The Coming Bubble of 2010 and How to Avoid It

Even though it has been barely two years since the last investing bubble burst, bringing companies like American International Group (NYSE: AIG  ) , Fannie Mae (NYSE: FNM  ) , and Freddie Mac (NYSE: FRE  ) to their knees, there's yet another bubble forming. And I believe it will burst in 2010.  

Just ahead, I'll tell you how to completely avoid it -- and present an alternate investment strategy you can adopt instead of following the crowd into this bubble.

But first, a look at this bubble and how it formed.

All that glitters
Congress is spending billions of dollars in stimulus funds to jump-start the economy. It's funded almost entirely with debt. As the national debt level rises, the dollar becomes weaker because currency investors shy away from high-debt countries. This causes higher inflation, which everyone agrees is coming.

But the consensus right now is that the best way to counteract inflation is by investing in gold.

And the consensus is dead wrong!
The problem with gold is that it's a luxury commodity. It has no coupon rate or growth prospects, and it can rise in price only as much as demand for it grows.

It's also difficult to value. Some believe the price of gold per ounce should match the Dow Jones Industrial Average. Others believe it must reflect the price of a top-tier man's suit. Still others believe it must account for global supply and demand.

In spite of this inherent confusion, many prominent investors -- John Hathaway of the Tocqueville Gold Fund, Jim Rogers of Quantum Fund fame, and even hedge fund manager David Einhorn, to name a few -- believe gold can do well right now. What's more shocking: The recent Value Investors Congress was full of lectures on how to profit in precious metals.

Even the best can be fooled
The average investor is blindly following these noteworthy men. That's why more than $12 billion of new money has been invested in the SPDR Gold Trust this year alone. I'm the first to admit that falling prey to other investors' moves is an easy pitfall -- but it can also set you up for disaster.

So what exactly are all these investors -- and their followers -- overlooking? These three facts:

1. When gold demand rises, supply does, too, which brings gold prices back down.
Fortune magazine reports that gold miners invested more than $40 billion into new projects since 2001, and they "are now bearing fruit." Bullion dealer Kitco "predicts that these new mining projects will add 450 tons annually -- or 5% -- "to the gold supply through 2014, enough to move prices lower." The demand also brings out sellers of scrap gold, which adds even more to the supply.

All this while demand for gold has dropped 20% in the past year.

2. Gold is not just dollar-denominated.
Unlike oil, gold is bought and sold in local currencies throughout the world. The Wall Street Journal reports that "gold remains well below last winter's peaks when priced in pounds, euros, yen, or Swiss francs." This indicates that it is solely Americans speculating on gold's rise.

3. Gold is historically a poor investment.
Perhaps the most damning fact is that, from 1833 through 2005, gold and inflation had nearly perfect correlation, according to Forbes. This means that, after taxes, you would have actually lost money in gold.

Warren Buffett once quipped, "It gets dug out of the ground ... Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

In fact, the only way to make gold rise is to get other investors to buy into the idea -- like a giant Ponzi scheme. And as we know from watching the unraveling of Bernie Madoff's empire, this can't last forever.

Which is why buying gold today is a horrible decision -- and why investors would be better off looking elsewhere.

The absolutely best place to be looking
The best way to invest for inflation is to invest in high-yield dividend companies. Unlike gold, which has no coupon rate and no growth potential, you should be sending your investing dollars to companies that pay a dividend (which often rises) and also have both stable growth potential (which also often rises) and strong assets (in inflationary periods, assets are more valuable since they cost more to replace).

Here are four solid candidates that fit that bill, all of which have a long history of dividends -- through periods of inflation and deflation alike:

Company

Market Cap

Dividend Yield

5-Year Compounded Annual Growth Rate
of Revenue

Liabilities-to-Asset Ratio

Dividends Paid Since

ConocoPhillips (NYSE: COP  )

$77.1 billion

3.8%

11.2%

60.7%

1934

Coca-Cola (NYSE: KO  )

$123.4 billion

3.0%

7.3%

49.9%

1893

AT&T (NYSE: T  )

$151.8 billion

6.3%

25.3%

63.2%

1881

Procter & Gamble (NYSE: PG  )

$168.3 billion

3.0%

9.0%

53.2%

1891

Data from Capital IQ and DividendInvestor.com.

These are exactly the sorts of dividend-paying stocks that former hedge fund analyst and current Motley Fool Income Investor advisor James Early looks for in his market-beating service. In fact, two of the stocks in that table are official recommendations of his.

In his newsletter, James has put together a "core portfolio" of top dividend stocks, consisting of six dividend stocks he believes every investor should use as a platform to profitable dividend investing. You can see his portfolio completely free, with a 30-day trial to his newsletter as my guest today. Click here for more information.

Adam J. Wiedermanowns no shares of the companies mentioned above. Coca-Cola is a Motley Fool Inside Value recommendation. Coca-Cola and Procter & Gamble are Motley Fool Income Investor recommendations. The Motley Fool owns shares of Procter & Gamble. The Fool's disclosure policy is outlined here.


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Comments from our Foolish Readers

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  • Report this Comment On November 06, 2009, at 7:34 PM, akutach wrote:

    Doesn't point number two reflect changing currency valuation from relatively strong dollar to weak over that same time period? The fact of gold-dollar peak valuation does not indicate uniquely American speculation, and the assertion is rather absurd.

    If a significant imbalance of gold prices between any two currency values occurred, investors would buy gold in the cheaper currency and immediately sell in the other for a profit minus transaction prices, thus narrowing the imbalance.

    The bubble will be evidenced by rising prices despite insignificant demand from physical buyers (point number 1).

    How does "20% less than last year's demand" compare to the volume of speculative buying?

    India and China seem to think gold is worth as much as their dollars at todays prices, and plan on buying much more than India did last week in the near future. Though their positions are probably about asset diversification rather than speculation or investment.

  • Report this Comment On November 06, 2009, at 7:49 PM, xetn wrote:

    Unfortunately, you do not understand what gold is; it is not an investment, it is money, real money. The rise or drop in the dollar denominated price is really reflecting the change in value of the dollar or other currencies. As a matter of fact you state that a 5% increase in the amount of gold would cause the "price" of gold to decline. I have to ask, just how much supply of dollars have you seen in the last 20 years? Just for a clue, since 1989 the value of the dollar has dropped over 74%. The reason that the value of gold stayed almost level (it actually only varied less that $2.00 from 1800 to 1913) is because the dollar WAS gold, silver, nickel and copper coins. It was not a bunch of worthless paper.

    In a free market, money would fluctuate based on the old basic pricing system, supply and demand. In fact, the reason the value of the dollar has dropped by over 95% since the creation of the Fed is because of the continued inflation of the number of dollars since the creation of new money out of thin air; counterfeiting.

    So, just to sum up, real money (for the last 5000 years) has been a commodity mostly gold whose value has been based on the supply and demand, just like all goods. Real money is nothing but a medium of exchange and will fluctuate by how much individuals value holding it vs spending it on some want or need. The reason why gold money has had a fairly stable value for most of its history is its limited supply on a yearly basis; it is not easily increased.

  • Report this Comment On November 07, 2009, at 11:59 AM, park94 wrote:

    Jeez another gold fear monger, Gold is a mineral just like copper, titanium, silver. And No it does not have any super powers, it cannot fly and it might save you from inflation but it's more in the way an old stamp collection can, through rarety value.

    Gold is industrially uselesss, and it's main use is jewelry. The thing is that it's basically controlled by a monopoly that owns all the gold mines, that puts it's own price on it's own assets. So they could pretty much charge whatever they wanted 100, 1000,3000$ but they also have to convince gullible people to pay for it, Hence, the kings used gold argument.

  • Report this Comment On November 07, 2009, at 12:47 PM, notafoollikeyou wrote:

    I can see why fool is in the name of this site if your writers show their ignorance as is displayed in this article.

    Any sane person will have gold and silver in their portfolio. Not an excessive amount, but as 22 of the top 24 hedge fund managers have personally bought gold this year so should everyone.

    Gold has been money for thousands of years and will hold its value far better than worthless pieces of paper called stocks and FR$, especially when govt's are hell bent on debasing their fiat currencies.

    Gold has increased in value by about 45% in the past ten years while the stock market at 10,000 in 2001 vs 10,000 today has lost 25% of its purchasing power. Which would you rather own?

    I guess you think the Asians and especially Chinese are stupid for accumulating gold and even encouraging their citizens to buy it if they thought the value would decline? This demand alone would offset any paltry 5% increase in production (which I seriously doubt). At present mine production if every person on earth wanted just 1 oz of gold it would take 1,500 years to supply it.

    You really should not be writing negatively about things you obviously have no knowledge of and quoting Buffet and Kitco (Nadler is beyond a gold bear and always wrong). hardly makes you an expert, but a true fool.

  • Report this Comment On November 07, 2009, at 2:26 PM, Anadultmale wrote:

    Great article! Finally a writer gets his t's crossed and i's dotted. When everyone get's in the boat, it going to sink. Over 2 million ounces per month are sold. So go read Frank Holmes's part of Goldwatcher and know that industry uses gold alot (in tons per year) every year. Well the Chinese may not be totally stupid, because $15 million get 51% of Firstgold. Sure come December first is Chinese as the boss, where the gold bars will be rolling out the door and swinning to China. Where by Gold when you can buy the Gold mine. Real smart America and/or California. Give away the house it's empty anyways

    It's the dollar slide that is part to blame. How much longer can the billions get pushed into Gold? I'll give it as a Christmas gift, a great big drop in price. Smarter players know which mining stock to play short. Look at the P/E and be shocked like I was. I've seen stock price moving wildly lately. Have you?

  • Report this Comment On November 07, 2009, at 2:56 PM, ET69 wrote:

    Boy! Emotional responses. Apparently Mr. Wiederman has touched a nerve ! Lets get a few facts clear about atomic #79 AU. First it has many industrial uses in dentistry and electronics and not just for jewelry. It is a transition metal and is very resistant to corrosion eg, nitric acid will dissolve silver but not gold- yet another reason it is more valuable.It is the most malleable metal. It can be argued that golds value is based as much on its industrial uses as on any psychological or scarcity value.

    As an emergency holding of last resort in social chaos it is probably not as valuable as bottles of alcohol or food stuffs or guns and ammo. Silver is probably more useful as a trade medium. In short gold is over valued.

    During the melt down last spring I bought the aforementioned as security and not gold. As far ar the argument that hedge manager bought it and therefore so should you ...well now THAT WOULD BE FOOLISH !

  • Report this Comment On November 07, 2009, at 4:34 PM, TMFDonauschwaben wrote:

    First off, I'm glad to see so many readers with such varying comments. I also wanted to add my own 2 cents to a few things...

    xetn,

    You said "Unfortunately, you do not understand what gold is; it is not an investment, it is money, real money."

    Sure, it used to be, back in the times of the Romans and even when the dollar was pegged to gold... but no longer, I'm afraid.

    And even "doomsday scenarios" of the world going to hell and currencies becoming useless seem highly unlikely. Each country's government has a vested interest in maintaining its currency, and they will do all they can to continue generating demand for it, even if it is inherently worthless.

    Secondly, people ARE "investing" in gold, not just using it as money. They believe it is a reasonably safe spot for their cash (or as an alternative for their cash) and that it is likely to rise over time. That's an investment, plain and simple.

    Bottom line, I don't think we're going back to gold as a real form of money anytime soon... so speculating in gold is not a smart move for long-term wealth generation.

    notafoollikeyou,

    You said "as 22 of the top 24 hedge fund managers have personally bought gold this year so should everyone."

    That argument makes no sense at all.

    Many hedge funds dabbled in CDOs and MBSs before the financial meltdown -- and you can see where that got them. Following the "elite" as so many believe hedge fund managers to be is often a really dumb move. They're 100% fallible.

    You also said "At present mine production if every person on earth wanted just 1 oz of gold it would take 1,500 years to supply it."

    Do you have a source for that fact? Even assuming that fact is 100% correct, the thinking there is flawed because it fails to account for the astoundingly high amount of gold that already has been extracted from the ground. I decided not to mention scrap gold much in my article, but the number of people who choose to sell their scrap gold when gold prices rise skyrockets. So even if miners can't get the gold out of the ground quick enough (and, again, I'm not convinced you're 100% right about that lag time), if the demand for gold rises high enough, there will ALWAYS be those willing to sell gold they already have, thereby really making miners only slightly necessary to the supply/demand equation.

    You also said "You really should not be writing negatively about things you obviously have no knowledge of and quoting Buffet and Kitco."

    First, you misspelled Buffett's name... But typos aside, I have followed Buffett for years, am an investor in Berkshire Hathaway, and have studied his historic moves pretty closely, so I don't think you're warranted in making this statement.

    ET69,

    You said "it has many industrial uses in dentistry and electronics and not just for jewelry." That is certainly true and I'm not trying to deny it...

    You also said "It can be argued that golds value is based as much on its industrial uses as on any psychological or scarcity value." Perhaps... but again, the bottom line is that it's a commodity whose value is contingent on supply and demand, whether demand be jewelry, or industrial uses... Real demand for gold has fallen (and shows no meaningful signs of reversing), while prices continue to rise.

    Thanks again, everyone, for your comments... keep 'em comin!

    -- Adam

  • Report this Comment On November 07, 2009, at 4:38 PM, TMFDonauschwaben wrote:

    And one last thing, I'm curious whether those who have commented (or those who will comment) actually have a vested interest in gold.

    That is, do you own a gold ETF, etc.?

    For full disclosure, I personally own no gold other than my wedding band. Which is probably not too surprising after reading the article.

    -- Adam

  • Report this Comment On November 07, 2009, at 5:33 PM, notafoollikeyou wrote:

    Adam

    There is little to be accomplished by trying to eduate you about investments since you are unwilling to educate yourself about various asset classes, but you should checkout Goldseek,com. Admittedly it is somewhat overwhelmed with gold bugs, but there is also tons of useful iformation and real facts about gold there.

    I would never tell anyone to put all of their assets in gold, but a reasonable allocation makes a lot of sense and I hardly think you have more knowledge than most large hedge fund managers and what they do with their personal money.

    How can you have such faith in worthless stock certificates that have a value detrmined by some market maker. Maybe you have already forgotten Oct 08 and March 09, but they will happen again and that can easily plunge big company stocks to zero like GM and many more.

    I notice you also failed to explain why the DOW is down 25% in purchasing power over the last ten years and you apparently think that is a good investment compared to gold that has appreciated substantially during that time.

    I also find it interesting that you own none of the stocks reco'd in your own article

  • Report this Comment On November 07, 2009, at 7:50 PM, masterN17 wrote:

    Wow, an anti-gold article from the Fool! Good read. Keep the diverse analysis coming.

  • Report this Comment On November 07, 2009, at 8:17 PM, jennifergmd wrote:

    I have to say this is one of the most un-educated articles I have read on TMF. If one of your statements is false, they all may be false. As has been pointed out India bought 200 tons of Gold last week. I am pretty sure they are not a territory of the U.S. Nor is China. Nor is Sri Lanka. Not sure what you think is going to happen to the dollar, but a little lesson- as the dollar falls, gold goes up. Repeat after me, dollar falls, gold rises. And in the end, there is no place for the dollar to go but down. Short term- sure it may go up. But at the end of the day- when the Feds are done playing their games, the true value of things like real estate, gold, silver, stocks will become apparent. There is nothing natural about the market anymore. The government is doing everything it can to prevent the inevitable. Anyone who thinks otherwise will pay dearly. And I will sell you my gold that I have purchased every year for 6 years and will continue to do. And you can use your dollars that you so much believe in. And then- I will sell you my mining stocks when you finally come around. I assume you own life insurance, perhaps disability insurance..... why? that does not pay you back unless you have a whole life policy. Good luck- you will need it.

  • Report this Comment On November 07, 2009, at 8:30 PM, jennifergmd wrote:

    Another point- please name a time when gold was not money? When you couldn't go trade your gold for U.S. Dollars? It has an exchange rate for a reason. As do currencies, other commodities, etc. There is a value to it. I don't see an exchange rate for my house, my t.v., my car. Please- tell us what is supporting the almighty dollar? Gold has history on its side- thousands of years. The dollar has history against it. Name one fiat currency that has survived and thrived forever? Think about it- gold is still as relevant today as it was 5000 years ago. Please please - keep waiting to buy gold- when mania buying hits, I will on my way out. Remember the tech boom, the real estate boom. There will be a gold boom and people will get crushed.

  • Report this Comment On November 07, 2009, at 8:40 PM, jennifergmd wrote:

    Another point...:) You talk about supply and demand of gold like it is oil- like they just turn on the spigot....It is getting harder and harder to find mineable gold. Just because they find it does not mean it is profitable. They have every incentive right now to mine as much gold as they can- being that it is at record prices. But gold is still going up. But the easy gold is getting harder and harder to find. There are geographic issues, political issues, etc that you have no clue about. Mining is obscenely expensive. Guess what happens if the credit markets freeze up and mining companies can't get loans to continue exploration? That is one reason why gold got clobbered (in addition to liquidity issues for hedge funds, etc) last year. Most gold mines are worthless. You vastly underestimate the demand of gold during a monetary crisis. I strongly suggest you do your research about what was one of the most profitable stock sectors during the depression. Guess what??? gold mining stocks, which increased about 5-6 times in value. Ever wonder why gold was made illegal to own in 1933? Please answer that question for everyone- because GOLD = REAL MONEY. Otherwise it would not have been illegal. I could go own forever..

  • Report this Comment On November 07, 2009, at 8:47 PM, jennifergmd wrote:

    And comparing gold to Bernie Madoff?? You have clearly lost your mind..... And when did BuffeTT make that statement? Was it before its run up from $250/ounce to almost $1110/ounce? Do you think he would laugh at making four times your money in an 8 year period? By the way- Jim Rogers is not saying gold is the best value right now. He thinks it will likely hit $2000 an ounce in the next decade. He thinks sugar is a better deal now, silver, etc.

  • Report this Comment On November 07, 2009, at 10:36 PM, dc46and2 wrote:

    "'gold remains well below last winter's peaks when priced in pounds, euros, yen, or Swiss francs.' This indicates that it is solely Americans speculating on gold's rise."

    The logic of this statement is deeply flawed. If, as you posit, the rising dollar price of gold was wholly caused by American speculation, there would be arbitrage profits in buying gold in Euros et al, selling in Dollars, and then exchanging back to the original currency. This action would keep the price of gold in various currencies in approximately the same relation as the exchange rates for those currencies. The only thing that the quoted statement could logically indicate is the devaluation of the dollar.

    Notwithstanding that flaw, I agree that viewing gold as an investment is foolish. Gold is not productive, it just sits there. In contrast, a good business produces things of value. Additionally, the business itself grows and becomes more valuable which will be reflected in the value of its stock.

    Gold may, however, be useful to an investor, provided he doesn't have any illusions about what it is or what it is good for. Others have said that "gold is money" and this view is more accurate than the view that gold is an investment. If you claim to have made a profit on gold, you must admit that it was either due to speculation or inflation. If it was speculation, then you ought to remember that speculative bubbles don't last forever. If it was due to inflation, then you have not really profited at all--the true value of the gold hasn't changed.

    In a good business, intelligent men combine the power of their mind with wisely invested capital and create wealth. Gold is merely a medium of exchange or a temporary store of wealth. Use gold wisely, but don't stop investing in good businesses when the price is right.

  • Report this Comment On November 08, 2009, at 12:36 AM, jennifergmd wrote:

    i agree with your statement- however, you are discounting the gold manic phase of buying that will happen. in a rational world- i agree with you about it keeping pace with inflation. but a rational world it will not remain forever. if i am wealthier than i would have been with stocks over that same period, it is actually wealthier. and over the last 10 years- you would be wealthier for having gold. but you make the real money in gold stocks... that is where fortunes are made

  • Report this Comment On November 08, 2009, at 12:47 AM, akutach wrote:

    TMFDonauschwaben My question went unanswered if you'd be willing to take a shot at it. You said demand for gold was down 20% in the last year. I agree with your first point that when speculative demand significantly outstrips physical demand for gold then you have entered a true bubble. Was that 20% drop economic in nature because people stopped buying so much jewelry (I assume this is the bulk of the physical gold demand), or because prices went so high that jewelers knew they couldn't pass price increases onto customers? To answer this, what has happened to physical gold demand in the latest quarter? Is it thawing with the global economy or gone further down as you might suggest based on further increases in dollar denominated gold?

    To answer your question I'm long GLD. I admit the position is speculative. I have a lot of faith in people's tendency to create bubbles, and my expectations of reward are not so high.

  • Report this Comment On November 08, 2009, at 8:17 AM, TMFDonauschwaben wrote:

    notafoollikeyou,

    First off, no need to go down an insulting path, as fired up as you may be. No good comes from that.

    Secondly, "a reasonable allocation makes a lot of sense." I still stand by my argument that it makes no sense -- it's a long-term money-losing venture.

    You also said "I hardly think you have more knowledge than most large hedge fund managers and what they do with their personal money" -- maybe, maybe not. We'll see who made the right call soon.

    You also said "How can you have such faith in worthless stock certificates that have a value detrmined [sic] by some market maker." First off, as a shareholder in select companies, it's not the "stock certificate" I own, but a share of a company's profits. And I firmly believe that the companies I own have a brighter long-term future in growing those earnings than speculators in gold have in driving up false demand in gold ETFs.

    As for your comment about the Dow, what would you have said in 2007? There have been all sorts of times in stock market history when the ten-year trailing return is negative... and you know what? They turned out to be the best times to get into the market, not into gold.

    And you're right, I don't own any of those stocks. But that doesn't lessen my argument at all.

    -- Adam

  • Report this Comment On November 08, 2009, at 8:24 AM, TMFDonauschwaben wrote:

    jennifergmd,

    It sounds like you've fully bought in to the whole doomsday economy scenario and the complete collapse of the dollar (I admit, the dollar will struggle -- but a complete collapse and fall of our currency and our country in general is an absurd idea) and there's not much convincing I can do to talk some sense into such an impassioned critic.

    But yes, the whole gold as a solid investment right now amounts to more than nothing but a giant Ponzi scheme a la Madoff. Gold has been a useless investment for the past two hundred years, so why do you think that all of a sudden that is going to change? Costs of mining gold were expensive back then... it was a rare commodity back then... the U.S. was beginning to take on what seemed like momentous levels of debt back then... and yet still -- after taxes, investors in gold lost money.

    But again, thanks for sharing your thoughts.

    -- Adam

  • Report this Comment On November 08, 2009, at 8:43 AM, TMFDonauschwaben wrote:

    akutach,

    Sorry I didn't answer your question earlier.

    Just to restate, you said "Was that 20% drop economic in nature because people stopped buying so much jewelry (I assume this is the bulk of the physical gold demand), or because prices went so high that jewelers knew they couldn't pass price increases onto customers? To answer this, what has happened to physical gold demand in the latest quarter? Is it thawing with the global economy or gone further down as you might suggest based on further increases in dollar denominated gold?"

    Looking at the latest-available quarterly numbers right now. For Q2 09, jewelry consumption (the largest source of global gold demand) was down 22%, industrial and dental demand was down 21%... yet gold as an investment was up 46% -- driven most largely by people pouring money into ETFs (up 1,315%!). All of these numbers are from the World Gold Council, specifically this link: http://www.gold.org/assets/file/value/stats/statistics/pdf/D... You will have to register there to see that PDF, but I definitely recommend it if you're interested in following gold supply/demand trends in an easy manner.

    And you're right to think that the diminishing demand for gold is in part because of the rising prices, as well as the overall economic condition. Which is part of the problem with a long-term gold investment... if the price of gold goes up ten-fold -- even five-fold from its price today, you can bet that demand for real gold usage (most largely driven by jewelry use) is going to plummet.

    I also appreciate your disclosure about gold, "I admit the position is speculative. I have a lot of faith in people's tendency to create bubbles, and my expectations of reward are not so high." You sound like you know the risk/rewards nature, which makes you sound like the wisest and even-tempered gold investor that has commented so far.

    Thanks for commenting!

    -- Adam

  • Report this Comment On November 08, 2009, at 11:06 AM, CoyoteMoney wrote:

    People invented money because gold simply wasn't practical enough. When you think seriously about the problems supply, of security and of assaying, the disadvantages become pretty clear.

    Not surprisingly, there was a big run up in gold as part of the 1980's recession as well. If you'd bought gold near that peak you didn't get your money back for a very long time.

    People pay too much for a FatHead of their favorite althlete, brag about it, and in the end they get a big poster of a future has been. In the modern world gold is just a commodity, and this my fellow Fools is just another bubble.

  • Report this Comment On November 08, 2009, at 12:55 PM, jennifergmd wrote:

    When you talk about a decrease in gold demand of 20%- it sounds like you are only considering industral uses. You are not taking into account demand as a monetary or inflation hedge.

    I am shocked that you think the dollar won't collapse at some point, whether it be 10 years, 20 years etc. You simply have little understanding of the economic situation at hand. I shorted GM from $50 a share down to the last penny. I don't recall you suggesting GM will likely go bankrupt. What do you think will happen with our debt situation? Our debt payments are huge right now as a country. What do you think will happen when interest rates rise? Inflation is a foregone conclusion down the road. What will our debt payments look like when that happens? It was the same thing with GM. They had to borrow money just to pay their operating costs for 20 years. Then when their credit rating was lowered and their borrowing costs increased- it was game over. The U.S. is in the same boat. They just have more room for error because the dollar is the world currency reserve.

    I have spent 20 years studying as a physician. Most doctors make bad investors because they forget that it took years to become good at what they did and get cocky. I study the economy relentlessly. And I promise I study it more than you. Your complete lack of knowledge regarding the economy is appalling. And your ignorance about gold is even worse. Which would be fine if you didn't influence others.

    You can just say that the dollar collapsing is absurd without offering any evidence to support it. Of course- buying at the peak of anything is a bad idea. But we are not at the peak of gold right now. You are talking historically about gold as an investment. Yet if you had accumulated gold over the last 8 years- you would have done quite well. If you had taken a little money each year and bought gold every year for the last 20 years, you would have done well with that.

    Your blind spot is that thinking that something hasn't happened before means that it will never happen. We have had a depression before in this country. There is no reason to think it can't happen again. We are all under the impression that the Fed has the ability to stop a depression. That is the biggest fallacy out there. They just have the ability to delay it.

    I am well invested in all sectors of the economy. I am just ready to pull it out when the time comes.

    I encourage you to lose the ego you have of what you think is right. And start basing your investment ideas on sounder principles. Good luck to you.

    Brian

  • Report this Comment On November 08, 2009, at 1:03 PM, jennifergmd wrote:

    Coyote Money

    -Please understand- if you buy anything at the peak- it will be bad. Gold is not unique in that way. Think back to the tech or real estate bubble. The problem is that most people when it comes to investing are like lemmings. They follow the herd. It is the contrarians that figure this out much earlier. It is the contrarians that are already out by the time everyone else is jumping in. From 2005-2007, I wouldn't have touched real estate for all of the tea in china. And I certainly would not have taken equity out of my house to pay for anything that was not an emergency. Yet people continued to buy real estate and use their equity as an ATM.

    The key in any investment is to be in before anyone else is and to get out as close to the top as possible.

    Regarding gold- I consider it an ounce of prevention- quite literally. The pound of cure will be obscenely expensive.

    By the way- I view gold as mainly as insurance. Silver on the other hand- will be where the money is at...

  • Report this Comment On November 08, 2009, at 1:21 PM, wuff3t wrote:

    "Your blind spot is that thinking that something hasn't happened before means that it will never happen."

    That's a reasonable point, but by the same token isn't it also possible that everyone could wake up one day and think "Hey, why am I investing my money in this stuff that doesn't really DO anything..."

    Yes, yes, I know gold has industrial uses but that's not why anyone invests in the stuff. As you yourself state, it's insurance; a hedge-bet. But underlying that is a self-fulfilling prophecy - that gold is valuable just because enough people say it is, and not because it has any intrinsic value. If tastes changed overnight (highly unlikely) it would be just as easy for the whole world to agree that actually gold was just a heavy, cumbersome waste of money and we'd all been mad to ever think it was otherwise. And this new mindset would be no more right or wrong than the current one.

    When Cortes invaded South America the Conquistadores couldn't believe how much gold the Aztecs had lying around. The Aztecs, for their part, handed over as much of it as the Spaniards wanted. Previously they had largely ignored it, as they couldn't see any value in it, and they were startled that the Spanish did. I guess this is my blind spot as far as gold is concerned: it's not that I can't see why some people think it is a good investment, it just seems antithetical to me to try to value my other investments based on their fundamental, intrinsic worth - then invest in something that has so little intrinsic value.

    Like I say, it's my personal blind spot, and I'm not even convinced I'm doing myself any favours by thinking this way! I just know what I feel comfortable with, and investing in something that people like just because it's "all shiny" doesn't sit well with me.

  • Report this Comment On November 08, 2009, at 3:54 PM, TMFDonauschwaben wrote:

    jennifergmd,

    You continue to cite the high debt load of the U.S. as the reason for future inflation, and why gold makes a smart play because of that…

    I’m not arguing with you that the debt load of the U.S. is quite frightening. However, you're forgetting that there are countries on the other side of the equation... those to whom we owe the debt. They have a vested interest in the dollar NOT collapsing to the ground, since that is the only way they will get their invested money back. I agree with you that it doesn't seem like the U.S. dollar will be in high demand until the end of time, but I don't agree with you that any collapse is as imminent as you are convinced. Until we pay off all our foreign debtors, they still have an interest in seeing the dollar as a currency in reasonable demand.

    Furthermore, if you have studied the economy as intensely as you are indicating, how do you account for all the other times in American history when the debt level was at unprecedented levels? When fear and panic were just as widespread as it was today? And the fact that our country and our economy did not collapse?

    Let’s start with the Panic of 1819 which looks VERY similar to what we’re in today. It resulted in foreclosures, bank failures, high unemployment and a decline in both agricultural and manufacturing production. It was made worse by the high level of foreign goods we were importing. It looked like the new country of America was destined for failure. But 4 years later, the country had again found its footing and continued its journey to the top of the world.

    The Panic of 1837 saw another bubble burst and ensuing years of inflation, but again… it did not slow America down.

    Then we go to the Panic of 1857, which again began with a recession and led to more bank failures, and a stock market that dropped over 60%… British investors got nervous that the U.S. wouldn’t be able to repay its debt. What’s worse, the panic began to spread to Europe and throughout the entire world. But again, this did not slow America’s long-term trajectory down…

    And it goes on and on, with the Panic of 1873, the Panic of 1893, the Great Depression, etc., etc…

    One could argue that U.S. economic history has been nothing more than a set of bubbles forming, bursting, and then causing widespread panic. Fear of the U.S. not being able to repay its debts has accompanied every single panic, and yet we’ve still be able to continue trucking along, fighting off this fear, and grow to have the world’s highest GDP on a nominal and PPP basis!

    So, what say you about that?

    And again, I’m not trying to inject an “ego” into my rebuttal, as you continue to assert. I’m just putting the facts out there, Doc!

  • Report this Comment On November 08, 2009, at 6:33 PM, notafoollikeyou wrote:

    I must say I read many comments on here and am amazed at the lack of knowledge and insight of most posters. There are too many outlandish statements to rebut, but a few bits of reality are necessary.

    Obviously everyone wants to believe that the US is strong and mighty and it is an economic powerhouse, but it is a dieing one. That means the currency must be devalued and when our debt faces default (or masive currency printing to avoid it) and we need to borrow trillions just to survive something has to give.

    I almost have to laugh as people rip gold as a useless asset, which it is any many ways, but when is the last time you ate your stock certificates or put them in your car to make it run? What could be a greater ponz scheme than the US stock market? A company prints a piece of paper and sells it to an "investor". The investor rarely even sees his certificate (unlike gold cons in my safe). The companies rarely even pay dividends and it would take a long time to ever recover your investment even if they did. The only increase in value is to find another sucker to pay more for the stock than you did and it can easily go to zero value if no one wants to buy it. And then you have the nerve to say Gold is a risky asset class.

    I won't even go into discussing the value of the US $ that has declined 94% in purchasing power over the last roughly 100 years and has much further to follow, but it is no different than any other worthless piece of paper if no one will accept and more countries want nothing to do with it.

    I am no Greenspan lover, but even he gets the concept of gold now:

    Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said..What is being proven is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.

  • Report this Comment On November 08, 2009, at 8:19 PM, jennifergmd wrote:

    Adam,

    To think that we have any chance of paying our debt back is crazy. It will never happen. There is no way it will ever be paid back. Not even if interest rates stay at nearly 0. You should do the math- calculate our debt payments at 0% interest, 1, 2,3 ,4, ...8% interest. Name one country that has ever spent its way out of this amount of debt. It can't and won't happen. Yes, our creditors have a vested interest in getting their money back. Creditors would like their money back from many companies that fail. That does not make it happen. Those who lent us money so that we could keep buying their goods will pay a price as well.

    We went from the largest lender to the largest borrower nation in the world over a 30 year period.

    I did not say the collapse of the dollar is going to happen next month, next year, etc . It may happen in 10 years, 20 years, etc. But collapse it will. And I also did not say I have all of my money in gold or silver. I have enough in silver and gold to protect myself against a depression or hyperinflation. I will also have other ways of protecting myself as well- such as ETFs that short long bonds, etc. Do dismiss precious metals as a ponzi scheme is misplaced. I would never have all assets in one category.

    You mentioned that the demand for gold is decreasing. The IMF had 400 Tons of gold on the block. The fear was that this would flood the market. India stepped up and bought 200 tons. Please explain how that suggests a lack of demand. And why India would buy that much gold? Why wouldn't they buy more U.S. treasuries if gold is such a bad deal? It implies a loss of confidence in the U.S. dollar. Plain and simple. I doubt you understand the manipulative forces involved in the gold and silver market. For instance, which investment banking firm controls the majority of the gold and silver short contracts? Do you know how much above ground silver there is in the world?

    I assume that you have life or disability insurance, correct? If you do- why do you own it? For me, gold is simply insurance. I can sleep at night knowing that if (or when) hell breaks loose, I will not have to worry. And you cannot deny we were on the verge of financial collapse last year. And now- we have paid a dear price to avoid a depression. What will happen if there is another crisis?

    We have not reached a bubble in gold yet. I challenge everyone reading this post to go ask 10 people if they have personally bought gold or silver bullion- either in physical metal or ETf. I have asked at least 100 people- and not one has done so. How does that represent a bubble. Everyone had owned some tech stocks, or bought a house etc. But not more than 1 in 25 or less has actually bought gold or silver . And that does not even include the mining stocks. People will get slaughtered in the mining stocks when the bubble peaks. There are only a few decent ones out there. No offense- when the bubble forms and then pops- TMF will be contributing to it as well. Your company has sold advertising space at the top of their home page to a gold mutual fund.

    I would never think of giving my patients half-baked advice. I hope you will do your homework and then report back to us.

    Just answer one question- why did India buy gold? And the answer is not for jewelry or dental fillings I can assure you.

    Hope you had a good weekend,

    Brian

  • Report this Comment On November 08, 2009, at 8:29 PM, jennifergmd wrote:

    Here is the link to a company that pays part of your salary..... I would not want to buy a full position in gold at these prices. I would probably try to average in over the next few months or so depending on one's level of concern. But some gold at these levels is better than no gold. I am also not saying that there won't be a correction in gold or silver in the near term. But when you look at how much we lose each year in insurance, is it that big of a deal if gold drops 20% in the near term? It would just make me load up some more. I am also not arguing that a bubble in gold will not develop. It absolutely will. We are just not there yet. When your next door neighbor tells you about the gold mining stock he just tripled his money on- that will be a sign of a bubble about to burst.

    http://www.usfunds.com/our-funds/our-mutual-funds/gold-and-p...

  • Report this Comment On November 08, 2009, at 10:57 PM, notafoollikeyou wrote:

    As an Add on for all of you investors, and especially Adam, that think stocks are a better investment than gold, I hope you are aware that you do not even own the stock you have paid for (unless you physically hold the certificate in your hands - not even allowed by many companies) and no where does your name appear on the companies records. You are totally at the mercy of The Depository Trust Company (DTC) and most investors do not know if they are solvent, will stay solvent, are honest and trustworthy, or worse yet if they have any record of you.

    The DTC owns that bond or stock, not you. Rather than in your name, it's registered (as the legal Registered Owner or agent) in their "street name", Cede & Company.

    The DTC is the Registered Owner - holder - of your stock or bond. The DTC is the legal property-holder, share-holder, stock-holder, owner and purchaser. Your name appears nowhere on the book entry or certificate as the actual owner. Instead, you have been designated by the legal registered owner, the DTC, as the Beneficial Owner. This means that your lawful Rights in that stock or bond are confined to that of a successor or heir. The difference between an owner and a beneficiary is like night and day. Take the time to absorb and understand the definitions:

    In these troubled times fraught with fraud, gov't intervention and Wall Street crooks this should be worrisome to most investors. Meanwhile I sleep well knowing my gold is in my safe.

  • Report this Comment On November 09, 2009, at 9:22 AM, jennifergmd wrote:

    Adam,

    The only point I needed to make about gold= money is:

    If gold is not money, then why was the dollar backed by gold for so many years? It was not backed by flat screen tv's, hummers, oil, etc. It was not because of a lack of value that nixon took us off of the gold standard in the early 70's. It was so we could recklessly print our money and use the devalued dollar to allow our deficit spending. Prior to that time, trade deficits had to be settled up with gold.

    I hope you have the courage to admit your lack of insight regarding the issue in which you tried to influence your readers. I believe you have a fiduciary responsibility here.

    Best,

    brian

  • Report this Comment On November 09, 2009, at 10:18 AM, TMFDonauschwaben wrote:

    jennifergmd,

    You just said "For me, gold is simply insurance." I think that sums up your argument pretty nicely -- and where we are at odds. Perhaps you've simply misunderstood my article from the beginning. After all, if gold is an insurance policy for you (which you claim it is), then ok, fine, that's what it is for you.

    However, I don't consider purchasing an insurance policy investing... it's merely something you have purchased as a safeguard, with no assurance of making an above-average return on your capital.

    However, the whole point of my argument and this article is that gold makes a horrible investment. You can't expect it to pay you regular dividends, and can't reasonably expect it to rise in value (unless you're speculating, which -- again -- is not investing).

    You also said, "I hope you have the courage to admit your lack of insight regarding the issue in which you tried to influence your readers. I believe you have a fiduciary responsibility here."

    I firmly believe that those individuals who are trying to "invest" in gold are making a big mistake, and that is why I wrote this article, and I stand behind my opinion. Of course, any individual is free to disagree with my opinions. But I am entitled to have my beliefs just as you are entitled to have yours. Even though I don't believe your opinions are correct, there is still a possibility that your opinions turn out to make more money than mine... and even if you don't believe my opinions are correct, you must likewise accept that there is a possibility that my opinions will turn out to make more money than yours. Investing is never an adventure in certain outcomes (which is why there's a whole risk-reward trade off)... so neither one of us can be 100% certain our predictions will come to light.

    I think you've made your point and your opinions pretty clear for whomever wishes to read it, so I don't think we need to continue our back and forth any more. I wish you the best of luck in your endeavors, most especially with your insurance policy of gold.

    -- Adam

  • Report this Comment On November 09, 2009, at 11:46 AM, Doccus wrote:

    I think the facts speak for themselves. Rather than worry about who's 'right', the very fact that gold's going up solely because of investments, rather than use (and it DOES have some industrial uses), is worrying enough.

    I got from the article, i think , what it was meant to convey.

    Thank you...

  • Report this Comment On November 09, 2009, at 3:31 PM, jennifergmd wrote:

    Point taken...I am sorry if I misunderstood your initial point....Passionate views can often be....well, passionate. I hope everyone can come out a winner .....

  • Report this Comment On November 09, 2009, at 6:25 PM, polomora wrote:

    Just read this message posted to the Metals & Mining board here on the MF:

    http://boards.fool.com/Message.asp?mid=28082319

  • Report this Comment On November 09, 2009, at 8:16 PM, TMFDonauschwaben wrote:

    jennifergmd,

    No worries -- it was a fun and lively debate! :-)

    -- Adam

  • Report this Comment On November 10, 2009, at 1:54 AM, joandrose wrote:

    Jennifergmd

    I retired early from corporate management. My income is now sourced entirely through my investments and like most, also suffered wounds over the past two years ! Big learning curve that .....

    For what it's worth - think you have got a better understanding of the value of gold relative to fiat currency debate - than 90% of other correspondents. Well done - excellent contribution.

    Joseph

  • Report this Comment On November 10, 2009, at 2:05 AM, biofest wrote:

    Thanks for commonsense on gold.You have a lot of patience to reply to people like "notafoollikeyou" who seems both arrogant and insulting.To quote him -"There is little to be accomplished by trying to eduate you about investments".

    I have been investing for fifty years and have substantially outperformed gold although I must confess to having invested in gold mines from time to time.

    My major investment theme is companies with substantial investment in R&D although I have a weakness for forest product companies with lots of land.

  • Report this Comment On November 10, 2009, at 9:02 AM, TMFDonauschwaben wrote:

    It's not often I find myself agreeing with Nouriel Roubini, but here's a recent interview that readers of this article would like find interesting: http://www.hardassetsinvestor.com/features-and-interviews/18...

    Some good quotes:

    "[S]ome of the increase—even in precious metals—is not justified by fundamentals. The supply looks excessive, and it looks like part of a bubble"

    "But those people who delude themselves that gold can go to $1,500 or $2,000 are just talking nonsense. The fundamentals are not justified, and those people are just talking their books."

    Amen, Roubini!

    -- Adam

  • Report this Comment On November 10, 2009, at 11:52 AM, c0ffeen0te wrote:

    I personally don't like to trade / investment based on somebody else's view...lacking inherent utility (with apologies to the dentists and jewelers) the price of gold is dependent upon those who believe it has/will retain value. I myself had a brief/unhappy fling with gold stocks in the late 90's.

    To protect myself against the decline in the dollar, I try to find reasonable investments in global or non-US based companies that I think have inherent value. Also inflation-linked bonds which sadly I entered much too soon...yeah everybody says we will have inflation but when? Tough to have inflation with tepid demand.

  • Report this Comment On November 10, 2009, at 4:33 PM, TMFDonauschwaben wrote:

    c0ffeen0te,

    I agree with you that foreign companies (and U.S. companies with a global footprint) are a good way to diversify against any potential danger facing the U.S.

    Thanks for your comments!

    -- Adam

  • Report this Comment On November 10, 2009, at 6:53 PM, montecorp wrote:

    The question remains:

    Why did India buy so much gold??

  • Report this Comment On November 10, 2009, at 7:14 PM, stockmenot wrote:

    We are in uncharted territory when it comes to our economy and it scares me. There are several ships about to collide, and one thing that is not being discussed is food and water.

    I think montecorp's question is a good one....but for different reason's. When it comes to a worldwide slowdown, it doesn't matter how pretty gold is, you can't eat or drink it. And if we are all in the same trouble wolrdwide, there's no one to buy that gold. Gold then is only as valuable as paper. And Russian money during the depression was more valuable burned for heat.

    What can we invest in that is absolutely fool proof....something we all need....food or water?

    How can you safely invest, and in what?

  • Report this Comment On November 10, 2009, at 10:20 PM, montecorp wrote:

    Stockmenot, we're not all in the same trouble worldwide; the world's countries' problems are connected but not completely interdependent on each other. China has the largest manufacturing base and the largest population, as well as a much higher savings rate. They're also very smart and I'm sure they have a plan. An obvious one would be to focus their manufacturing capabilities toward Asia, India, Europe, Brasil, etc. and to stop financing our largess with their savings, to stop accepting our IOUs as anything of value and instead focus the fruits of their labor toward their own people. Give their people prosperity in the form of convenience (that we've come to expect as entitlement) as a value in exchange for part of their massive savings (note: NOT in exchange for DEBT).

    The US could very well default on their IOUs. Really, how are we going to pay those trillions back? Seriously??? Then what? Short-term mayhem guaranteed and also long-term irreversible ramifications. AMERO, anyone?? (sure, it prob won't be called the Amero, but suffice it to say the dollar will be replaced with something else- or maybe someone is willing to suggest our current unprecedented situation will somehow magically end up without a currency failure? Adam, in all of your historical references, could you also please overlay the currencies that failed in our country's history? All of those were just freak incidents, right?

    Back to Gold. Gold is the perfect medium of exchange, which is why it will always have value. It has all kinds of practical purposes for the storing of value.

    Let's start from scratch, as if we were all on an island and had to create an economy (or if we suddenly found ourselves without a dependable fiat instrument to trade with each other).....

    If I had pigs and you had grain, we could only trade if you needed pigs and I needed grain. That's called double-coincidental demand. If I didn't need grain and that's all you had, then I wouldn't trade you my pigs and you'd go without meat or find someone else who had a surplus of pigs and needed grain. But what about the guy down the street who has the best tomatoes and doesn't want either of our things? I want those tomatoes! Surely we can work out a deal here....

    We would soon determine that we needed a medium of exchange that had a value we could rely on. It would preferably not rot, not be destroyed, not be faked, not be easily moved/stolen, not be replicated ad infinitum by someone whom I don't know nor did grant that authority, and so on.

    We could use seashells or pebbles, but they're all different from each other in weight (no standardization, no divisability) and just lying around everywhere, and we certainly wouldn't want someone finding a beach full of seashells and then coming back and buying up all of our pigs and grain and basically becoming a central banker and enslaving us (or creating hyperinflation by their sudden flooding of currency in the marketplace, assuming they weren't able to totally monopolize the scene).

    We'd try different things, but I assert to you that ultimately (if it were available) we would evolve into a gold-based currency system. It just fits the bill of all the needs that a dependable currency demands. Those demands are basically 1) store of value, 2) standard unit of measure, and 3) and agreed upon unit of exchange. You can't have an economy without those things. You can't save money, insulate yourself from this year's crop failure, or invest in new businesses, or borrow money to build a house/farm/water-treatment-plant/school, or feel secure that someone won't undermine your currency or all your hard work.

    I can postulate further, but gold is more than just a shiny metal. It has intrinsic value in its ability to function as a currency and therefore enable economies.

    I'm still curious, why did India buy all of that gold? Any of you big-heads should certainly have an idea that they could share.....

    -Monty

  • Report this Comment On November 11, 2009, at 7:54 AM, TMFDonauschwaben wrote:

    Pretty interesting chart: http://static.businessinsider.com/~~/f?id=4afaa8c40000000000...

    Quite frankly, I think the fact that the largest gold ETF now outranks the largest EAFE ETF furthers my point...

    -- Adam

  • Report this Comment On November 11, 2009, at 7:53 PM, eekthecat wrote:

    You people who are so unhappy about fiat currencies... gold IS a fiat currency. It has some value, yes, for industrial purposes. But its value now is much higher than its intrinsic value, and with the way you people are thinking of it, it is essentially the same thing as a fiat currency, because you are placing value in it that it doesn't really have. The simple act of using something as a means of exchange turns it into a fiat currency, because it is purely by fiat that gold becomes a means of exchange. Because look, what can I or you do with gold? I can't do anything with it. To me, it is totally useless. The only reason it has value is that there are some people who can do something with it (i.e. industry). But, the price these days has little to do with those people who have an actual use for it, as speculation and hedging against inflation and whatnot have driven the price up well beyond what utilitarian purposes would put it at. So, you are putting value into it via fiat. If the economy were to collapse entirely, which it seems a lot of gold lovers expect it to, there would be no reason whatsoever to consider gold any more valuable than paper currency, as its industrial value would be nil, and then its value would be purely fiat. Of course its supply is finite, unlike dollars, BUT... this does not really matter... the dollar may have lost lots of value of the years while gold has not, but the total supply of VALUE in the world has always increased (i.e. the economy has always been growing). The numerical values do not matter. The dollar may be worth much less than it used to be, but the standard of living is much higher now, so why should we care about numbers, which are imaginary? Your hatred of fiat currency and your love of gold are both silly.

  • Report this Comment On November 12, 2009, at 2:01 AM, BFil wrote:

    I am not sure that the US is interested in an outsiders optimistic viewpoint but here it is.

    The US economy remains three times larger than the next largest. 90% of its employees are still employed after the worst recession in 80 years (try this more often - 90% employed is often the right way to look at 10% unemployed)

    Practically every industry on earth has one or more formidable US competitors and it is still less dependent on international trade than any nation except North Korea. You have everything to go for.

    The national debt will not melt away quickly but it does not need to.

    You have massive private financial resources, a growing population, exceptional higher education, plenty of risk takers and a tradition of philanthropy.

    Against all this, hoarding gold and forecasting prolonged doom is a non-starter

  • Report this Comment On November 12, 2009, at 11:20 AM, tugcapt65 wrote:

    Note that India bought 200 TONS OF GOLD LAST WEEK. (at $1,100/oz. that's about $17,600 a US pound @400,000 US pounds.)I thought it was interesting that they did. I see nothing wrong with diversifying your portfolio, whether it be a country or individual, although putting all of your eggs in one basket usually is unwise, unless you're hoarding cash or cash equivalents.

    In a nutshell, use basic common sense when investing...spread the risk. Everybody has their own opinions about investing in gold.

  • Report this Comment On November 12, 2009, at 1:26 PM, mic510 wrote:

    "...But the consensus right now is that the best way to counteract inflation is by investing in gold.

    And the consensus is dead wrong!..."

    No, Mr. Weiderman, it your consensus that is dead wrong!

  • Report this Comment On November 12, 2009, at 3:38 PM, TMFDonauschwaben wrote:

    mic510,

    Come on, man, at least toss some facts out there if you want to rebut my argument!

    -- Adam

    P.S.: My last name is spelled with the "i" before the "e"

  • Report this Comment On November 12, 2009, at 5:41 PM, stanton17 wrote:

    BFil,

    Thank you for your elegant and intelligent post.

  • Report this Comment On November 12, 2009, at 9:02 PM, vriguy wrote:

    India bought gold because they had some excess dollars, and the Reserve bank of India is aware that any time in the future they can sell their gold to an increasingly wealthy Indian public - whose appetite for gold is larger than the world's entire current supply.

  • Report this Comment On November 13, 2009, at 10:46 AM, Joelshann wrote:

    The only articles that usually get this much scuttlebutt are those that mention Sirius.

    Maybe Wiederman would like to write a follow-up article called "The New Weimar Republic: How Satellite Radio will advance a lose fiscal policy and ruin Gold holders" Then he can slam both of those at the same time.

    That would make for some interesting comments.

    (Disclosure: long gold, no positings in SIRI)

  • Report this Comment On November 13, 2009, at 2:36 PM, pcoppney wrote:

    It is the wedding season in India. The government know the value of gold, even if only in India, will go up in the short run. Which makes it a better play than dollars now. Not necessarily forever, but for now.

    Gold is a commodity used as a store of value, it happens to be the most visible of them, but it is only a commodity not a magical element.

    I don't know the actual cost to mine an ounce but it has to be less than $1150 so eventually the price will come down, however it may go higher before it does. I think that would meet the definition of a bubble. That fact aside, the dollar is low and gold is high, assuming the whole United States does not go out of business, it is still better to by low and sell high, right? At some point in the not to distant future you may want to look at trading some of your gold for dollars. Even if you trade it for stocks of companies valued in dollars.

    In the interest of disclosure, I am long on a small gold position, and long on multiple large positions of solid value companies both US based and international.

  • Report this Comment On November 13, 2009, at 3:27 PM, aaoxenfree wrote:

    Question for author and commenters:

    What is your opinion on the effects that the CTFC enacting commodity limits would have on the price of Precious Metals? (or energy for that matter)

    Currently there are enormously concentrated short positions in PM held by one or two banks...

    I began researching precious metals a couple of years ago, have realized 70% profits on my investment in silver (in at 10, out at 17), and am now torn between the 'doomsday' and 'life must go on as it always has as its in every country's best interest' scenarios similar to those presented here in the comments thread.

    Thanks for your input. (I am not being snarky, seriously interested in varying opinions).

    Thanks!

  • Report this Comment On November 13, 2009, at 3:28 PM, aaoxenfree wrote:

    also, if another crash is imminent, which has been predicted by many who say the stock market is currently in a bubble, then isn't PM the best way to keep your value liquid so you can buy up cheap stocks when they hit bottom?

  • Report this Comment On November 13, 2009, at 5:24 PM, Brigadoon22 wrote:

    Nice article. I am not a professional investor. I'm an engineer, aka average Joe. I find that I agree with the post. I believe gold has the potential to be one of the next bubbles to burst. I have several friends that are hell bent on buying gold for two reasons.

    1) They want to protect their savings.

    2) They think they can make a killing when they sell it.

    Gold appears to be a logical safe haven for investments. My friends are buying gold based on fear and greed. One thing I have observed is that logic breaks down when fear hits. If gold prices start to go down they will sell when their fears overcome their greed.

    When the market was going down last year my friends sold their stocks. If a downward trend hits gold I can see the gold bubble burst when the average joe begins to sell their gold. I'd love to be proven wrong on this.

    For what its worth, I see commercial realestate going down before gold. I live and work near many industrial parks. There are a lot of empty buildings around.

  • Report this Comment On November 13, 2009, at 6:33 PM, OhMagnificentOne wrote:

    The only fools around are those who don't own gold. I have read this same non-sense about not owning gold and it demonstrates a complete lack of understanding of why gold is rallying. Gold is not just a hedge against inflation: it is a hedge aginst times of uncertainty. The price of gold is not a bubble and will not reach bubble territory for quite some time. That doesn't mean there won't be corrections but the price trend for gold is up.The fact that there are l individuals still knocking gold as an investment means there is plenty of room for the price to move higher. When Adam J. Widerman says it's time to buy gold rest assured that will be the time to sell it.

  • Report this Comment On November 13, 2009, at 7:08 PM, TWOTIMETUNA wrote:

    After reading most of these comments, what is the best place to put money right now?

  • Report this Comment On November 13, 2009, at 7:48 PM, TMFDonauschwaben wrote:

    OhMagnificentOne,

    I stand by my argument that gold, at these prices, is not a smart move.

    Times of uncertainty don't last forever, and this whole "own gold in times of uncertainty" philosophy you're operating under has popped up many times in American history. And those unfortunate individuals who fell for it at the exact wrong time have lost money.

    So I hope you're well-enough diversified not to be burned like your forefathers in history have been.

    TWOTIMETUNA,

    As my article closed out, I think both dividend-paying companies and companies with a strong international presence are the best bets for your money right now.

    -- Adam

  • Report this Comment On November 13, 2009, at 7:49 PM, TMFDonauschwaben wrote:

    OhMagnificentOne,

    I stand by my argument that gold, at these prices, is not a smart move.

    Times of uncertainty don't last forever, and this whole "own gold in times of uncertainty" philosophy you're operating under has popped up many times in American history. And those unfortunate individuals who fell for it at the exact wrong time have lost money.

    So I hope you're well-enough diversified not to be burned like your forefathers in history have been.

    TWOTIMETUNA,

    As my article closed out, I think both dividend-paying companies and companies with a strong international presence are the best bets for your money right now.

    -- Adam

  • Report this Comment On November 13, 2009, at 8:01 PM, TMFDonauschwaben wrote:

    A comedic blog post about a reality of gold: http://paul.kedrosky.com/archives/2009/11/the_price_of_go.ht...

  • Report this Comment On November 14, 2009, at 1:01 AM, dc46and2 wrote:

    Well, this is kinda off the subject of the article, but I can't resist...

    eekthecat wrote:

    "You people who are so unhappy about fiat currencies... gold IS a fiat currency."

    I'm afraid Webster beat you to it. He says "fiat money" is:

    "money (as paper currency) not convertible into coin or specie of equivalent value."

    Gold has no "intrinsic" value. The value of ANY commodity is 100% subjective, but there is a clear logical distinction between gold and fiat currency. The latter is given it's initial value by government decree; its acceptance is enforced by the barrel of a gun. The value of gold was assigned by the free will of rational men, acting for their own mutual benefit, long before any government thought to coin it. Gold is exchanged voluntarily without coercion.

    The supporters of fiat currency just keep repeating the incantation that fiat currency = gold in the hope that one day everyone will believe it. Only when the last rational mind has been destroyed will we equate the whim of an economic planner to a physical constant, enforced fraud and manipulation to honest and voluntary exchange, and your paper to gold.

    "the dollar may have lost lots of value of the years while gold has not, but the total supply of VALUE in the world has always increased [...] The numerical values do not matter."

    The fact that men have continued to produce under this burden it not evidence that they ought to have born it, or that they could not have produced more without it. You are correct that any particular numerical value is irrelevant, but the way that those values change over time is important.

    Consider a ruler or tape measure--the particular length chosen for its units is unimportant. However, its usefulness would suffer if those units were not fixed in relation to the physical world, but varied over time according to the unpredictable fancy of a distant mind. This fiat ruler would only be useful to a workman insomuch as it approximated a real ruler; only error and inefficiency would result from its fiat nature.

    Money is the "ruler" of commerce--the standard measure of value, the basis of all economic calculation and decision making. Like the fiat ruler, fiat money is only useful insomuch as it approximates the real thing. How many productive hours have been wasted because of its fiat nature? How many brilliant minds have wasted their lives trying to out-guess the central manipulators. How much time have you wasted, worrying about which way the floating currencies will float this year or the next? How many savers have been punished for saving? How many lenders have been defrauded of the true value of the principle? How much tax has been collected due to illusionary capital gains? How many resources have been misallocated because the decision maker could not distinguish the real from the mirage created by a central planner?

    One cannot reasonably argue that "the numbers don't matter" and inflation does not have those effects--they are precisely what the central planners strive to accomplish. If their "monetary policy" did not have those effects, then they would have no effect at all and the central planners would have no use for fiat currency.

  • Report this Comment On November 14, 2009, at 1:07 AM, dc46and2 wrote:

    Well, this is kinda off the subject of the article, but I can't resist...

    eekthecat wrote:

    "You people who are so unhappy about fiat currencies... gold IS a fiat currency."

    I'm afraid Webster beat you to it. He says "fiat money" is:

    "money (as paper currency) not convertible into coin or specie of equivalent value."

    Gold has no "intrinsic" value. The value of ANY commodity is 100% subjective, but there is a clear logical distinction between gold and fiat currency. The latter is given it's initial value by government decree; its acceptance is enforced by the barrel of a gun. The value of gold was assigned by the free will of rational men, acting for their own mutual benefit, long before any government thought to coin it. Gold is exchanged voluntarily without coercion.

    The supporters of fiat currency just keep repeating the incantation that fiat currency = gold in the hope that one day everyone will believe it. Only when the last rational mind has been destroyed will we equate the whim of an economic planner to a physical constant, enforced fraud and manipulation to honest and voluntary exchange, and your paper to gold.

    "the dollar may have lost lots of value of the years while gold has not, but the total supply of VALUE in the world has always increased [...] The numerical values do not matter."

    The fact that men have continued to produce under this burden it not evidence that they ought to have born it, or that they could not have produced more without it. You are correct that any particular numerical value is irrelevant, but the way that those values change over time is important.

    Consider a ruler or tape measure--the particular length chosen for its units is unimportant. However, its usefulness would suffer if those units were not fixed in relation to the physical world, but varied over time according to the unpredictable fancy of a distant mind. This fiat ruler would only be useful to a workman insomuch as it approximated a real ruler; only error and inefficiency would result from its fiat nature.

    Money is the "ruler" of commerce--the standard measure of value, the basis of all economic calculation and decision making. Like the fiat ruler, fiat money is only useful insomuch as it approximates the real thing. How many productive hours have been wasted because of its fiat nature? How many brilliant minds have wasted their lives trying to out-guess the central manipulators. How much time have you wasted, worrying about which way the floating currencies will float this year or the next? How many savers have been punished for saving? How many lenders have been defrauded of the true value of the principle? How much tax has been collected due to illusionary capital gains? How many resources have been misallocated because the decision maker could not distinguish the real from the mirage created by a central planner?

    One cannot reasonably argue that "the numbers don't matter" and inflation does not have those effects--they are precisely what the central planners strive to accomplish. If their "monetary policy" did not have those effects, then they would have no effect at all and the central planners would have no use for fiat currency.

  • Report this Comment On November 14, 2009, at 4:25 AM, tdiaczok wrote:

    Seems to me that Gold is just another avenue of investment that is preferred in times of uncertainty (as stated). But how long will this current uncertainty last ? That is the question. People deriding those who are now investing in gold are assuming that they will get greedy and overstay the party. That can happen with any investment. I agree that price rises will be based on speculation and the flight to safety rather than intrinsic value. Many posters have missed the point about why gold is valuable. Simply put it is a universal store of value that people know they can always find buyers for.

    Gold is also positioned within the investment universe as the asset class to be in during crisis and while it is "branded" that way the market will always ensure a self fulfilling prophecy.

    The person who indicated thatgold is a fiat currency also misses the point of increasing money supply, difficult with gold backed currencies, easy with fiat currencies. Increases in money supply are at the root of most credit based bubbles which is how we got into this mess in the first place.

    Gotta say in passing that this debate is great, lots to think about !

  • Report this Comment On November 14, 2009, at 9:33 AM, Brigadoon22 wrote:

    I have noticed one trend as an engineer. Gold is becoming less popular in manufacturing as a contact and solder finish. The main driver appears to be cost.

    Soft electroplated gold is used for wire bonding applications in electronic assembly applications. Immersion and electroless gold are used as either an oxidation resist prior to soldering or as a solderable finish itself. Card edge connectors and touch pad contacts also use electroplated hard gold due to its durability as a contact surface.

    Many of my customers are moving away from gold in these applications. In the electronics world there are cheaper alternatives available. Gold is a favorite but not when it raises the price of the finished assembly drastically. If a designer/engineer can shave some pennies from an electronic application the savings go to the company's bottom line. Some of these applications amount to tens of thousands of complex assemblies. This adds up to thousands of dollars.

    Once the manufacturing process has been qualified for a given product line the process doesn't change. Change in manufacturing can introduce unknowns that may create scrap and waste money. Hence the resistance to change. I find that product cycles last for a year or slightly longer.

    If gold prices drop in value in a sell of run it will be good for the electronics industry. Gold is a favorite contact surface. Cheaper is better from where I am sitting. However, due to the product design, qualification and manufacturing cycle required to maintain quality, gold will be slow to ramp up in applications that have eliminated it. New applications may use it. However, once a low cost alternative becomes entreanched it is tough to move away from it.

    High unemployment = no money for consumers.

    No money for consumers = poor retail sales.

    Poor retail sales = sell it for less.

    Sell it for less = build it for less.

    Build it for less is where my observation comes in. I can't comment on other sectors that use gold since I'm not involved in them. Some other FOOL may find this observation useful.

    If unemployment remains high I think people will keep running to invest in gold. If the dollar continues to tank it makes sense to me. If/when unemployment starts to go down, I can see people start to sell off their gold due to the comfort factor. If unemployment stays high for a long time then people may still sell their gold just to survive. I know that sounds very 2012'ish but a person has to eat.

  • Report this Comment On November 14, 2009, at 12:04 PM, krazycanuck wrote:

    "Gold is not just dollar-denominated.

    ... This indicates that it is solely Americans speculating on gold's rise."

    Here's the thing: if only Americans speculate on gold's rise, and it's "stable" in other currencies, then the exchange rate has to exactly offset the US dollar increase in the gold price, otherwise we have arbitrage! There have been periods in the current gold boom (since 2001) when it has risen in US dollars as the US dollar has declined against global currencies, and there have been periods that gold has risen in other currencies, some of the latter including a rally in the greenback. So, the second 'overlooked' item is not 100% correct.

    Moreover, in my experience gold is seasonal, usually strong from September to March or April, so I see higher prices ahead, at least until Spring, and I don't think we'll see the peak for a few more years. What does concern me is that at the peak, EVERYBODY will be trying to sell at once, with no new buyers, and this is where the "ponzi" comparison holds water, as the whole thing will implode as overstocked dealers refuse to buy what they can no longer sell and the price crashes. Nevertheless, I think everybody should hold SOME gold in their portfolio.

  • Report this Comment On November 14, 2009, at 5:55 PM, TheAmerican wrote:

    I find it ironic that after blasting the dollar, gold's value and increase is hailed in dollars! Gold, as the dollar, has exact intrinsic value- ZERO! Gold will only be traded for an 'acceptable' amount of dollars, francs, euros, whatever. Gold is the perfect vacuum- it tries to gather all dollars, all francs, all euros, etc. The more fiat currency printed by governments, the higher the exchange rate. I hesitated to buy gold now as it is tantamount to buying high in the stock market. Now, if the worst happens, gold should be easily traded for goods and services. I have decided to hold some gold and silver, as coins, in my house (so to speak) rather than in my portfolio.

  • Report this Comment On November 14, 2009, at 9:02 PM, Cqqldude wrote:

    As one of the non professional investors here, the chat between Brian and Adam, has been one of the very best educations I have received in the area discussed. Thank you both for you passioned arguments!

  • Report this Comment On November 15, 2009, at 10:53 AM, TMFDonauschwaben wrote:

    Cqqldude,

    Thanks for that comment -- I'm glad you enjoyed our back and forth!

    Who did you end up siding with in the end? Haha!

    -- Adam

  • Report this Comment On November 16, 2009, at 10:33 AM, TMFDonauschwaben wrote:

    CEO of Barrick Gold predicts a pullback: http://www.cnbc.com/id/33875450

    -- Adam

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