Is Gold a Safe Store of Value?

Gold Coin Sellers Angered by New Tax Law

Starting Jan. 1, 2012, Form 1099s will become a means of reporting to the Internal Revenue Service the purchases of all goods and services by small businesses and self-employed people that exceed $600 during a calendar year. Precious metals such as coins and bullion fall into this category and coin dealers have been among those most rankled by the change.

This provision, intended to mine what the IRS deems a vast reservoir of uncollected income tax, was included in the health care legislation ostensibly as a way to pay for it. The tax code tweak is expected to raise $17 billion over the next 10 years, according to the Joint Committee on Taxation.

Once again...

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan, 1966

1. Let's assume gold bought today exactly keeps up with inflation long-term.
2. Let's assume you are taxed at 28% on all those inflationary gains.
3. Therefore, plan to lose up to 28% of your purchasing power over the long-term.

The only way it makes sense to hold gold is if you think it can rise much faster than inflation overall.

Gold averaged $285.73 in June 2000.
Gold averaged $1232.92 in June 2010.

That's a 15.7% average annual return.

Meanwhile...

The CPI-U was 172.400 in June 2000.
The CPI-U was 217.965 in June 2010.

That's a 2.4% average annual inflation rate.

Gold has outperformed the typical "safe store of value" by roughly 13.3% per year for the last decade, but I'm told greed and leverage have nothing to do with it.

Oxford Asset Management's Gold Leverage Program

This investment is speculative, therefore the above projected prices and returns are based on stated price levels, and should not be understood as guaranteed future prices that will definitely be attained.

Diversified Gold Investment's Leveraged Transactions Example

By making a 20%* down payment of $9,000 and financing the balance**, the cost per bar is only $1,800 (plus fees and commissions) and the investor has five bars of gold in his account instead of one.

Wikipedia: Gold as an investment

This article contains weasel words, vague phrasing that often accompanies biased or unverifiable information.

How can we know this?

Gold is also money, although it is treated by some investors as a commodity.

Gold is not money. Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. I cannot pay my debts with gold bars, any more than I could pay my debts with aluminum cans. I could sell either in exchange for money and then use that money to pay my bills though.

Gold is a commodity. This really isn't open for debate. A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market. It is fungible, i.e. the same no matter who produces it.

Using leverage

Bullish investors may choose to leverage their position by borrowing money against their existing assets and then purchasing gold on account with the loaned funds.

There's no mention of what bearish investors may choose.

Leverage or derivatives may increase investment gains but also increases the corresponding risk of capital loss if/when the trend reverses.

What's up with the "if/when"? Is this the one trend that may never reverse? Leveraged investments that always gain? Wouldn't that be a first.