Your Questions About Disadvantages Of Gold Investment

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David asks…

What is balance of payments? and why balance of payments be always in equillibrium?

Hey guys pls help me out. wid what balance of payments exactly is? and why should we have balance of payments in equillibrium? i mean its lucrative for ny country if there BOP is in surplus

financi4 answers:

Hi

Balance of payments can be difficult/confusing

What does it mean?
The balance of payments, (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country’s exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). Balance of payments is one of the major indicators of a country’s status in international trade, with net capital outflow.

A very good article explaining this can be found in the Consise Encyclopedia of Ecconomics. It can be read

http://www.econlib.org/library/Enc/BalanceofPayments.html

and starts

Few subjects in economics have caused so much confusion—and so much groundless fear—in the past four hundred years as the thought that a country might have a deficit in its balance of payments. This fear is groundless for two reasons: (1) there never is a deficit, and (2) it wouldn’t necessarily hurt if there were.

The balance of payments accounts of a country record the payments and receipts of the residents of the country in their transactions with residents of other countries. If all transactions are included, the payments and receipts of each country are, and must be, equal. Any apparent inequality simply leaves one country acquiring assets in the others. For example, if Americans buy automobiles from Japan, and have no other transactions with Japan, the Japanese must end up holding dollars, which they may hold in the form of bank deposits in the United States or in some other U.S. Investment. The payments of Americans to Japan for automobiles are balanced by the payments of Japanese to U.S. Individuals and institutions, including banks, for the acquisition of dollar assets. Put another way, Japan sold the United States automobiles, and the United States sold Japan dollars or dollar-denominated assets such as Treasury bills and New York office buildings.

Although the totals of payments and receipts are necessarily equal, there will be inequalities—excesses of payments or receipts, called deficits or surpluses—in particular kinds of transactions. Thus, there can be a deficit or surplus in any of the following: merchandise trade (goods), services trade, foreign investment income, unilateral transfers (foreign aid), private investment, the flow of gold and money between central banks and treasuries, or any combination of these or other international transactions. The statement that a country has a deficit or surplus in its “balance of payments” must refer to some particular class of transactions. In 1991 the United States had a deficit in goods of $73.4 billion but a surplus in services of $45.3 billion.

This article goes on to explain the concept of advantage/disadvantage of surplus and deficit.

I hope this helps

George asks…

what is the financial formula to measure risk (standard deviation) of gold investment?

i want to make some risk and return analysis, and compare gold and other financial asset such as bond, stock, reits commodities and etc.

financi4 answers:

First off, the formula for standard deviation is available on 1.2 billion websites. Doing a research project and not being able to find the formula for standard deviation on the web does not bode well for your research project.

Second off. You have some problems with this approach. Gold is inherently undiversified. Stocks are diversified. That means gold starts out at a disadvantage. “Bonds” can mean anything from short-term AAA debt to defaulted pennies on the dollar crap.

Third off, the risk/return analysis suggests that perhaps you can come up with a return. If you knew returns, then we have an optimality theory for portfolios invented by Markowitz in the 50’s (he won the Nobel prize for it). You may have noticed that almost nobody talks about their Markowitz optimizer. The problem is that the inherent return in equity is not known to say nothing of the inherent return in gold (although I’ll bet if I got liquored up I could argue eloquently that the inherent return in gold is the inflation rate).

Fourth, if you are looking at volatility going forward for a wildly traded commodity like gold, you shouldn’t be using standard deviation at all, you should be using implied volatilities from option data which is something like teh marekt’s estimate of forward vol. It’s like 40% for gold and less for all other assets you have listed.

Steven asks…

How to invest in gold?

Do i just buy gold and put it in my safe? how do i sell it later? is it really a very good idea? anyone have details on investing in gold? have you done it? did it work out good?

financi4 answers:

As others have said you can own paper gold or physical gold. Paper gold is like an ETF, gold stock, or other some sort of paper product which has a claim on gold. That claim may or may not be convertible to you in real physical gold. You can not buy gold from any bank in the US. If you live in Canada then you can acquire it from some banks directly.

I always take physical possession of my gold and in fact I just got back from the post office where I had delivered to me 6 ounces of gold. You want physical gold in your hands before moving into paper gold in any form. The best way to own gold in in the form of coins minted by government. In the US you want American Eagles or pre 1933 US $20 gold pieces in raw ungraded condition see examples here.

Http://www.amergold.com/vault/pageview.php?coin=20_Liberty_gold_coins_au

http://www.amergold.com/vault/pageview.php?coin=20_Liberty_gold_coins_xf

http://www.amergold.com/vault/pageview.php?coin=20_Saint_Gaudens_au

WARNING!!!! If in the US DO NOT BUY FOREIGN GOLD. The only exception to this is fractional gold such as 1/10th 1/4 ounce, 1/2 ounce Canadian Maples, Krugerrands, fractional gold from Australia, China, and European Union Philharmonics. Stay away from British sovereigns, swiss gold francs and other older foreign gold. Only buy American gold eagles and US $20 raw gold when ever possible There are many advantages to owning US material that would take time to explain. There are many disadvantages to foreign gold. Also stay away from Goldline because they push the foreign gold on people who are uneducated in gold buying.

I buy gold from only 2 companies and will consider using a third. They are American Gold Exchange http://www.amergold.com/ Patroit Trading Group http://allamericangold.com/index.html and the third is APMEX http://www.apmex.com/ Selling gold back is as simple as reversing the buying process. Just call the coin dealer and sell it back to who you bought it from or call some other dealer, broker or coin shop. The dealers work with bullion banks and will buy gold on the spot.

First off you need to understand that gold is not an investment. Gold is and acts more like an insurance policy. You are insuring that something in your portfolio can never go to $0.00. All paper assets have the ability to go to $0.00. This is what you are insuring against. Silver is also in the gold realm as well, so when talking about gold, silver is included.

Gold is money and a store of value. It is the “Currency of last resort” as Greenspan has stated many times through the years. Gold doesnt pay interest, dividends, doesnt restate earnings, has no lawyers, accountants, CEOs or CFOs lying to you on television. Gold doesnt ask for bailouts, doesnt go BK and cannot cook its books. Gold cant be debased or printed at the will of a company or governmetnt and holds its purchasing power.

Gold sits there as a store of value, is labor intensive, and a one ounce coin will not split into a bunch of half ounce coins at the direction of the pin stripped bandits on Wall Street. Also Gold is the ONLY asset class in the last ten years to increase in value and retain every dollar of its purchasing power.
The NASDAQ is up 1700% since it was created in 1971. Gold has outperformed all assets since we went off the gold standard in 1971. Gold would be even with the NASDAQ if it fell to $630 an ounce. Gold would be even with the DOW and the S&P 500 if it were to fall to $420 an ounce.

Gold has outperformed ALL asset classes since we went off the gold standard. No exceptions. However silver since 1928 has outperformed them all.

Investing in gold and silver for the short term is gambling. Dont do it. Putting cash into gold and silver for long term savings is the only way to go. History has shown that to be the best way to perserve wealth for 6000 years.

Alan Greenspan said before he became chairman of the Federal Reserve, “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold (from 1933 to 1975). If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” Alan Greenspan 1967

Paul asks…

What are the problems of full-reserve banking?

I have heard several arguments for this system since it is supposed to provide economic stability and eliminates many of the dangers of the banking system that we have today. But what are the issues with this system and are there advantages to keeping the fractional reserve system that we have today?

financi4 answers:

This is a rather nasty subject.
Http://bilbo.economicoutlook.net/blog/?p=7299

Those who object to fractional reserve banking do so primarily on the grounds that it allows the easy creation of money and so increases inflation. Many are people who believe that any price inflation is evil (not economically bad policy, but morally evil)
http://www.usagold.com/gildedopinion/greenspan.html

So, what would you have to give up in order to achieve the combination of full reserve banking and 0% inflation rate?

1. Economic growth.
Http://pages.stern.nyu.edu/~nroubini/NYT/krugeconairu.htm

If you have fiat money and full reserve banking and are willing to have an inflation rate greater than 0%, then this is not a valid objection. (The government can create the extra money you need for a small amount of inflation) But if you want to eliminate any inflation, if you want a gold-back currency, etc. Then it is the bigest cost.

2. Major government regulations. Without government regulation and close inspection, you can’t prevent the creation of money by lenders. (Historically, banking started with various institutions offering “promises to pay” to be used by travelers, etc. Without some way of checking that each and every “promise to pay” is backed by full reserve, you allow the creation of money – i.e. Factional reserve banking)

Again, not an issue if you don’t object to government regulations – though full reserve regulations would have to be much tighter than today’s financial regulation. Today there is a whole “shadow banking system” that is completely unregulated but still creates money by fractional reserve lending.

Some proponents of full-reserve seem to think the market will take care of this problem,
http://mises.stackexchange.com/questions/161/fractional-reserve-banking-and-freedom
but that seems more than a little optimistic to me.

3. One of the primary (some would argue the single primary) functions of a bank is to convert short-term debt into long-term investments: the bank takes the money in checking accounts (which are short term because they can be withdrawn any time) and created mortgages (long term investments) with it.

Many argue that with full-reserve banking, this function of banks would be impossible.
Http://en.wikipedia.org/wiki/Full-reserve_banking#Debate_over_full_reserve
If so, it would make the cost in economic growth still greater.

So, you pay these costs and what do you get in return?

The claim is that you get “greater stability”
http://ralphanomics.blogspot.com/2010/01/full-reserve-banking-helps-stability.html
But how?

1. Yes, it is true that private banks can no longer create money, but modern central banks already limit how much money the banks they regulate can create. Most of the instability problems have come from institutions and activities that aren’t regulated.

2. For stable prices, the supply of money has to match the supply of goods. So if private banks are not going to create money as needed, the central bank or the government will just have to do it on its own. And it is (they are?) perfectly capable of doing so.

So why do you trust the government to create the right amount of money but not control the amount of money the private banks create?

3. Of course, you can distrust the central banks and the governments to the point where you insist on currency backed by a commodity such as gold rather than have fiat money.
Http://en.wikipedia.org/wiki/Money

Now you no longer have price stability – a find of gold causes inflation
http://en.wikipedia.org/wiki/California_Gold_Rush#World-wide_economic_stimulation
A long period with no new gold causes deflation and depression;
http://en.wikipedia.org/wiki/Gold_standard#Disadvantages
as does people choosing to hold more cash:
http://www.amatecon.com/gd/gdcandc.html

4. Then there is the question of bank runs. Full reserve banking is supposed to make them impossible. That may be true if the bank has a single building and all the money is right there. But what if the bank has several branches? Do you have to go to the branch where you opened your account? Are we going to give up electronic banking completely?

If the answer is that there will be central vault with reserves, then how is that different from the current system with the FDIC and Federal reserve guaranteeing deposits?

Mark asks…

A little help with Economics Application Questions?

1. What are some disadvantages to having a money system backed by a precious commodity, such as gold or silver?

2. What would happen if the market interest rate on loans were 12% and the government, feeling the rate too high, passed laws making it illegal for banks and other institutions to lend at a rate higher than 6%? How would it effect households, business firms and the government?

financi4 answers:

1. It puts a restraint on economic growth. For example, if the government wants to finance a greenhouse project that is expensive, the government can either use taxpayer’s money or deduct expenses from other public investments. But a money system that is not backed by precious commodities (known as the fiat system) can easily just print up a bunch of money and finance the greenhouse project without having to resort to either of the two options (which is a big hassle BTW).

However, being on the gold standard as its called, restricts growth as the government has to carefully make sure that any money spent is backed by the precious commodities.

2. Aggregate spending would increase at the new 6% high. Of course, since the 6% interest rate serves as the maximum now, aggregate spending can further be increased as in this case, the 6% is now considered to be relatively high. Therefore, if it is to be changed, the only other direction in which the interest rate can move is down – thus increasing overall spending in the economy even more.

Chris asks…

What is the best way to buy Gold, for example, how about eGold?

financi4 answers:

In my opinion there are two avenues open to you.

The index gold funds of which one is GLD. One share is the equivelent of 1/10 oz. Of gold. You buy it just like a stock. There is one disadvantage that you need to be aware of. There is an annual management fee on the fund.

The other avenue open to you that you may wish to consider is a gold mining stock. ABX is the most profitable. There are others. Buying shares in a less profitable company may prove a better investment if gold goes up another $100 an ounce because it will mean a more significan increase in earning for the less profitable company. Along those same lines there are mutual funds that invest in gold mining companies. You might wish to investigate those.

Those are the two investments that I believe other you the most potential.

Donald asks…

In what form is it best to own Gold?

As an investment, other then stocks? Bullion, coins, some other form?

financi4 answers:

Mostly depends how paranoid you are.

You may find this interesting reading:

https://online.kitco.com/bullion/

You could buy gold coins at a local coin shop, or online.
Bars are harder to buy locally, but they can be purchased online.

Storing your gold at home has a big advantage and a big disadvantage: No matter what happens, you can lay your hands on it. However, you have to worry about someone breaking in and stealing it.

If you store your gold somewhere else, you may have to pay to store it, and you can only get it out when they are open for business.

Look at the Kitco “pool” accounts. They basically store your gold for free, but if you want the gold, you may have to pay fabrication fees, shipping, handling, and insurance.

Grandpa

Ken asks…

Is property a better investment than a mutual fund or gold?

financi4 answers:

It can be. It can also not be. It depends on the property. All three have advantages and disadvantages. It comes down to knowing everything you can know about an investment before you invest.

Michael asks…

Please explain the Advantages and Disadvantages of Common Stocks?

Please explain the Advantages and Disadvantages of Common Stocks

Thanks

financi4 answers:

Advantage: Best investment vehicle over time. Outperforms gold, real estate. Average rate of return about 10% a year over the history of the stock market.

Disadvantage: Risk. You are putting your money into a company or companies that may make bad decisions or have bad earnings, causing the stock to go down.

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