of a portfolio.” He added, “It provides investors with an asset in their portfolio which is not going to be affected by the same thing as … equity and credit. It is valuable [in different] cultures and countries.”
Ah, yes, the individual investor. The most basic investment advice is, “Buy low, sell high.” (Please note that you don’t have to buy something at the lowest point and sell at the highest point to make money. You just have to sell at a higher price than you bought.) Therefore, it grates on my nerves when people tell me they want to buy gold the day it hits a new high, BECAUSE it hits a new high. These are always people who don’t follow the price of gold, as I do all day, every day (there’s an app for that!). They’ve just heard on the radio that gold has hit a new high and “someone” says it will go higher so they need to buy it right now. Jebus! At least wait for a damn dip. There’s always a dip, and I always buy on a dip. For instance, maybe I couldn’t afford to load up on gold chains for my necklace designs when gold was trading at $1550 an ounce. But gold is $1618 an ounce as I’m writing this, so you better believe that if it falls into the mid-$1500s, I’ll find some money so that I can run to my wholesaler and buy a couple of chains. Hell, maybe I’ll even buy a chain when gold next dips to the $1590 range. But the day that gold hits that new high? I’m not buying THAT DAY, no matter what folks say on NPR.
I needed to find someone to explain this annoying investor behavior to me. Stephen Wood, who is chief market strategist, North America, for Russell Investments, came to my rescue. Wood is one of Russell’s experts on the economy, capital markets, portfolio strategies and behavioral finance. He said, “What behavioral finance teaches us is that it is the design of the human brain and the way it processes information and arrives at actions, can all too often be detrimental when it comes to investing.” For example, he told me that people find it reassuring to do what everyone else is doing, so that when gold (or another investment) hits a new high, they feel successful and smart if they buy into it. That’s the exact opposite of Joseph Kennedy — the super-rich dad of John, Robert and Ted Kennedy — who famously got out of the stock market when he started getting stock tips from the shoeshine boy.
One of Wood’s colleagues had mentioned that investors wanted to sell their Japanese-related investments right after Japan’s big earthquake in March, when such investments plunged. If they’d done that, they would have sold at a low and missed a recovery. Selling on the news of the quake seemed similar to buying gold on the news of a record, so I asked Wood about whether it’s smart for the individual, non-expert, non-economy-of-scale investor to transact based on the latest news. He said, bluntly, “Usually, any action in response to a cataclysmic event is not in your best interests. You are not the only person on the planet with a TV; the info is widely and instantaneously distributed to all global investors. Especially natural disasters – they tend to spike volatility and then subside. Always ask yourself, what is your investment edge? Your value add?”
Getting back to gold specifically, I asked if I was obliged to concede that someone was a smartypants if s/he bought gold on the day it hit a record as long as gold did, in fact, go higher after (as it is likely to continue to do). I was relieved when he answered, “Buying gold at $1500 and having it rise to $2000 would seem to be good. Especially if you can be disciplined enough to sell and book a profit. But ask yourself for the future, was it luck or skill? And how can you tell the difference? Is it repeatable?”
Wood said it’s all about the greater fool theory: “People who buy only rapid price momentum, suspecting or not caring that fundamentals don’t warrant that price — they are hoping that someone (some buyer) will pay an even higher price than they did in hopes of finding an even greater yet fool.” Sounds like the real-estate story, doesn’t it? Everyone thought real estate could only go higher, until it stopped going higher and the people who bought at the high were screwed.
“The gold market is a very misunderstood market,” Artigas of the World Gold Council told me. “It’s interesting how many investors and many people may have opinions … even the ones who do like it as an investment … do not necessarily understand what is behind it.” If you do think you understand it, Artigas said there are many ways to get in on the action: “Investors can buy coins, bars, buy futures and options or purchase gold-backed ETFs (exchange-traded funds), which have opened an opportunity for investors to access the market in vehicles traded on exchanges — you can see the price in the same way you can follow the price in your bonds or stocks.” But don’t come to me asking where to go to make these transactions, because I’m going to tell you to consult your investment adviser. And if you say to me you don’t have an investment adviser? Well, I’m not going to be your free investment adviser, bitches! You’re welcome to buy gold jewelry from me instead. Not only will you get the value of the gold but, as John Keats wrote, “A thing of beauty is a joy forever.” You can’t put a price on beauty.