By DAVID MOON, Moon Capital
September 3, 2006
Cynics wouldn't keep saying it if
there weren't some truth in it: By the time an investment idea becomes so
popular that it is offered in $5,000 increments, the profit potential is
probably gone; the financial institutions have probably sucked the idea
It's happened with all
sorts of asset classes. Office buildings, via the limited partnership craze. The
film industry. Railroad cars. Foreign currency. Silver. Oil and gas drilling.
It is our nature to be
followers. We don't want to stand out from the crowd. We want to wear the same
tennis shoes as Michael Jordan and carry the same handgun as 50 Cent. And we
want to own the investments being touted as winners on television, in the
newspaper, on the Internet, or at the barbershop.
Most of these 'winners'
are the assets that have already significantly appreciated, providing healthy
profits for the early investors.
Scientists tell us that
human beings use as little as 10 percent of our brain capacity. As we used to
say in Alabama, imagine the quality of our decisions if we would use the other
I thought about this as
I read last Sunday's News Sentinel article about gold
Now that the price of
gold has almost tripled, investors can buy gold coins at a kiosk on Chapman
I have no idea if the
price of gold is near a short-term peak, but it certainly isn't near a bottom.
There's no good way to calculate a true value for gold, since there are limited
economic uses for it. Unlike a house, you can't live in it. Unlike silver, gold
isn't used to produce jet engines or batteries. And enriched uranium has its own
special sorts of uses.
More than 80 percent of
the world's gold production is used in jewelry.
In the short term, price
is determined solely by supply and demand. Demand can be affected by many
things: the newspaper, Jim Cramer, someone's charisma, nice brochures or a
kiosk. But in the long term, the price of an asset is a function of its value '
determined by financial issues, such as the utility of the
Gold has been used as a
hedge against inflation for centuries. The problem with this strategy is that
you must endure years of negative returns to enjoy the occasional spike in gold
prices that provides the hedge. This is an expensive
Another useful long-term
inflation hedge is a well-run money market fund. The rates on these funds are
much more highly correlated with inflation than gold prices. As a result, the
rates move much more slowly. So there isn't as much 'action.' Who wants to own a
four percent money market fund? I want to triple my money in
Of course, from 1980 to
1983 gold prices declined from $850 to $318 an ounce. But not a penny was lost
in money market funds. The rates steadily declined, as did
My favorite kiosk
purchase these days are those fuzzy house slippers at the
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).