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Written by José D. Roncal
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Tuesday, 15 March 2011 02:56 |
It’s no secret that gold has been accelerating in value for the past decade. Yet there are still those that question gold’s validity as a safe, so called investment. We say “so-called” because we have always maintained that the term investment is very misleading. As we point out in our bookThe Big Gamble: Are You Investing or Speculating?, you are always speculating.
Many have lost money speculating in the stock market. Many others have lost after speculating in real estate. Was there any intrinsic value in a piece of paper that represented ownership in a start up tech company in Silicon Valley—that piece of paper you may have purchased along with everybody else that got swept up in the frenzy? What was that paper worth when everything bottomed out?
Others sank money into a home that now sits boarded up and empty, or metaphorically speaking, sits underwater; or in more tragic scenarios, has blown away in the wind. We are not advising anybody where to put their money, but at least in terms of intrinsic value, it appears that a good portion of all the gold that has ever been produced throughout history still exists today in some form or other.
The recent skepticism around gold’s value could be linked to the fear that a bubble is forming based on the notion that a bunch of overly exuberant speculators are on a buying spree in the hopes of selling to the “greater fool”—or rather selling before the prices start to plummet.
Is there a gold bubble forming? It certainly has all the makings of a bubble. A speculative bubble happens when prices for a particular asset rises above a level justified by its fundamentals. For this to happen the price must be bid up to irrational levels. The question remains, what is the irrational level? Will the price of gold escalate ad infinitum? Of course not, but let’s not blame it all on the speculators. Today’s gold rush has attracted average citizens. Is it herd mentality or a safe hedge? It remains to be seen.
Most people see speculators as unsavory characters, unscrupulous villains looking for quick profits, distorting market prices, and taking advantage of everyone else with a less adventurous spirit. Some of the discontent has to do with the levels of return speculators can realize—returns that are often sizable. When this takes place in a period of economic crisis, it not only tends to incite anger, it seems to lead others to assume that the actions of the speculators caused the crisis in the first place.
But not recognizing the important role that speculators have played in our economy over time is shortsighted. We’ve dedicated part of our book to stories about famous and successful speculators and the roles they’ve played in blazing new trails in industry and business.
The fact that they are willing to risk their capital in search of high profits is essential to a healthy commodity market. But many have confused speculators with gamblers. A gambler simply relies on the odds, or dumb luck, in an attempt to turn a profit. They may hit the jackpot, and they help bolster the bottom line at the casinos, but they don’t make any meaningful contribution to the markets.
Should you buy gold? That’s for you to decide. But before you make any decisions we recommend reading a detailed explanation of the difference between investments and speculation. You’ll find that and more when you pick up a copy of our bookThe Big Gamble: Are You Investing or Speculating? |
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Written by José D. Roncal
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Tuesday, 01 March 2011 00:00 |
The headlines keep reporting that food prices around the world are spiking. Everybody is looking for a culprit. Want to know why corn prices are near an all-time high? Don’t blame it on the weather. Blame the speculators. Never mind that heavy rains damaged crops in key Corn Belt states pushing prices to more than $7 per bushel; it must be the work of speculators.
Wondering what’s pushed wheat prices over the top? Pay no attention to the fact that the 2010 heat wave and drought in Russia resulted in massive reductions in wheat yields. Blame the speculators.
Fretting over rising oil prices? Don’t blame it on unrest in the Middle East. No, folks, we all know this is the fault of speculators—at least that’s what many so-called experts would have you believe.
When the going gets tough in the financial markets, speculators are always the first to get blamed, and right now it’s as if speculators are walking around with big red targets painted on their backs. But clearly, there is no single factor responsible for rising food and energy prices.
Now, don’t get us wrong. We know that speculation can get a lot of people into trouble. We wrote a book about it. InThe Big Gamble: Are You Investing or Speculating? we point out how many misunderstand the word “investment,” not realizing that all they are ever doing is speculating.
But the growing hostility toward speculators is starting to concern those who understand how the commodity markets work. In their opinion, these markets can not function without speculators.
Speculators that are willing to risk their capital in search of high profits, are essential to a healthy commodity market. If the growing pressure against them were to cause new legislation that restricted their activities, the fear is that it could damage markets that are already under pressure from rising global demand for food and fuel.
Some speculators buy as prices rise, which drives them higher, while others buy when they believe prices have fallen too low, then sell if prices get too high or place bets that pay off only when prices go down. All this creates liquidity in the market making it easy for everyone to buy and sell without creating major swings in prices.
But it’s not just the commodity market that could suffer without the presence of speculators. As we’ve stressed in our book, many famous speculators have blazed a trail of innovation and brought us the new technology and services that have become part of our everyday culture. Can you imagine life without Frederick Smith’s Federal Express, or the computer breakthroughs from Bill Gates and Steve Jobs?
Speculators build entire new industries, create jobs, and foment waves of progress that move the economy forward. Progress would come to a screeching halt if risk takers were no longer willing or allowed to speculate.
Of course, there is plenty of greed and questionable ethics to go around. That’s what unfairly gives all speculators a bad name. Many of us have an innate and natural desire to speculate. We aren’t suggesting that you suppress those desires, but we will remind you to never risk what you can’t afford to lose, and never put your money into something you don’t understand just because “everybody else is doing it.”
So to answer our original question, speculators are neither good nor bad, but history has proven that they are definitely necessary. |
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