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Joel Bainerman
January 10, 2005

I am just a small time investor so understand that I have no axe to grind. I am nothing but the likes of many of you out there that have bought precious metals in the past few years, believing it was one of the most astute and safest investment choices around these days.

Well if my experience is any example, it isn't - and here's why.

In October 2002, I invested about $50,000 of my family's money in gold and silver certificates - 80% in gold - 20% in silver, via the Perth Mint Certificate program. In March 2003 - I did the same with another $50,000.

The question isn't how much I have increased the value of my investment - but rather how much more I would have enhanced it had I merely converted my US dollars into Euros and not purchased these certificates from the Perth Mint but instead - had Euros sitting in a regular bank account earning interest.

I am not an economist - so there will be no accompanying graphs in this essay pointing out all the stuff the other guys point out when they try and convince you that you should buy gold and silver as a good investment.

From December 2002 until December 2004 the dollar has declined by 40% against the Euro.

I bought $40K worth of gold in December 2002 at $320 - and that has risen to $420 - about a 25% gain. Since the US dollar diminished in value in that time by 40% - I really lost 15%. Had I bought Euros in December 2002 instead of gold - not only would I be protected against a depreciating US dollar - but I would have actually made a 15% gain in addition to the interest I would have earned had this money be sitting in a bank account - safe and protected as my gold and silver was.

Unless my math is wrong - I lost money by investing in gold - at least in relation to what I could have gained by choosing the Euro as a way to protect myself against a falling US dollar and to earn a return on my invested capital. As the $40K was in US dollars - it really doesn't mean that I have to buy gold to protect myself against the weakening US dollar. That argument only works when one is holding US dollars. I was - but could just have easily traded those US dollars into Euros - and been invested in Euros. I didn't because I naively believed that precious metals were a better investment choice.

It wasn't. The moment I would have traded it in for Euros I would also protect myself against a depreciating US dollar - but also made 15% more than what I made in my gold investment - plus interest on the money given to a bank. I would have been much further ahead than I am today - sitting on my gold - and gold trading at $418.

On the silver I bought in Dec 2002 at $4.70 - I have seen about a 45% gain - but considering the dollars I now can get for that silver has been devalued by 40% - at least in relation to the Euro - the gain is minimal. I also lost the use of that capital during that time - which I would not have had I been earning interest from a bank - or had invested into something that would have created a yield - as well as maintaining the value of the investment (i.e., to protect against a diminishing US dollar). Such as real estate property in the UK or Central Europe.

This argument that "gold is a great investment because it is a safeguard against a weakening US dollar" is bogus. The moment I trade my US dollars in for either Euros or pounds - I am fully protected against a "weakening US dollar." The difference is now - in Euros or pounds - I can invest this capital - and not be bothered by a declining US dollar - but actually earn an annual yield on my investment.

It only got worse by March 2003

In March 2003 just a few months later - I bought another $50K chunk of precious metals - $40K in gold at $370. This means that in nearly two years - I have made a grand total of a $50 an ounce - about 15% gain. In that same time, the US dollar fell from .92 cents to the Euro to what it is today - .76 cents - about a 20% loss. Had I put that second $50 into Euros - I would have made 5% more than what I made investing in gold - and still protected my US dollars.

I bought silver at $5.20 in March 2003 - and today it sells for $6.50 - a 25% gain - 5% more than had I put that money in Euros instead. And unlike that money sitting in a bank account earning some interest - my gold and silver investments earned me zero interest/yield.

From what I learned about investing in precious metals - in a so-called "early stage of a secular bull market in gold and silver" is that overall my investment didn't perform well - even though both gold and silver increased in value. Having it valued only in US dollars - and showing gains only when it is valued in US dollars - isn't good if you are judging the worthwhile-ness of the investment in US dollars.

What I did learn was that without a doubt - if you have to chose - invest in silver over gold. Silver did slightly better - but not stellar - and produced no yield whatsoever.

So it is important that others don't get sucked into the same allure of the "gold bug" propaganda that is everywhere out there in this investment sector. The moment one takes his/her money out of US dollars and denominates it in another currency - this big threat of "losing the value of the US dollars" is made irrelevant. Nobody is forced to hold their investment in US dollars. Also - you can't use the value in US dollars as the measurement - if these dollars are worth less - and don't even cover the loss in value despite the price of gold and silver rising. This is a fact which I challenge any of the "gold bug bulls" out there in Internet land to disprove.

Again, I am not an economist and I may be screwing up the math somewhere here - so if I have - and anyone out there wants to correct my assumptions - please feel free to do so in another essay. I would love to hear that my investment in gold and silver did better than I think it did.

So how come this investment sector isn't attractive?

There is no doubt in my mind that via the instrument of futures contracts, the price of gold can be manipulated to the advantage of the elite investment entities in the market. Silver less so - but also. There is simply no reason why gold should not have risen more than it has since October 2002 - in absolute terms. The fact is it didn't fulfill its most basic function, which is to protect against a weakening dollar. The dollar lost 40% in that time - and gold only went up 25%. The price of gold then was $320. Today it is struggling to keep above $420. How exactly have I done so well by putting my money into gold rather than a bank - in Euros?

I don't think I am missing something when I say that from what I have learned - for someone who is trying to protect the value of his monetary assets, but as well, earn some return on them - I would have done better investing it in Euros. If anyone more qualified in economics and investment analysis can prove my basic contention to be wrong - please do so. I want to be told I have misread something here - and that I should leave my investment capital in gold and silver. Prove me wrong - please.

I am not a big time economist or "professional gold/silver promoter" just an average, everyday investor who feels he got caught up in the fever that afflicts the precious metals market. I hate to say that I was sorry to invest in gold and silver two years ago - but the truth is - I am. I wished I had just converted my dollars into Euros - kept in the bank with interest and no storage/certificate/insurance costs.

From now on - when I read on the various precious metals websites about how we all need to invest in precious metals as it is "the only way to protect yourself against a weakening US dollar," I will no longer buy into this propaganda. It simply isn't true. There are many other ways to protect oneself against a weakening US dollar - and that is to get out of US-denominated asset altogether. While China and Japan can't - you and I can.

It just didn't turn out the way they said on the pro-gold websites back in late 2003

Okay, so when in the future, the US dollar collapses, gold will skyrocket - maybe - but if it doesn't increase more than the US dollar diminishes - I haven't made anything on my investment - whereby investing it in real estate in the UK or Cyprus - I would not only have protected myself against any currency risk - I would have showed some real gains for the effort. Had I put my money into Euros - and stuck them in a bank account - not only would I have done more on the capital gains side - I would have made a few percentage points a year in interest on the cash. Compared to having my wealth sit in gold or silver - I would have been much further ahead.

So from now on - if I want to make money in a bull market for precious metals - I will invest in companies that mine the stuff - not the commodity itself, as a different parameter exists when investing in an equity - which over time - and in a bull market - can do so much better than the commodity itself. I heard this so often when I first started investigating this sector - but didn't really tailor my investments in this sector - according to that principle. I will now as I realize that if gold and silver go up - the equities do much better. If gold and silver doesn't go up - the equities can still do well - not as good - but still better than the metals themselves. It takes a lot for gold to go from $425 to $475 - much more than for a share of stock in a mining company to go from $0.60 to $0.66. I now understand this principle and will only invest in equities - not the metals itself.

.If gold and silver do really well - these companies - all of them - will produce real investment gains - above and beyond what the US dollar decreases. Investing in companies whose stock is priced in any currency other than US dollars - is where I will invest my money in the future so as an extra protection against buying stock in a US denominated stock - and losing as the stock is in a declining currency. Thus Canadian juniors on the Vancouver or Toronto stock exchanges is where I will play this bull market from.

Investing in gold and silver commodities - in a word - ain't what it is cracked up to - at least in the first leg of this bull market. There is still near total control over the price that is set - and there is nothing in the foreseeable future to see that ending. The powers that be in this world that have an interest in gold not exploding - can play their futures card for a long time to come yet. Their supply of futures to create demand and put a damper on concerns about supply - is near total. Anyone who can't see that - is being blinded by the fact they don't want to admit it. I remember back in the summer of 2002 when I was first thinking about investing in gold and silver - someone said to me: "What's the big deal about gold. Do you really think it is a free market? Everyone knows that the Rothschilds set the price of gold in London - and have done so - for centuries? Why bother investing in any commodities where you are at a disadvantage because there is control over the price that the commodity can reach." [Editor's comment: Newbie Goldbugs please note, NM Rothschild no longer sets the price]

I didn't listen to him then - but I am now.

From my experience - investing in gold and silver simply ain't worth the wait because when the gain comes - it will be much less in real terms than what the "gold bug promoters" would have you believe.

I know some will say, "sure, in hindsight, you say investing in Euros was a better investment" but that is not the point. The reason why we do analysis is to judge how well the investment performed. The point of this essay is merely to point out that had I taken my money and converted it into Euros in December 2002 and put it in a savings account -

I would have done much better than putting it in supposedly, the "best investment choice in light of a depreciating US dollar."

I am sick of being propagated to on this subject by all the chatter that passes for solid investment analysis when it comes to investment in precious metals. I am sorry to rain on everyone's parade - but I am merely telling you one simple story - a true one - and the numbers in it are the same for all of us. Gold ain't doing good when it goes up 25% but the dollar loses 40% of its value of the gold is being valued in US dollars.

I don't think anyone can fundamentally disagree with this conclusion. If they do - I welcome rebuttals to this essay.

January 10, 2005
Joel Bainerman
Zichron Yaacov, Israel

Joel Bainerman is a former high tech journalist who left the field of high tech - due to the immorality of high tech valuations - for the more realistic world of mining stocks.


if U are a half black, half white investor, U can mentally switch from a bull to a bear in a twinkling. Good investors learn not to care what the mkt does; they just want to be on the right side. It's expensive to care. Leave caring to human relationships, not mkts" Harry Schultz

From my point of view, the investors are the big gamblers! They make a bet, stay with it, and if it  goes wrong, they lose it all! 
Jesse Lauriston Livermore