Investing in 2006

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It has been a good year, especially with an all-time record low poll rating for the President and “hot tub” Tom Delay in legal hot water. For those who invested in oil and gold it was a good financial year, with gold stocks up 25% and energy stocks up 40%. In contrast, the major stock indexes did poorly with the S&P 500 up 3%, the NASDAQ Composite up 1.4%, and the Dow Jones Industrial Average down 0.6%.

Gold has performed well since we identified the beginning of the bull market in gold and continues to look like a good long-term bet. I suspect that people will make money in gold, gold stocks, and other precious metal investments this year as well. Gold is a volatile investment but only because its value is measured in dollars. It is the dollar that is truly volatile while gold is actually a stabilizing and protective factor for your wealth.

I am often asked the question “how do you buy gold?” Here is my “system” to take advantage of the volatility of gold. First, you must save money to make a purchase. Second, I wait until I have accumulated enough money to buy gold mining stocks (or a precious metal mutual fund) and I also wait for a time when the gold price has been declining and the major financial media are publishing articles on the falling price of gold. Third, when the media starts to turn bullish on gold, I start thinking about selling some of my shares. Next, when the price starts to fall back I call Burt Blumert and use my profits from gold shares to buy some gold bullion or coins. This process can take a couple of years, but you can also go the direct route and buy a nice gold coin at any time. I’ve never sold any coins except during the hysteria of 1979—80 when I sold some of my coin collection. Once you have accumulated a bunch of coins you should start putting some of them in a safety deposit box.

I am not expecting energy stocks to increase by 40% again this year and have sold some shares equal to the profits of 2005. The housing bubble probably ended this summer so it would be a good time to sell your housing (and real estate stocks) which are up more than 50% since I first reported on the housing bubble in June of 2004. The only new investing idea for 2006 is Japan. The Japanese stock market seems to have finally bottomed in 2003 after more than 13 years of decline and it had a bubble-like year in 2005. Japan seems poised for further gains in 2006, but it too is a volatile investment.

Good luck investing in 2006.

Mark Thornton [send him mail] is an economist who lives in Auburn, Alabama. He is author of The Economics of Prohibition, is a senior fellow with the Ludwig von Mises Institute, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War and is the editor of The Quotable Mises.

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