Warning! Gold Could Drop Below $500

Gold has performed very strongly over the past decade, trouncing equities and bonds in the process and handing investors who own the SPDR Gold Shares (NYSE: GLD  ) or the iShares Gold Trust (NYSE: IAU  ) handsome gains. Amid a heated debate about whether gold is in a bubble, it's worth taking a historical view to examine the risk investors are taking by paying more than $1,300 for an ounce of gold.

Gold's real return: zero
In fact, gold appears to have eked out a small positive real return over time. Using data from the World Gold Council and precious metal dealer Kitco, I was able to construct a series of inflation-adjusted gold prices going back to 1851, according to which gold generated a historical average return of 0.7% per annum. However, even that small positive real return is a bit of a mirage resulting from the powerful gold rally we've witnessed. Indeed, as recently as 2005, gold's average real return over 154 years was zero, period.

That shouldn't be surprising: There is no reason to expect that an inert asset that produces no cash flows and has few industrial applications to accrete value. By stating that gold has returned nothing, I'm not disparaging the yellow metal; rather, it shows that the precious metal has acted as a store of value -- over the very long term (for practical purposes, however, gold's price volatility makes it unsuitable as a store of value). That's consistent with the notion that it is an alternative currency that no government can debase.

Still, this alternative currency could be in for a big devaluation. To see why, look at the following graph of 10-year trailing real returns for gold since 1861 (based on average annual gold prices):

Sources: World Gold Council, Kitco.

Sources: World Gold Council, Kitco.

Recent gains could reverse
There are two important observations to make:

  1. Gold returns are mean-reverting: The alternating peaks and valleys in the graph illustrate the fact that periods of higher-than-average returns tend to usher in periods of lower-than-average returns, and vice-versa. That's not surprising since this property shows up across different asset classes, including stocks.
  2. Investors who have owned gold over the past 10 years have earned a real return that is far in excess of the historical average. In fact, there is only prior period that witnessed higher returns: the bull market in gold that culminated in January 1980. Judging by gold's performance over the next two decades, that top capped off an enormous bubble.

Putting one and two together suggests gold returns going forward will be lower than the ones we have become accustomed to during the past decade. Just how severe could a reversal be? Let's take a look at the current price of gold in context. The following chart shows the average annual price of gold expressed in constant 2010 dollars (i.e., inflation-adjusted):

Sources: World Gold Council, Kitco.


Sources: World Gold Council, Kitco.

Gold could fall by two-thirds!
Gold is galloping ahead of its historical average (the red line)! In fact, the price of gold would need to fall by almost two-thirds to get back to its long-term average of $456/ ounce, not to mention that markets typically overshoot. That's a sobering thought if you have a significant position in gold.

Don't let the gold hucksters fool you
Gold is inherently a speculative asset. Despite what I wrote above, I do believe that it represents an attractive, but high-risk, speculation, as the current supply demand dynamics look compelling. However, I can't rule out that things will turn out differently than I expect them to. If the economic recovery stabilizes and high inflation doesn't materialize, gold could decline significantly from its current level.

Let me emphasize that point: At these prices gold is no safe haven; it's an active bet on a specific scenario for the U.S. economy. Super-investor John Paulson owns gold because he believes the U.S. will experience double-digit inflation, but if that doesn't pan out, the bet could prove costly. Major gold miners that have closed out their hedges, including AngloGold Ashanti (NYSE: AU  ) , Barrick Gold (NYSE: ABX  ) and Gold Fields (NYSE: GFI  ) would share in the pain.

Gold is now a bubble
I have been bullish on gold ever since I began looking at this market in February 2009, and I have argued against the idea that this is a bubble. As I review my thesis, I now believe it's likely that we are in bubble territory; nevertheless, I remain bullish because the conditions are in place for this bubble to continue expanding. Investors who wish to speculate on this can do so via the two ETFs I mentioned in the opening paragraph or through the following vehicles: Sprott Physical Gold Trust (NYSE: PHYS  ) , the Central Gold Trust or the Central Fund of Canada (AMEX: CEF  ) .

If you want to bet on gold, there are smarter ways to do it than just buying the metal. One little-known company has discovered a mountain of gold in Canada. Get the company's name in the Motley Fool's free report, One Gold Stock Digging Up Massive Profits.

You can follow Fool contributor Alex Dumortier on Twitter; he has no beneficial interest in any of the stocks in this article. The Fool owns shares of Sprott Physical Gold Trust ETV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 02, 2010, at 4:57 PM, name7865 wrote:

    This article misses a key point: the demand for gold depends on the number of people who have money to invest, but the supply of gold is mostly fixed (gold mines add to the available supply very slowly). Right now, the number of investors is increasing rapidly as China, India, Brazil, etc develop.

    Other financial assets increase in amount when the moneyed population increases (more companies are formed, which issue shares and bonds). Gold does not.

    The way to look at the gold price is to reckon that most prudent investors will want a certain percentage of their assets in gold, as a hedge against financial disaster. Maybe as little as 2% of their assets - but there are a huge number of new investors coming on-stream. If there will be 5 times as many investors, worldwide, in 2015 as there were in 1990, then expect the gold price to be 5 times what it was in 1990. Because they will want to put the same fraction of their assets in gold, but there is only one-fifth as much gold available per investor.

  • Report this Comment On November 02, 2010, at 5:26 PM, kenfwtx wrote:

    You want us to SELL. That means BUY.

    America is going down the drain. More quantitative easing is needed for our economy? My parents came from a third world country, we know how money operates. I'm keeping mine. We also have rich people buying it by the ton.

    I'm Asian by the way, we think about gold way differently, same with Indians (India).

  • Report this Comment On November 02, 2010, at 5:39 PM, TMFAleph1 wrote:

    ERRATUM:

    "gold was fixed at $20/oz until 1933 and then set at $35/oz. It did not trade free until Nixon closed the gold window in the 70's. Track the price since then."

    I did track the price since then. By the way, the average gold price in constant 2010 dollars since 1972 -- the first full year during which gold traded freely -- is $659.13, or LESS THAN HALF the current price.

    Alex Dumortier

  • Report this Comment On November 02, 2010, at 5:48 PM, djp928 wrote:

    Yeah, Gold is way above its historical average. What else is way above its historical average? Oh yeah, the printing of US Dollars. Hrm...

  • Report this Comment On November 02, 2010, at 5:52 PM, deltafox2 wrote:

    I don't think we'll be in the $500 territory for another while even though the bubble hypothis is certainly correct. I fully share the views of ken and name. Gold is a recommended portfolio position of 5-10% according to just about anyone you ask - meaning professional advisors. Multiply that by the total wealth accumulated in portfolios around the world times a guessed figure of 30% of people who will add GLD, physical gold or derivatives to their portfolio - relate this to available supply, figure in the fact that the (largely US-originated) financial chaos will be here to stay for another while and there can be only one conclusion: to add a "0" to this figure in the medium term. Howewer, when things go parabolic it has in the past been wise to take profits.

  • Report this Comment On November 02, 2010, at 5:53 PM, tzapa wrote:

    Platinum seems like a safer bet than gold at this time.

  • Report this Comment On November 02, 2010, at 5:56 PM, TMFAleph1 wrote:

    @djp928,

    "Yeah, Gold is way above its historical average. What else is way above its historical average? Oh yeah, the printing of US Dollars. Hrm..."

    I don't disagree, which is one of the reasons why I think it remains a good speculation, but a speculation nevertheless.

  • Report this Comment On November 02, 2010, at 6:12 PM, ddepperman wrote:

    The Death of Capital

    www.hcmmarketletter.com

    Michael Lewitt

  • Report this Comment On November 02, 2010, at 6:48 PM, PositiveMojo wrote:

    What do you think when someone says that Gold is a currency, and not a commodity?

    I examined the "Trade Weighted US Dollar Index" to see if there was any correlation between gold and a basket of currencies. In 1985 the value of gold was $327 per oz. vs. 68.2 cents for the dollar. By 2005, the value of the dollar was 111.6 cents, a 63.6% increase. The value of gold was $513 per oz., a 57% increase. However, in 2008, the value of the dollar was 96.1 cents vs. $865 per oz. for gold.

    The conclusion is that when the gang in Washington fire up the printing presses the value of the dollar drop and the value of gold rises. I don't see a contraction in money supply any time soon, so I'm having a hard time following your reasoning. Can you explain?

  • Report this Comment On November 02, 2010, at 6:52 PM, PositiveMojo wrote:

    P.S. If China tries to gut the American dollar they would be cutting their own throats.

  • Report this Comment On November 02, 2010, at 7:04 PM, TMFAleph1 wrote:

    @PositiveMojo

    Wherever did you get the notion that China might try to "gut the American dollar" -- they are resisting calls by U.S. officials to allow the renminbi to appreciate.

    Besides, nobody needs the Chinese or anyone else to gut the U.S. dollar when U.S. politicians and officials are doing a fine job unassisted.

  • Report this Comment On November 02, 2010, at 7:28 PM, PostScience wrote:

    I would never try to time the collapse of a bubble, but when this baby pops, it's going to be spectacular. Gold lost over 50% of it's value in the 1980's. Could easily happen again.

    Gold is the same as fiat currency - it only has value because people think it does. Personally, I don't have any use for the stuff.

  • Report this Comment On November 02, 2010, at 7:43 PM, Ladybird22 wrote:

    Way to go, MarathonMan. (Is that you, Frank)?

    I entered the jewelry bus. in 1980 & remain; buying gold off the street has kept me alive this year. Until there is a celebratory mood (read: what the public "thinks" as this i-s-s election day), I'll stick to scrap.

    I think that last year's prediction of gold @ $1500/oz. by December will come true this year!

  • Report this Comment On November 02, 2010, at 7:44 PM, falas71 wrote:
  • Report this Comment On November 02, 2010, at 8:34 PM, TMFAleph1 wrote:

    No it's not Frank. My byline is included at the top of the article -- my name is Alex.

  • Report this Comment On November 02, 2010, at 9:03 PM, GrumpyOldGuy wrote:

    I think I heard that the extraction cost of gold is over $500 an ounce. If this is true then if gold hits 500 bucks I am going "all In" instead of the 7% I an in now.

  • Report this Comment On November 02, 2010, at 9:55 PM, TMFKopp wrote:

    "If there will be 5 times as many investors, worldwide, in 2015 as there were in 1990, then expect the gold price to be 5 times what it was in 1990."

    Well, Alex, I think you've got one thing right for sure -- gold is bubbly. The sentiment above -- that everyone needs to own an asset no matter what the price -- is exactly the kind of insanity that drives bubbles.

    It'll be a fun ride, but good luck with the dismount :)

    Matt

  • Report this Comment On November 02, 2010, at 10:00 PM, xetn wrote:

    Is there really a gold bubble? If there was, it would mean that almost everyone is jumping on the bandwagon. Ask your self how many people do you know that own gold? Can you count them on one hand or maybe one finger?

    I believe gold (and to an extent silver) are a reflection of fiat currencies. And not just the US dollar. At any rate, you should read the following article by noted economist/historian Dr. Gary North:

    http://www.lewrockwell.com/north/north889.html

    and an excerpt from the article regarding the price of gold to various currencies:

    http://www.the-privateer.com/chart/g-multi.html

    This will give you a much better analysis on gold.

  • Report this Comment On November 02, 2010, at 10:14 PM, globalsailor wrote:

    Any investor has to look ahead rather than behind. If you really think that the printing presses will continue then buy gold. If you don't think that they will continue then sell. The current climate in Washington sounds very angry and very ready to do nothing. The last government in Washington was run by a more independent Fed that ran interbank interest rates up to double digits. This one has interest rates as low as they can go. I'd still buy the metals.

  • Report this Comment On November 02, 2010, at 10:19 PM, TMFAleph1 wrote:

    "Is there really a gold bubble? If there was, it would mean that almost everyone is jumping on the bandwagon."

    Bubbles play out in several stages. What you are describing is the late stage of a bubble, not the early one.

    Alex Dumortier

  • Report this Comment On November 02, 2010, at 10:54 PM, KLIPDOG wrote:

    "Indeed, as recently as 2005, gold's average real return over 154 years was zero, period"

    ....ofcourse it was zero, think about it, makes perfect sense. Gold's value is based in fiat currencies. That is why it is a store of value. A gold coin 100 years ago, could buy you a haircut, a nice suit, and a good pair of shoes. It's price per ounce at that time? Doesn't matter, why, becuase today it can buy the same exact thing even though it's price per ounce is ten times higher or more---so what's the meaning of this you ask, simple, that fiat currencies are inflateable to a very high degree, while gold is much more resisitant to inflating, that's why it makes sense that it's returns can be zero, yet still a sound investment, at least for wealth protection, give or take some extenuating circumstances ofcourse, ahem, like interest rate announcements or quantitative bulls#$%--I mean easing.

  • Report this Comment On November 02, 2010, at 10:55 PM, jabontik wrote:

    I have a good predictor of asset bubbles - my 70 year old mother. At the peak of the housing bubble, she called me and told me to go out and buy a house, any house. Everyone is doing it, housing always goes up!

    She is invested in gold, although I haven't got the frantic get rich quick call yet.

  • Report this Comment On November 02, 2010, at 11:09 PM, goalie37 wrote:

    To me the greatest evidence of a gold bubble, and this is fairly recent, is the rabid hostility one encounters when daring to suggest it may be a bubble.

  • Report this Comment On November 02, 2010, at 11:14 PM, starbucks4ever wrote:

    As for myself, I am looking forward to gold ownership, at the right price, of course. When gold retraces to $100 an ounce, I will probably buy the pullback. I don't know why I want this stupid metal. It will be a stupid emotional trade on my part, based on the greater fool theory.

  • Report this Comment On November 03, 2010, at 1:59 AM, SteveCK072 wrote:

    This time is different! It's a new paradigm! The old rules no longer apply!

  • Report this Comment On November 03, 2010, at 2:01 AM, MartinSamuelson wrote:

    Whenever people have a fanatical response to someone suggesting that something is a bubble, it's a bubble. Whenever an asset is ridiculously valued compared to history and the fanatics explain it's because all of the fundamentals have changed, it's a bubble.

    If you buy into a bubble you are a sucker unless you sell to another sucker before it bursts. Like playing Russian roulette except here you get rich if you don't shoot yourself in the head.

  • Report this Comment On November 03, 2010, at 4:01 AM, AvianFlu wrote:

    This thread is perfectly timed for the QE2 announcement later today!

  • Report this Comment On November 03, 2010, at 4:29 AM, esotericrajen wrote:

    The analysis in this article is very one-dimensional - i.e. it only looks at the price of gold over time. The main force driving the price of gold now is the fact that there is so much money-printing going on that the value of the actual money has dropped.

    It would be very interesting to see an analysis of the price of gold versus the availability of money (or the *real* value of the USD).

    We are in a phase of unprecedented printing of money, which is debasing the value of our money. Hence, gold is rising in price, not necessarily value.

  • Report this Comment On November 03, 2010, at 5:13 AM, tdiaczok wrote:

    Eventually Gold will come down severely off a peak and all of the "experts" will say "See, told you so !!" Crowing how right they they were even if prices drop to levels we still haven;t currently reached. It will all be relative to when an individual bought into the market.

    My understanding is that most asset bubbles are built on easy credit. Interest rates in the US are low but are people borrowing to speculate in the metal ? Not yet, the bubble will come and then burst, but not yet, not while fiat currencies face extinction.

    Most people here understand reversion to the mean is. It will happen to gold eventually, but only after world currency systems and economies go through significant change and huge amounts of pain.

  • Report this Comment On November 03, 2010, at 6:06 AM, Yourdeadmeat69 wrote:

    $14Trillion in debt, currency backed by BS not gold and silver, printing press dollars about to be run off today via FOMC meeting, the way of all currencies backed by govts instead of gold or silver is zero.

    I didn't say that. Thomas Jefferson said that. He had 400 years of experience to draw upon. He said if you give the power of printing money to banks, ie the Fed, your banks would own you and your currency goes to zero.

    That's why gold and silver were selected to back the dollar in the Consitution. That's because when we tried to just issue paper, called Continentals, they went to zero in a heartbeat.

    Now with our "transvestite mauve" colored funny paper, if you think that Bretton Woods making our dollar the standard of the world after WWII, as the only capitalized nation left standing, will stand the onslaught of China and India in the 21st Century, think again.

    Select 1971 as the year Nixon commoditized silver and gold on the free market--gold went to $105 and ounce almost overnight.

    Folks who made 10K a year in 1971 bought 3500 cars and $40000 houses. Now you need 100K to buy the same car, now $35K and the house is $400K--all we did was add a zero, because the "growth" of 4.5% a year everyone "expects" is 3% INFLATION designed to be so, to continue the myth that America still leads in manufacturing in the world.

    The Chinese and Indians are collecting gold and silver, because we are headed for "we;re noot interested in your bond paper" just as soon as those economies don't need to export their junk to us, and can satisfy demand with local population.

    It'll take about ten years, but that is the end of the trail. BUY GOLD AND SILVER.

  • Report this Comment On November 03, 2010, at 11:31 AM, prime99 wrote:

    Now that the election is over, let’s see if we can take a step forward. For the last three months, we’ve been living in a Tale of Two Cities. We’re coming off one of the strongest rallies in history, yet struggling with the worst unemployment levels in 25 years. We’ll see what the Fed has to say, but I’m scared quantitative easing is going to trigger runaway inflation.

    S&P vs Unemployment- http://www.hiddenlevers.com/hl/u?8XpAUi

    Economic impact of quantitative easing- http://www.hiddenlevers.com/hl/u?aOUL7k

  • Report this Comment On November 03, 2010, at 12:35 PM, jrj90620 wrote:

    Even using phony govt CPI gold would have to be over $2300 to be comparable to the peak in 1980.The U.S. is much more bankrupt today than in 1980.Demand for gold from the rising Asian countries is huge.Glad to read these articles.Bull markets climb a wall of worry and I will worry about gold when I don't see so many that believe we are in a bubble top.

  • Report this Comment On November 03, 2010, at 1:07 PM, jesusfreakinco wrote:

    Is this article an April fools joke? Just checking b/c you can't be serious...

    JFC

  • Report this Comment On November 03, 2010, at 1:12 PM, JGBFool wrote:

    The national debt nearly tripled while Reagan was in office. What happened to the price of gold between January 1981 and January 1989?

  • Report this Comment On November 03, 2010, at 1:50 PM, chumchingee wrote:

    Gold is a commodity. It depends on scarcity for value. It is a currency in several countries. India and China think gold is the currency of choice and they might be right.

    This is the most interesting article going against main stream (fashionable gold) right now. Glad to see someone pointing out the history behind gold.

    I look to see a change in perspective at the US Fed soon. With this change should, would, could have serious effects on the value of gold. The jails are full of losers with should, would or could in their speech patterns.

    A sound monetary policy would be to raise interest rates to around 10-12 percent on savings.

    Cut government across the board by the same percentage.

    This would reverse a lot of damage.

    Cut the money supply by around 20 percent.

    Then you have a similar situation that caused the fall of the price of Gold. Incidentally the Russians dumped a huge amount of gold on the open market about the time the price fell in the Reagan years. Interest went to 20% for a while there.

    Is there someone out there going to dump all their gold like the Russians in the near future?

    It bankrupted the Russian economy.

    But it did cause the price of gold to fall.

    Should, Could, Would have . . .

    In the real world, I think Gold will stabilize at around 2,000 an ounce in the next year or two. I think you are looking at confiscation of all assets of gold by the US government. That is my prediction of the near future.

  • Report this Comment On November 03, 2010, at 2:06 PM, TMFKopp wrote:

    @chumchingee

    "It is a currency in several countries."

    Please do expand on this. This is news to me.

    "In the real world, I think Gold will stabilize at around 2,000 an ounce in the next year or two."

    Which seems almost wholly unsupported by gold's history. Looking back at Alex's chart, the $2,000 could perhaps be justified on the basis of the bubble argument, but it'd be impossible to justify the "stabilize" as gold's price seems to continuially go through cycles.

    That is... unless.... it's different this time!

    Matt

  • Report this Comment On November 03, 2010, at 3:27 PM, rfaramir wrote:

    JGBFool: "The national debt nearly tripled while Reagan was in office. What happened to the price of gold between January 1981 and January 1989?"

    The debt tripling happened because of overspending while the Fed did NOT print extra money to accommodate the spending. So interest rates rose and the price of gold fell.

    When the Fed prints, interest rates fall and the price of gold rises. It's simple supply and demand. If you make more monetary units (inflation of money supply), it takes more of them to purchase goods and services (rising prices). You haven't helped anything, you've just stolen purchasing power from savers and distributed them back into the market, starting with the bankers (or whomever the Fed buys assets from).

  • Report this Comment On November 03, 2010, at 3:30 PM, Aislabie wrote:

    This is an entirely US dollar-centric discussion. If demand is worldwide then it is worth a look at what the gold price has done in other currencies.

    A Japanese person in yen or a Chinese person in yuan is going to see a very different long term gold investment result and comparison with their other local opportunities

    This will affect the worldwide demand for a quality investment when ranged against other investment choices.

  • Report this Comment On November 03, 2010, at 3:50 PM, lctycoon wrote:

    "Whenever people have a fanatical response to someone suggesting that something is a bubble, it's a bubble."

    I can think of a couple stocks that will cause the fanatical response if you make any suggestion that they are not perfect. Would those be in a bubble too?

  • Report this Comment On November 03, 2010, at 4:55 PM, rfaramir wrote:

    @Aislabie

    If you look at xetn's second link, the chart clearly shows that the other nations' central banks acted very similarly to ours. They were in the same boat with the same motivations, so the outcome was the same. They could inflate, they profited from inflating, so they did inflate the money supply.

    @truthisntstupid

    "How do you know YOU won't be one of those left standing when the music stops?"

    Because I don't hold paper gold. If I have my own chair, then I'm not playing musical chairs. Having pieces of paper gold sharing rights to one unit of physical with 99 other so-called gold investors is a disaster waiting to happen, both for the suckers and the companies perpetrating the fraud.

  • Report this Comment On November 03, 2010, at 5:19 PM, wyrdmage wrote:

    I appreciate Warning Voices, especially this one: "I'm warning you that a gold bubble is developing but I'm still bullish on gold because the bubble has room to grow".

    I, too, am very bullish on gold, but at some point it will plummet. My experience is that people who completely ignore Warning Voices instead of valuing them as a source of information are the people who already know it all and never make mistakes.

  • Report this Comment On November 03, 2010, at 5:24 PM, TMFAleph1 wrote:

    @wyrdmage

    Nicely put!

  • Report this Comment On November 03, 2010, at 11:09 PM, barklikeadog wrote:

    The only proof I need to know that gold is a bubble is all of the TV and radio commercials urging folks to buy gold; you know the end is in sight when they are pushing it on the little guys, always the last in line and left holding the bag.

    Don't believe it? Want to buy some tulip bulbs (one of history's great bubbles)? Gold bubbles have burst, silver too, stocks, real estate, oil .... you name it, capital is always looking for the next big thing, the bandwagon gets going and then at the end someone is left holding the bag. Yeah, yeah, this time its different. Right. Good luck with that.

  • Report this Comment On November 03, 2010, at 11:12 PM, barklikeadog wrote:

    Oh, and the other day I heard a news report on an analyst who predicted gold could hit $10,000 an ounce .... a sure sign of insanity, or a means of getting more little guys in to the bubble, before it goes splat. Pump & dump.

  • Report this Comment On November 04, 2010, at 11:39 AM, ryanalexanderson wrote:

    For every dealer pitching gold, I'll show you five scrap metal dealers attempting to buy your gold.

    For every columnist in the market urging the public to buy gold, I'll show you five wondering if it's a bubble.

    For every person who owns gold, I'll show you five who don't.

    Until these ratios change (as they did with Internet stocks, tulips, and houses) - or Paul Volcker 2.0 shows up - I'm pretty comfortable with my physical precious metals, thank you. This time is NOT different - when a country's economy tanks and they suddenly can't find the "OFF" switch on the printing press, you need some precious metals.

  • Report this Comment On November 04, 2010, at 3:30 PM, Vineconimcs wrote:

    Really like this article and the associated comments. Physical gold in the form of jewelry is supportable. All else, is speculation not investing, I am not smart enough to sell before the bubble pops, so just stay out is probably my best course of action.

    The supply system is why I am bearish on gold for the long run. Mining companies are reporting plenty of gold in reserve statements most of which is sitting in tailings piles in various countries including the USA.

    Recovery costs are probably slightly over $500.00 an ounce, but the cash outlay for a single plant is closer to $300 -$350 Million. Producers will hedge the price of gold to at least cover the big fixed start up costs. This is what to look for, that will pop the bubble.. Mines increasing production year over year. If the USA actually gets some fiscal restraint and cools off the printing presses, that will accelerate the slide.

  • Report this Comment On November 04, 2010, at 4:55 PM, qcw wrote:

    I doubt anyone comes back to look at these things - LOL.

    But your article appears a couple days ahead of a huge move up in gold.

    Im looking forward to your post on GOLD GOING UP .. I may need to sell then.

    -Q

  • Report this Comment On November 04, 2010, at 5:18 PM, TMFAleph1 wrote:

    "But your article appears a couple days ahead of a huge move up in gold.

    Im looking forward to your post on GOLD GOING UP .. I may need to sell then."

    @qcw

    You must think this observation is clever, and that it proves that my article is some sort of contrarian indicator. However, it appears that you did not read the article, only the headline. In the final paragraph, I wrote that I remain bullish on gold.

    In any event, it should be clear in the article that I was not making a short-term call on the direction of gold. I don't know how to make such calls on gold and I rather doubt that anybody else does, either.

  • Report this Comment On November 04, 2010, at 6:41 PM, albo999 wrote:

    You can't extrapolate the performance of gold based on historical measures. We are in uncharted waters.

  • Report this Comment On November 05, 2010, at 11:38 AM, euzkara wrote:

    Your writer on this gold article is not only misleading your subscribers but his distortions are so atrocious as to be patently ridiculous. Forget 1851. If in 1973 you had bought 1000 ounces of gold, you would have paid roughly $35,000. Those same 1000 ounces today would be worth roughly $1,350,000. Even adjusting the 1973 price for inflation, the rate of return would still be over 1000%. And you allow some idiot to claim, on your banner, that the rate of return for gold is near zero??? You must think WE are all fools!

  • Report this Comment On November 05, 2010, at 11:42 AM, not2Boutdone wrote:

    Wait just a minute now, isn't normalizing gold prices to inflation (ie: the "Inflation Adjusted Gold Prices Chart") missing the whole point? It seems to me that inflation adjusting gold prices to demonstrate a weak 0.7%/year return is like charting the S&P500, after normalizing the curve to the average price-to-earnings ratio of the underlying stocks, then complaining that stocks have a lousy "real" return over time! Am I missing something?

  • Report this Comment On November 05, 2010, at 11:42 AM, refriedbean wrote:

    Your conclusion that Gold's a bubble, but keep buying it, because it will continue to go up, leaves me with one thought. What?

  • Report this Comment On November 05, 2010, at 1:00 PM, Raydoggy wrote:

    Houses are at an all time low, gold is at an all time high. Houses earn rent, gold earns nothing but speculative profit. Houses prices can probably only stay stable or rise. Gold will most probably fall within a few years.

    $100,000 invested in a good condo will return 7-8K per annum net, plus any capital gain when the market picks up. Gold will earn - zero, it will only increase with speculation.

    If the money earned from rent was put back into more housing earning rent...

    Buy low, sell high, isn't that the GOLDen rule?

  • Report this Comment On November 05, 2010, at 1:04 PM, tom2727 wrote:

    I think the point about normalizing gold to inflation is to show that it is currently in a bubble. Yes, if inflation takes off in the future, the "true value" of gold will also rise at that rate.

    But if gold is really trading at 2x its "inflation adjusted value", then you need 8 years of 10% inflation before you break even. Not a good inflation hedge IMO.

    Want an GOOD inflation hedge, try maybe buying real estate, which is just coming down off its own bubble. The "true value" of real estate should also track inflation (or possibly exceed it). But it also provides you a nice income stream while you wait, and in most markets it's not overvalued.

    Side note here. If you're looking to bet against gold, don't buy something like GLL. Instead try buying puts against UGL. Those leveraged ETFs are a total scam IMO.

  • Report this Comment On November 05, 2010, at 1:41 PM, Kakabeka wrote:

    Are you a tea partier???

    Because obviously you are totally clueless.

    In the US the wall street monkeys are still running the show with no adult oversight.

    The next 2 years will be gridlock

    and job loss will get even worse.

    Because of the Chamber's control of the election funding thanks to the Conservative morons on the Subprime Court the 2012 election could be very ugly especially if spineless obama isn't replaced with someone intelligent

    with a spine like Hillary

    p.s.I agree with kenfwtx

  • Report this Comment On November 05, 2010, at 2:45 PM, NelsChristian wrote:

    "At the peak of the housing bubble, she called me and told me to go out and buy a house, any house. Everyone is doing it, housing always goes up!"

    One more piece of information is needed to evaluate this story: By any chance, where you living in her basement at the time of the suggestion?

    And if she's 70 and buying gold, don't complain, that's your inheritance. It's certainly safer than if she had been buying blue chip stocks like GM.

  • Report this Comment On November 05, 2010, at 3:41 PM, MFreader001 wrote:

    Gold is bubble because the whole financial system is a bubble. Actually everything tangible that can be sold multiple times on the market is good as a long term investment, like for example works of art (oil paintings, watercolor, silver wine labels, micro-mosaics, walnut, rosewood, and mahogany boxes, models of old ships, captain wheels (1:1 scale), old navigation maps, collectible pipes, roman coins, bronze sculptures, even aluminium bronze bars). Today I saw a polished fossil of extincted species which looked incredible.

    The key moment is that when selling such goods multiple times on the market the people raise their value (as a result of the very same desire to acquire & possess, which is driving the financial system at present).

    Not entirely bad idea also is to invest in wine and whiskey (rare vintages).

  • Report this Comment On November 05, 2010, at 4:07 PM, clayman14 wrote:

    Why 2010 constant dollar comparison?

    Why not compare it to the inflation adjusted dollar?

    Where else should we store savings? U.S. dollar savings accounts, Treasuries, TIPS selling at negative yields, if Gold is a bubble then the Dollar and Treasuries are bigger bubbles by several magnitudes.

    As for timing the bubble, I think the bubble can be timed. After the bursting of the treasury bubble and the U.S. dollar bubble then I'll sell my gold before it bursts. Unless of course the Fed ups interests rates substantially and congress slashes spending dramatically. Until these happen though gold is as good a place as a savings account in the U.S. dollar.

  • Report this Comment On November 05, 2010, at 4:15 PM, clayman14 wrote:

    One other thought...

    Gold is a little easier to time because it can be more counter indicated by large macro trends that don't shift quickly. As I mentioned above Federal Reserve Policy and U.S. Legislative spending policy are slow moving and greatly debated macro influencing policies that indicate change over long term. As long as the Fed keeps printing and congress keeps spending then gold stays a nice hedge. Even with the election changes even Republican's aren't talking about changing that much they want to "level off" spending and roll back Obamacare to the Huge Medicare/Caid spending arrangement, basically they are going to do the same thing the past group did. From a Macro view no big changes...unstable dollar, no other better resever currency at the time = gold investment.

  • Report this Comment On November 05, 2010, at 4:18 PM, MJL123 wrote:

    Nothing ever changes! The price of gold will continue to rise until it falls. All you need to know is when!

  • Report this Comment On November 05, 2010, at 4:28 PM, whadayathink wrote:

    Here's what I don't get:

    The advertisers recommending the purchase of gold say, you'd better buy gold as dollars are becoming worthless pieces of paper. But what do they take in exchange for the gold?... the dollars they say are becoming worthless pieces of paper.

  • Report this Comment On November 05, 2010, at 4:56 PM, Kingz99 wrote:

    This guy really knows how to look at all the wrong things. LOL. This article is so laughable its ridiculous. What a fail. The whole reason for a run up in gold totally flew over his head. A bubble? Does this guy even read a newspaper?! Don't listen to suckers like this. Keep your eyes open and your mind sharp. Don't be a sucker.

  • Report this Comment On November 05, 2010, at 5:33 PM, jwebbzor wrote:

    "The advertisers recommending the purchase of gold say, you'd better buy gold as dollars are becoming worthless pieces of paper. But what do they take in exchange for the gold?... the dollars they say are becoming worthless pieces of paper."

    Its because the companies you see advertising on TV are just scamming people with gold plated coins. They are making huge dollar profits off the general public. Just because they are receiving USD for their sales doesn't mean they should stop. They can then take the USD profits that they made and convert them into a different inflation hedge. Gold isn't the only inflation hedge, nor is it the best one.

    Better options:

    Invest in dividend yielding stocks in emerging markets.

    Buy Foreign Real-estate (in a non-bubble market)

    invest in a renewable energy device for your home (solar panel, small wind turbine)

  • Report this Comment On November 05, 2010, at 5:52 PM, shotgunb wrote:

    NEW WORLD ORDER ANYONE??

    If you think this is just a conspiracy, think again. How many times have you heard people in high places refer to this as their best end? There are forces out there who are trying to create a one world currency and this will lead to a one world government. Wake up and smell the evil! We elected one of their stooges to the presidency and now we are seeing the fruit's of their labor. Prepair, or be crushed!!

  • Report this Comment On November 05, 2010, at 6:46 PM, ikkyu2 wrote:

    Past performance is no guarantee of future results.

  • Report this Comment On November 05, 2010, at 6:48 PM, ballyhootow wrote:

    What was the price of gold in Weimar Germany, or Argentina in 1989, or in Zimbabwe now? The biggest bubble is the U.S. Dollar. Right now every country is competing for the weakest currency, and the U.S. is no exception. Gold may one day be in a bubble, but that will be far down the road.

  • Report this Comment On November 05, 2010, at 7:17 PM, LatifK wrote:

    I too believe there is a bubble in gold. I don't think the correction is about to happen any time soon, but none the less it is due.

    Real gold is a funny item in that it straddles many definitions depending on who you ask and that add's to its aura, but in the end it comes down to the basic economics of consumption and production. If either side of that scale is overly tilted, a magnified response occurs that only gets smoothed out over long periods of time.

    As per the quantitative easing, thats been going on. Its not as bad as one is lead to believe. The fed buying treasuries is akin to me changing money from my right hand to my left hand. It creates no net change to the currency supply. It just artificially deflates the returns on t-notes forcing private capital and sovereign funds to seek other vehicles for their returns. Which has a net effect of putting money into circulation that might not otherwise be there, but its not "new currency" so to speak.

  • Report this Comment On November 05, 2010, at 8:30 PM, ETFsRule wrote:

    Great article, agree 100%

  • Report this Comment On November 05, 2010, at 8:57 PM, TMFAleph1 wrote:

    "If in 1973 you had bought 1000 ounces of gold, you would have paid roughly $35,000."

    @euzkara,

    Unfortunately, there was no way you could have paid $35/ ounce in 1973. The annual average price of gold in 1973 was $97.32. The lowest monthly average price was $65.14 in January.

    Alex Dumortier

  • Report this Comment On November 05, 2010, at 10:27 PM, auberon512 wrote:

    Get it straight. Gold and silver are savings. Businesses that produce cash flow are investment. Publicly-traded stocks are speculation. Fiat currencies are toilet paper.

  • Report this Comment On November 05, 2010, at 10:32 PM, TMFAleph1 wrote:

    "Businesses that produce cash flow are investment. Publicly-traded stocks are speculation."

    @auberon512

    Those two statements are inconsistent; good publicly-traded stocks are ownership interests in businesses that produce cashflow.

    Alex Dumortier

  • Report this Comment On November 06, 2010, at 12:17 AM, casinojohn wrote:

    Wow! This is hilarious! I think I'll go to the casino and play "Golden Cherries"!!!

    I believe we are all suckers because we all abide by the monetary (debt-slave) system. Until we the people decide that the paper that has cool colors and masonic ordered faces printed on them is in fact just paper (I know it's not actually paper),and worth nothing, we will remain sucker slaves at the mercy of the Banking System. Why are there so very few families or simply men running this show? Literally able to make the Almighty dollar not so Mighty? And we all just accept it...I say we boycott the whole system: burn our stocks, cash, bonds, banks and whatever else we are slaves to and, well...see what happens. I said I was going where? Duh!

  • Report this Comment On November 06, 2010, at 1:13 AM, AirForceFool wrote:

    I've been bearish on gold for some time now... I think it stands the chance of going up as long as the planet is printing new money at the current pace... and it isn't like the U.S. is the only country that's fired up the presses.... when it $800 I thought wow... again at a grand, and just recently when it blew through $1200 on the way to $1400... I'm glad for those that have benefited... I have ever so slightly in some silver stocks that mine smaller amounts of gold with the silver.... but I'm really not sure where the correction is... it is absolutely pure speculation IMO... so as an investor, I say no thanks.. I've been accumulating silver for the past 18 months, because I see a double whammy with silver... the huge number of uses for the metal, and the fact that there is a lot of silver that is not being recovered because of the cost of recovery in such small amounts.... Don't get me wrong... I have some silver @ $10, so I'm a little nervous at above $25... but I'm still buying... I can see a possible reversion to the mean, but I still see the general trend as up from here... just my two cents. Chris

  • Report this Comment On November 06, 2010, at 2:23 AM, auberon512 wrote:

    "Those two statements are inconsistent; good publicly-traded stocks are ownership interests in businesses that produce cashflow."

    @TMFMarathonMan

    Yes, but unless you are an executive or board member at said publicly-traded company you have no input into the management of the business and no way to know for sure if the cash flow is real and how long it will last. And every time you want to buy or sell you will be front-run by a computer and you are subject to a flash crash at any time. Thus it is a speculation.

  • Report this Comment On November 06, 2010, at 2:49 AM, brizzlekizzle wrote:

    Now, who said that we are investing in gold? I am sure that most of us who own it have purchased it with one purpose, too hedge against inflation. Sure there is an increase in price beyond the inflation factor, supply and demand applies to gold as much as any other thing, but when the federal reserve is allowed to create 900 billion dollars and let it run through the fractional reserve banking system, you have to consider that you are making a loss if you cant keep up with inflation. Any investment is judged by its effect on your purchasing power, not the change in numbers. If you dont get it, you should invest in the Japanese stock market, it went up 267.21 while the DOW only 9.24. Look at how big that difference is!

  • Report this Comment On November 06, 2010, at 6:20 AM, marc5477 wrote:

    1st, playing the bubble game is like day trading, a zero sum game and half the people here will fail at it.

    2nd, never pay more than fundamental value for an investment. Gold has a fundamental value of what? Maybe a few dollars. As a metal it isnt nearly as useful or rare as people want you to believe.

    3rd, the world is not ending and even if it were gold would be useless. The US is still the major importer of the world. The second they stop buying, China falls back to 3rd world status along with more of the "developing" countries.

  • Report this Comment On November 06, 2010, at 3:44 PM, glenmere wrote:

    What and bunch of fools and Motley too that's it for me reading of this trash.

    Listen we are falling off a cliff and on the way down we spot a hovering bird that to us is climbing upwards and that my friends is the gold analogy. Do you think we can just print endless amounts of money and the dollar is worth the same? Nice trick but can't be done.

    Gold will skyrocket until we show fiscal restraint. The trouble with you "experts" is that you dissuade hard working ordinary people from this great investment. I love gold and it has saved me in the last ten years.

  • Report this Comment On November 06, 2010, at 5:51 PM, MFool1234 wrote:

    Our Christian TV station has an advertisement says invest in gold, the end times are here. Buy gold before its too late!

  • Report this Comment On November 06, 2010, at 6:47 PM, thinkpeople wrote:

    Why does everyone seem to accept as fact that the US is printing dollars at an unprecedented rate? Because Glenn Beck told you so? (You do know that he's *paid* to tell you that, right?) Well if this tidbit of conventional wisdom is true, then M2 (the most widely used measure of total money supply) would have skyrocketed in recent months/years, way beyond the historical average growth rates. Yet here is a graph of what M2 actually has done: http://research.stlouisfed.org/fred2/series/M2. There was a short-lived bump in M2 as central banks reacted to the financial crisis in late 2008 and early 2009, but then M2 essentially returned to the same trendline they have ridden for 30 years. So before you go paying ridiculous prices for yellow metal because the President is a socialist muslim, try thinking first.

  • Report this Comment On November 06, 2010, at 6:56 PM, satman40 wrote:

    What was that air mattress company you recommend, and continue to recommend all the way till it went flat...

    Former sub, who made it back with Gold.

  • Report this Comment On November 06, 2010, at 7:48 PM, only1ferret wrote:

    So, buy protection and set your own floor. When the protection starts looking too expensive to you its probably time for you to get out.

  • Report this Comment On November 06, 2010, at 10:46 PM, bigkansasfool wrote:

    The major of posters above that are blindly in gold are obvious Glenn Beck watchers that know little market history other than the false propaganda they've been fed. Those that were in the markets in the 70's and 80's saw how far and how fast the gold bubble bursts when it does, and make no mistake that this is a clear as day bubble. Every sign is there and is glaringly obvious. Gold is highly cyclical piece of dirt with escalator up swings and elevator down swings.

  • Report this Comment On November 06, 2010, at 11:11 PM, ETFsRule wrote:

    Excellent posts by thinkpeople and bigkansasfool. If anyone actually bothers to look at the facts, it will quickly become apparent that gold is in a bubble. And the idea that the US government is "printing tons of money" is nothing but a myth.

    In fact, for the past few years, the US money supply has been increasing at a rate which is much SLOWER than its historical average increase. Gold is bound to come crashing down, sooner or later. Over the past 2 years, the actual US money supply has increased by about 10 or 11%, but the price of gold has nearly doubled over that time.

    I recommend that everyone become familiar with the work of Paul Can Eeden, his theoretical gold price, and his Actual Inflation Rate (AIR) statistic. Links:

    http://www.paulvaneeden.com/Gold

    http://www.paulvaneeden.com/The.Actual.Money.Supply

    http://www.paulvaneeden.com/Actual.Money.Supply

    But, hey, if you want to throw your money away buying gold for political reasons (to "stick it to Obama" or whatever), then go right ahead.

  • Report this Comment On November 07, 2010, at 12:13 AM, eureka7 wrote:

    No wonder they call this site FOOL.com!

    I'll bet hardly a soul here owns physical gold and silver, but everyone has dollar-denominated assets. These are the true fools that believe the State - Republicrats and The Fed. Fiat paper has died a thousand deaths throughout history. DO YOU THINK THIS TIME IS DIFFERENT?

    Bernanke just gave you a pay cut!

    Gold and silver are rising because the dollar is falling. It's even failing against other currencies.

    Thomas Jefferson..........

    “If the people ever allow the banks to issue their currency, the banks and corporations which will grow up around them will deprive the people of all property, until their children wake up homeless on the continent their fathers conquered.”

    You will pay a heavy price for your ignorance and your faith in self-serving liars. It's not too late for you FOOLS yet. It soon will be. The train is leaving the station. NOW

    Look at the CRB Commodity Index. You know. Food and Energy. Look at it.

    http://www.crbtrader.com/data.asp?page=chart&page=chart&...

    It's skyrocketing. Retail prices goin' up real soon. Corn, meats, orange juice, oats, sugar, coffee, wheat, gold, silver, cocoa, soybeans, oil, natural gas+

    ^^^^^^^^^^^^^^^^

    Bubbles:

    The Dollar, the bond market

    The clock is ticking............Don't be lemmings or fools.

  • Report this Comment On November 07, 2010, at 3:35 PM, nphrn1 wrote:

    ETF'srule.

    As they say, you're entitled to your own opinion but not your own facts.

    http://research.stlouisfed.org/fred2/series/BASE

  • Report this Comment On November 07, 2010, at 4:44 PM, ETFsRule wrote:

    nphrn1:

    If you had bothered to follow my links, you would understand why Paul Van Eeden's Actual Money Supply (AMS) is a more accurate indicator of the overall money supply than the number you are using.

    If you want to use a less accurate indicator, which only accounts for a very small percentage of our true money supply, then go right ahead. But don't accuse me of making up facts when everything I have said is 100% true.

  • Report this Comment On November 07, 2010, at 5:48 PM, nphrn1 wrote:

    Alex

    In all due respect, your article missed the boat on several counts.

    1) Citing constant 2010 dollars sounds like it's being objective. But it's really misleading because it ignores one of golds strongest points; inflation. So gold was $20/ounce in 1929. It is now almost $1400. That's a 70 fold increase in 80 years in absolute dollars. Here's another chart you might be interested in. http://home.earthlink.net/~intelligentbear/com-dow-au.htm

    This actually makes your point a bit since the overall trend in DOW vs GOLD is positive. But it's stronger point is that if you are on the wrong side of the comparative cycle you will feel some pain. Also the DOW / GOLD ratio is now down to 11000/1400 or about 7.8. So it's actually closing on that downward trend line.

    The above actually supports your idea that gold is in a bubble. Probably, by any normal metric it is.

    But heres the problem. As many of the people responding to your article pointed out the money printing has been literally off the charts not only with dollars but also Yen, Euros and RNB. Europe is attempting austerity with enormous difficulty. If you think that we can stop printing you need to remind yourself of a few numbers.

    Federal budget $3.6 trillion

    Tax base $2.1 trillion

    Deficit $1.5 trillion (Yup, thats 3.6 - 2.1).

    Amount paid in interest - almost $400 billion.

    (I think around $250 billion for the "public" part of our debt and the rest for social security).

    Thats almost 20% of our tax base.

    Right now the yields are at historic lows (around 1.5%) that the government pays on average on their debt. If that yield doubles then so will our interest payments. If you look around at other countries reaction to the feds quant easing, it is sobering. China: "America needs to explain". Germany: "clueless". When other countries no longer want our paper rates will go up substantially. In 1980 Volker aised rates to 20% in order to control inflation. Now if our rates go even to 7.5% the debt interest will equal our entire tax base.

    Anyway, all of this is just trying to make the point that we, as a country can not pay our bills without quantitative easing. The more easing we do the more others will be reluctant to buy our paper , the more rates and our interest payments will need to go up and the more easing we will have to do. Even lowering our expenses as the republicans want is dangerous because 44% of our GDP is now dependant on government spending so as you lower spending, your tax base gets crushed. (This situation has been termed a "downward death spiral" where debt and government proportion of GDP is so high that even cutting expenses doesn't work.)This all seems to be playing out and if you want to debunk the gold thesis you need to decide how the US and much of the developed world is going to extract itself from it's fiscal mess.

    You also need to at least give passing nod to the fact that only about 1% of the worlds assets are currently in gold and that if this number even doubles gold could do nicely just on fundamentals. (Don't even get me started on silver here).

    I personally believe that we are in a world fiat bubble, not a gold bubble. I believe the fact that every single fiat currency going to zero in the history of the world also argues strongly for gold. The larger and stronger the economy, the longer it will withstand the printing press. But in the end they all fall when the abuse is too great.

    Once gold truly approaches it's peak I hope to come close to finding it, selling and investing in companies and real estate.

    Best regards

    Andy

  • Report this Comment On November 07, 2010, at 6:09 PM, nphrn1 wrote:

    ETF:

    I did follow your links. Van Eden stated:

    Actual Money Supply (AMS) is a tool that I created to measure the money supply

    From there I admit I didn't go and search through all of his articles supporting his "tool". But the chart in the other link showing M1 and M2 etc is one I am well familiar with. You'll notice that it stops at 2008. If it went on for another 2 years you would see that M1 spikes (just like in the graph that I linked.) You would also note that the broad money supply falls off of a cliff. So the fed is printing all the money it can (monetary base) while the rest of the world is too scared to lend and borrow (broad supply) and where the fractional reserve system is no longer doing its thing. So I really think that its not accurate to characterize the monetary base as less accurate because its smaller. It just means something different. And I think that if you look at M1 and M3 together you might agree that the fed is desperately trying (and failing) to use the tail to wag the dog.

    I'm sorry if my tone was a bit aggresive. But when you characterized buying gold as throwing away money to "stick it to Obama" I got a bit upset.

    I'll keep it more civil from here.

    Andy.

  • Report this Comment On November 07, 2010, at 6:59 PM, TMFAleph1 wrote:

    nphrn1,

    I applaud your effort to lower the temperature of the debate instead of taking the opportunity to raise it. This is all too rare on the interwebz.

    Alex Dumortier

  • Report this Comment On November 07, 2010, at 7:44 PM, TMFAleph1 wrote:

    nphrn1,

    You make some valid points, some of which I have advanced myself in previous articles on gold:

    Gold: Don't Get Out Before the Bankers Get In, Jun. 30, 2010

    http://www.fool.com/investing/general/2010/06/30/gold-dont-g...

    There is No Gold Bubble, Apr. 19, 2010

    http://www.fool.com/investing/international/2010/04/19/there...

    The Only Asset Worth Owning Today, Nov. 19, 2009

    http://www.fool.com/investing/dividends-income/2009/11/19/th...

    This statement, however, is utter nonsense:

    "Citing constant 2010 dollars sounds like it's being objective. But it's really misleading because it ignores one of golds strongest points; inflation. So gold was $20/ounce in 1929. It is now almost $1400. That's a 70 fold increase in 80 years in absolute dollars."

    You have things backwards here. The first goal with any investment is (or should be) to protect the purchasing power of your capital. Therefore, in evaluating the long-term performance of any asset, it is necessary to consider real returns rather than nominal returns.

    It is useless to know that the nominal price of gold has increased 70-fold since 1929 if one does not know how that compares to the rate of inflation during the same period. Expressing the price of gold in constant 2010 dollars is one way of converting nominal gold prices into real prices (I could have used the 1929 dollar as my base, too) -- which is what is useful in evaluating gold as a store of value or a speculative asset.

    Alex Dumortier

  • Report this Comment On November 07, 2010, at 8:23 PM, ETFsRule wrote:

    nphrn1:

    Don't take it personally, I was just making a point. The vast majority of pro-gold bloggers (not talking about you here) seem to make the same political-based arguments over and over again. Basically they are just railing against the gov't for spending too much, or for printing too much money... doom and gloom, fall of civilization, etc, etc.

    But as someone pointed out in another discussion, these same arguments could be used to justify buying gold at ANY price. Without a realistic model or valuation methodology, there is really no way to judge whether or not gold is overvalued.

    This is why I mention Van Eeden so often - he has come up with a very logical methodology for valuing gold, and he has shown that the price of gold has a very strong historical correlation with the broad money supply (either the M2 or his AMS figure). But, the run-up in the price of gold over the past few years has not been matched by a corresponding increase in the broad money supply - which leads me to believe that gold is overpriced.

  • Report this Comment On November 07, 2010, at 8:33 PM, KarlaHomolka wrote:

    fool is wrong. gold will continue to rise. just wait... and watch.

  • Report this Comment On November 07, 2010, at 8:46 PM, nphrn1 wrote:

    This statement, however, is utter nonsense:

    OK. Heres where all the diplomacy you granted me earlier may have to be retracted.

    The biggest driver of gold price is inflation.

    So obviously if you factor out inflation gold will be fairly constant over long periods but will be over or undervalued at various times around the horizontal line. Factoring out inflation from golds' appreciation is like trying to solve for X with a complicated algebra equation and coming up with zero = zero. You are using a graph to prove a point which is so intuitively obvious that you shouldn't even need a graph.

    So I'd really beg to differ. I think that a 70 fold appreciation in nominal terms over 80 years tells us a whole lot more than your graph which tells us absolutely nothing. The trick, if you are looking for perspective and useful information is not to factor out inflation but rather to compare gold to the dow or to the price of a house or the dollar or anything else over time.

    Andy

  • Report this Comment On November 07, 2010, at 8:48 PM, Velocitor wrote:

    It's funny to read these declarative predictions of doom for gold, spoken in such certain terms. So gold is going back to $500? Where did that number come from? The article doesn't say.

    Do you the Fool making such bold negative statements about any other investments ("IBM going back to $100")? No, you don't, despite the fact that nearly every other investment sector in the past five years has not performed as well as the precious metals. This looks like little more than a hitpiece against a contrarian investment option. I put 50% of my portfolio into gold and silver stocks five years ago, and NOTHING has happened in the market to make me regret that. In fact, the only thing I regret is not having put MORE in!

  • Report this Comment On November 07, 2010, at 8:48 PM, nphrn1 wrote:

    ETF.

    I'll try and check out Van Aeden a little deeper.

    Thanks.

  • Report this Comment On November 07, 2010, at 8:57 PM, TMFAleph1 wrote:

    nphrn1,

    For reference, at its current price of $1,394/ ounce, gold is up roughly 430% in real terms since 1929.

    Alex Dumortier

  • Report this Comment On November 07, 2010, at 9:07 PM, TMFAleph1 wrote:

    "So I'd really beg to differ. I think that a 70 fold appreciation in nominal terms over 80 years tells us a whole lot more than your graph which tells us absolutely nothing. The trick, if you are looking for perspective and useful information is not to factor out inflation but rather to compare gold to the dow or to the price of a house or the dollar or anything else over time."

    I don't follow you. You state that comparing gold to the dollar is useful -- that's exactly what I'm doing by looking at the price of gold on an inflation-adjusted basis.

    AD

  • Report this Comment On November 07, 2010, at 9:13 PM, TMFAleph1 wrote:

    "So gold is going back to $500? Where did that number come from? The article doesn't say."

    @Velocitor,

    Read the article once more; I state very clearly where I came up with the "below $500" in the title. This is the relevant passage in the article:

    "Gold is galloping ahead of its historical average (the red line)! In fact, the price of gold would need to fall by almost two-thirds to get back to its long-term average of $456/ ounce, not to mention that markets typically overshoot. That's a sobering thought if you have a significant position in gold."

    I'm very pleased to hear that you have done well on your gold speculation over the past five years, but that has no bearing on whether or not gold is currently overpriced.

    Alex D

  • Report this Comment On November 07, 2010, at 10:23 PM, KarlaHomolka wrote:

    So, Alex, you shorting gold? Many here bought to show their conviction in its rise. Put yer money where yer mouth is. I'd recommend looking at www.usdebtclock.org first tho'.

  • Report this Comment On November 07, 2010, at 10:30 PM, nphrn1 wrote:

    I don't follow you. You state that comparing gold to the dollar is useful -- that's exactly what I'm doing by looking at the price of gold on an inflation-adjusted basis.

    OK.

    Lets say that the so called true value of gold is Nominal gold/ dollar value.

    Gold is around $1,400 right now. If the value of the dollar gets cut in half tomorrow then gold might go to $2,800 in nominal terms. You are specificaly taking that number 2,800 and dividing by 2 in order to come up with $1,400 again. Whatever inflation does your normalizing formula will undo so that the number stays at $1,400 when adjusted. By definition you are removing the very factor which drives gold price over time by an equal and opposit factor. You come up with a number which, again by definition, has to be fairly constant over time and which therefor tells us nothing.

    Andy

    .

  • Report this Comment On November 07, 2010, at 11:10 PM, TMFAleph1 wrote:

    Andy,

    I don't understand your framework. The concept of 'dollar value' is meaningless in isolation. When you write: "If the value of the dollar gets cut in half tomorrow...", I have to ask: "Cut in half compared to what?" Presumably, you mean that it would have lost half its purchasing power, i.e., you now require twice as many dollars to buy the same basket of goods. That is exactly what inflation is.

    In your example, imagine that we experience 100% inflation in a year and the nominal price of gold adjusts upward by a factor of two. Under those circumstances, gold has not gained any value, it has simply enabled you to preserve your purchasing power at constant level. An ounce of gold at $2,800 buys you exactly the same basket of goods as it did when it was priced at $1,400. It is absolutely normal that the inflation-adjusted price of gold should remain constant in this example. The price series I produced allows us to visualize deviations from this relationship, i.e. increases/ decreases that cannot be explained by changes in the general price level.

    As I explain in the article, we should expect the inflation-adjusted price of gold to be relatively stable over LONG periods of time, since there is no reason for gold to do any better than preserve our purchasing power. However, the graph shows that there have been significant deviations from this relationship; in fact, we are currently in the middle of one of those significant deviations. That's what we call a bubble.

    You can trust me when I tell you that inflation-adjusted prices are the right way to look at things. There may be plenty of things I didn't learn when I took my degree in Economics, but this is an area I have a good handle on.

    Alex Dumortier, CFA

  • Report this Comment On November 08, 2010, at 12:31 AM, TMFAleph1 wrote:

    @KarlaHomolka,

    Why in the world would I want to short gold when I have stated that I think the price of gold will continue to rise?

    Alex Dumortier

  • Report this Comment On November 08, 2010, at 2:37 AM, Velocitor wrote:

    "Gold is galloping ahead of its historical average (the red line)! In fact, the price of gold would need to fall by almost two-thirds to get back to its long-term average of $456/ ounce, not to mention that markets typically overshoot. That's a sobering thought if you have a significant position in gold."

    Okay, so what is the historical average for the DOW? And how far would the DOW need to fall to get back to its long-term average?

  • Report this Comment On November 08, 2010, at 8:55 AM, nphrn1 wrote:

    If you're going to normalize for inflation to get a "true look" at gold you need to use either monetary base or broader money supply as your comparison (looking forward to checking out this Van Aeden).

    If your inflation adjuster is the core CPI, then it's almost worthless because:

    1) The basket of goods it uses has cheaper stuff in it. (No one's eating steak any more so lets substitute hamburger).

    2) It uses heudonics. (Computer memory is getting so much better that computers are much cheaper per unit of memory).

    3) It excludes food and energy (The things that really matter) because of "volatility".

    Check out this link (about 5 minutes) if you can spare the time. It actually looks at the price of gold over time and compares it to the monetary base. If you or anyone here can really look at this and convincingly poke a hole in this argument then I will seriously reevaluate my gold thesis. (Good luck).

    http://goldsilver.com/player/id/67/cID/2/

    Also, if you really look at your chart of gold prices it's misleading. The adjusted 1980 peak is $1,600 in todays dollars. In 1980 the peak was $850 (so I guess the dollar has lost half of it's value by your scale). If you had used unadjusted dollars and the 2010 bubble was destined to be about the same as 1980 we would have the $850 in 1980 and $1,600 today. If you want to normalize 1980 bubble to $1,600 you have to make todays $3,200 since the dollar is around half the strength. Your graph looks like we are going to top off at $1,600. In fact if you look at Maloneys data comparing gold price to monetary base you might be convinced that we are going much higher than $3,200.

    BTW, congratulations on your economics degree:)

    Andy

  • Report this Comment On November 08, 2010, at 9:57 AM, nphrn1 wrote:

    OOPS.

    I was actually wrong on that last point. Equivolent bubble would have gold peaking similarly at $1,600.

    My bad.

    Still the number I usually hear thrown around for gold adjusted peak is around $2,400.

    Would be curious to know what inflation adjuster was used here.

    Andy.

  • Report this Comment On November 08, 2010, at 10:23 AM, TMFAleph1 wrote:

    "...If you want to normalize 1980 bubble to $1,600 you have to make todays $3,200 since the dollar is around half the strength."

    No! Half its "strength" compared to what? Prices have already been normalized for inflation. There is no need to fiddle with today's price. The relationship between today's price and that in 1980 as shown in the graph is absolutely correct.

    Regarding your criticisms of the CPI:

    (1) & (2): On the subsitution and hedonic arguments, I refer you to this paper:

    Addressing Misconceptions About the Consumer Price Index, http://www.bls.gov/opub/mlr/2008/08/art1full.pdf

    (3) I didn't use the core inflation CPI, I used the All Items Consumer Price Index for All Urban Consumers (CPI-U), the "broadest and most comprehensive CPI" that the BLS produces. CPI-U contains food and energy prices.

    http://www.bls.gov/cpi/cpifaq.htm

    As far as comparing the price of gold to the money supply, this is another line of inquiry that doesn't invalidate the inflation-adjusted price series. I plan to look at this relationship from a historical standpoint soon.

    Alex Dumortier

  • Report this Comment On November 08, 2010, at 10:35 AM, TMFAleph1 wrote:

    Also note that the prices in the graph are annual averages, so the 1980 price ($615 in nominal terms) does not fully show just how extreme the bubble that peaked in January 1980 at $850 was.

    Alex Dumortier

  • Report this Comment On November 08, 2010, at 3:58 PM, AygHead wrote:

    Gold can also go to $500,000 an ounce. Gold can trade sideways for 500 years. Commodity markets are what they are, the place where buyers and sellers set a price based on various factors and expectations for the future, often based on supply and demand. Shock headlines like this can't be taken seriously. Better to say gold is poised for a decline because....

  • Report this Comment On November 08, 2010, at 5:36 PM, platymapus wrote:

    This article is short-sighted and fundamentally wrong.

    Every one is assuming gold has traded on the free market since the 70's.

    It's been manipulated by the major banks of the free world.

    Read about the gold anti-trust action committee

    http://www.gata.org/

    Also read this article http://seekingalpha.com/article/223037-gold-and-silver-marke...

    And didn't the CFTC just admit that silver has been manipulated by the major traders?

    It's not just the fed gov. debt that one has to consider but the debt of business and consumers. Some say it's north of 1.7 quadrillion.

    If America survives I would not be surprised if China and other holders of our debt would want some portion of our currency to be backed by gold, say 10-20%. If that happens look for gold to trade between 8000-10000 per ounce.

  • Report this Comment On November 08, 2010, at 5:41 PM, TMFAleph1 wrote:

    "Shock headlines like this can't be taken seriously. Better to say gold is poised for a decline because...."

    @AygHead

    Don't fixate on the title; instead, focus on the article content.

    Alex Dumortier

  • Report this Comment On November 08, 2010, at 5:43 PM, TMFAleph1 wrote:

    "This article is short-sighted and fundamentally wrong.

    Every one is assuming gold has traded on the free market since the 70's.

    It's been manipulated by the major banks of the free world."

    @platymapus

    I'm afraid I can't predicate my research on conspiracy theories.

    Alex Dumortier

  • Report this Comment On November 08, 2010, at 5:57 PM, KarlaHomolka wrote:

    "@KarlaHomolka,

    Why in the world would I want to short gold when I have stated that I think the price of gold will continue to rise?

    Alex Dumortier"

    Did you read this article that you wrote? LOL!

    "Gold is inherently a speculative asset." News Flash: GE is a speculative asset, as is real estate, paintings, foreign money...

  • Report this Comment On November 08, 2010, at 6:04 PM, DLweld wrote:

    Well, discussions about rate of return seem like they can go on forever. II met an older fellow the other day, he told me that his grandfather had advised him to buy 1 ounce of gold every payday (monthly). He did that - for 40 years - he now has a nice little nest egg of $675,000. It all seemed so simple to me - no knowledge or skill or timing required - maybe it sums up gold...

  • Report this Comment On November 08, 2010, at 7:05 PM, TMFAleph1 wrote:

    "I met an older fellow the other day, he told me that his grandfather had advised him to buy 1 ounce of gold every payday (monthly). He did that - for 40 years - he now has a nice little nest egg of $675,000. It all seemed so simple to me - no knowledge or skill or timing required - maybe it sums up gold..."

    @DLweld

    Just because he has accumulated $675,000 worth of gold does not mean that gold has provided an adequate return; it might be downright awful. What is the IRR of this investment program? How does it compare to the return this fellow would have earned by putting the same sum into stocks every month instead of gold?

  • Report this Comment On November 08, 2010, at 8:59 PM, nphrn1 wrote:

    "For reference, at its current price of $1,394/ ounce, gold is up roughly 430% in real terms since 1929."

    Price of gold was still $20/ounce in 1929. Didn't go to $35 until a few years later when Roosevelt changed the exchange rate. Again, 1400/20 = 70 in NOMINAL terms. What exactly do you mean by "real" terms and how do you come up with 430%?

    " Prices have already been normalized for inflation. There is no need to fiddle with today's price. The relationship between today's price and that in 1980 as shown in the graph is absolutely correct."

    Here I actually corrected myself and apologized in the previous post and you completely ignored both overtures and corrected me yorself. Your pretty tough here.

    (1) & (2): On the subsitution and hedonic arguments, I refer you to this paper:

    Look. I read it over. The BLS basically says it does not specifically substitute when people get priced out of higher quality stuff. But they do flock to more expensive stuff. As an example, if hamburger goes up more than filet people may flock to filet which will then be valued more heavily in the CPI than it had been. I think they are pushing credibility. At best, BLS has a difficult job with CPI and it is an inexact indicator with lots of subjectivity. At worst it is rigged to make inflation look lower than it is.

    Oh, and by the way, heres a CPI-U for U.

    http://www.caseyresearch.com/editorial/3791?ppref=ZAC175ED10...

    Still put absolute faith in it?

    Alex. I admit I'm beginning to be a bit of a conspiracy theorist. And while I wouldn't come out with GATA stuff as my front line argument I do believe they will be shown to be right. On the other hand, I really feel like you are WAY too confident in BLS statistics.

    I personally like to start with raw data (partially because I'm not a good statistician). I'll be looking forward to you looking at gold in terms of money supply because it's harder to BS money supply than CPI.

  • Report this Comment On November 08, 2010, at 10:12 PM, TMFAleph1 wrote:

    "Price of gold was still $20/ounce in 1929. Didn't go to $35 until a few years later when Roosevelt changed the exchange rate. Again, 1400/20 = 70 in NOMINAL terms. What exactly do you mean by "real" terms and how do you come up with 430%?"

    I am approaching this discussion in good faith and spending time on it, but I'm beginning to think you are stringing me along as part of a troll attempt or a prank. 'Real' is another term for 'inflation-adjusted'. I don’t know how to be any more clear than this: NOBODY cares about nominal returns when you are trying to evaluate an asset as a store of value/ investment. If you are still having trouble with the concept or application of inflation-adjusted returns, there is little point in taking the discussion any further.

    “Here I actually corrected myself and apologized in the previous post and you completely ignored both overtures and corrected me yorself. Your pretty tough here.”

    Your follow-up post went up as I was preparing my response, so I had not seen it.

    “Oh, and by the way, heres a CPI-U for U... Still put absolute faith in it?”

    I have no idea who Casey Research are or whether they are a serious research organization. I am familiar with ShadowStats, which also claims that inflation is understated and produces its own CPI series, but their objections to the BLS methodology don’t look very serious to me. As far as I’m concerned, the CPI-U is the best measure of inflation that we have and it is more than adequate in this context.

    “I personally like to start with raw data…”

    That is exactly what I did, the raw data being gold prices and the CPI. Any more raw than that and I’ll be forced to construct my own measure of inflation.

    Alex Dumortier

  • Report this Comment On November 08, 2010, at 11:05 PM, platymapus wrote:

    Alex if you read the seeking alpha article you may actually learn something, it's very well written article that documents the manipulation. Do the research.

    Also, everyone should understand the point of this article, it's to sell motley fool subscriptions.

    Also, if you have only been following gold since feb. 2009 I don't think you have enough experience to comment, graphs are great for looking back but offer nothing for the future and a only a FOOL would use them to do so!

  • Report this Comment On November 09, 2010, at 2:04 AM, TMFAleph1 wrote:

    "Okay, so what is the historical average for the DOW? And how far would the DOW need to fall to get back to its long-term average?"

    @Velocitor

    That makes no sense. The Dow Jones Industrial Average is a non-stationary series, so there is no reason to expect it to revert to its long-term average.

    Furthermore, even if we had established that stocks are overvalued, that wouldn't take anything away from the argument that gold is overpriced.

    Alex Dumortier

  • Report this Comment On November 09, 2010, at 2:14 AM, TMFAleph1 wrote:

    "I'll be looking forward to you looking at gold in terms of money supply because it's harder to BS money supply than CPI."

    @nphrn1

    If you believe the government is intentionally manipulating inflation data, why would you think it is any less capable of publishing false figures for the money supply?

    Alex Dumortier

  • Report this Comment On November 11, 2010, at 4:17 PM, nphrn1 wrote:

    I am approaching this discussion in good faith and spending time on it, but I'm beginning to think you are stringing me along as part of a troll attempt or a prank. 'Real' is another term for 'inflation-adjusted'. I don’t know how to be any more clear than this: NOBODY cares about nominal returns when you are trying to evaluate an asset as a store of value/ investment. If you are still having trouble with the concept or application of inflation-adjusted returns, there is little point in taking the discussion any further.

    Wow. I was actually kind of busy last few days so I didn't get to the board. First let me assure you I'm not a prankster or a troll. Also FWIW I'm not a complete idiot either. I have no trouble understanding the concept of inflation adjusted returns as evidenced by my qualms with the accuracy of most commonly used inflation indexes. I earlier showed a graph looking at gold vs the dow which I believe is much more meaningful.

    You should also look at ANY Motley Fool stock and you'll notice it's return is nominal with a nominal benchmark used for comparison. There are numerous articles where Tom and david have spoken about the DOW's 10.5% return over time. These are all nominal returns.

    All these points are really not important though. What is important is that your hostility is absolutely over the top. Please take some slow breaths and get control over yourself.

    And yes, lets end our correspondance right here by all means.

  • Report this Comment On November 11, 2010, at 11:24 PM, iceclimbers1 wrote:

    Um, a couple issues I have here. First off, you can't even just use the price from 1971-present because gold was not traded anywhere near to the extent it is today back in the first year of free trade. It was new, and people were unsure.

    Secondly, and it seems that I'm the ONLY person that knows this, but the primary cause for collapse in gold prices in 1980, the date that EVERY bull uses as the reason for the present to be a bubble, was almost ENTIRELY due to a duo known as the Hunt brothers.

    They controlled nearly 1/3 of the publicly-traded silver market, ran up the price from $6 to $50 dollars in only a few months. Then, in a period of four days (starting on "Silver Thursday") silver prices plumetted to 50% of it's all-time high. Gold was dragged along for the ride because both are precious metal commodities, so they have a strong coorelation to one another.

    Don't believe me? Compare the historical charts. You think that gold just happened to shoot up for no reason, and then suddenly collapse, with no relation to the silver manipulation that happened at the SAME EXACT TIME??

    Don't use 1980 as an example, it makes no sense, because then followed a period of serious recession (Energy crises, hello?!), and a particular "black gold" became the focus. Gold fell out of the spotlight thanks to the Hunt Bros., and it took a LONG time for it to come back.

    If you take the run-up and collapse for 1980 out of your data, then you would have likely had a nice,upward-trending line from 1970-present. NOW, does gold look like a bubble?

  • Report this Comment On November 11, 2010, at 11:25 PM, iceclimbers1 wrote:

    I meant "EVERY bear", not bull. :D

  • Report this Comment On November 12, 2010, at 2:44 PM, nphrn1 wrote:

    If you take the run-up and collapse for 1980 out of your data, then you would have likely had a nice,upward-trending line from 1970-present. NOW, does gold look like a bubble?

    It's almost impossible to make any assessment of gold prices over the last 100 years.

    Prior to 1971 the price was fixed at $20 and then $35.

    After 1971 it predictably exploded when it was allowed to float freely and probably had the pendulum swing too far helped by the Hunt fiasco.

    The plunge after 1980 was probably part due to the return to the mean from previous surge. But it was also due one of the greatest stock bull markets in recent history lasting the next 2 decades where everyone was selling gold to purchase the next big tech stock. By 2000 stocks were way overvalued and gold way undervalued.

    The question is now whether we have over corrected now in the upward direction. These over corrections are extreme. Gold could potentially go down to $500 or lower with an economic crash but will ultimately go up to $10,000 and beyond when the compensatory stimulus follows.

    Andy

  • Report this Comment On November 15, 2010, at 11:53 AM, fatisfish wrote:

    "When everybody is on one side of the boat, its better to get to the other side." - Sir John Templeton

  • Report this Comment On January 07, 2011, at 3:41 PM, samyzwonder wrote:

    Alex.. you are panicking.. do you get this syndrome too often?

  • Report this Comment On January 08, 2011, at 7:04 PM, TMFAleph1 wrote:

    I'm not panicking; I have no reason to -- I don't own any gold.

    Alex Dumortier

  • Report this Comment On January 09, 2011, at 3:11 AM, darkseid1998 wrote:

    I wouldn't listen to anyone making ridiculous claims about gold going to $500 or gold going to $5000. The rise or decline in gold is much more gradual than that. But it still beats leaving your depreciating dollars in a bank collecting nothing.

  • Report this Comment On January 09, 2011, at 5:18 PM, TMFAleph1 wrote:

    @darkseid1998,

    Read the article and find out why the claim isn't as ridiculous as you might think.

    Alex Dumortier

  • Report this Comment On January 10, 2011, at 2:48 PM, TMFAleph1 wrote:

    Edward Chancellor of GMO, an expert on bubbles (he is the author of 'Devil Take the Hindmost - A History of Financial Speculation'), agrees with me:

    Valuation Riddle for the Yellow Metal, FT.com, Jan. 9, 2011

    http://www.ft.com/cms/s/0/33aba278-1a96-11e0-b100-00144feab4...

    Alex Dumortier

  • Report this Comment On April 01, 2011, at 10:51 AM, mastermister wrote:

    If I was living in Zimbabwe before theiir dollar collapse, i'd wish I bought Gold with my zimbabwe dollar before the end of it....

    Now whats the outcome of Bernanke's Qe1 Qe2 Qe3 and Qe4 ???

    And when is the interest rate going higher?

  • Report this Comment On April 15, 2011, at 9:10 AM, nphrn1 wrote:

    He won't respond until gold hits 500.

  • Report this Comment On April 24, 2011, at 5:23 PM, pepper4 wrote:

    Gold going to $500? Pure poppycock.

  • Report this Comment On September 20, 2011, at 12:03 AM, AnitaGoldSmart wrote:

    Now, finally, the Main Stream media is talking about gold and silver...very, VERY LATE but still there is time for those who are still out of this market! Gold at 1800, you will cry in couple years for not have bought it!

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