Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Dueling Fools: Gold Bull Rebuttal

Chuck's bear argument against gold is built on three ideas:

  • Gold doesn't build value.
  • High prices will cause production to increase and flood the market.
  • Prices have already soared into the "stratosphere."

Let's bury these misconceptions right now.

Gold doesn't write bad checks
The idea that a company creates value by making products that people consume is very appealing -- but it comes with a downside. For every Procter & Gamble (NYSE: PG  ) making toothpaste and shaving cream, there are a few bad apples out there destroying shareholder value through excessive executive compensation, shareholder dilution, options backdating, and outright book-cooking.

Gold also creates value in the gold wedding rings people like Chuck and his wife wear on their fingers. Beyond jewelry, gold has value in medical, electronic, and pollution-control applications. The high price of gold represents that value.

Why the value?
Why do couples insist upon gold wedding rings? Gold is rare, and it never degrades or tarnishes. Chuck claims that high prices will cause mining companies like Barrick Gold (NYSE: ABX  ) to flood the market with a torrent of increased gold production. Gold isn't like coal or corn. People have been searching for gold for 4,000 years, and there just isn't enough of it around to sate demand. As I pointed out at Christmas, for most of the past decade, annual production has been falling.


Gold Production (Metric Tons)





















Source: U.S. Geological Survey

Firmly down to earth
After posting a 140% gain in the past five years, it may be easy to say that gold has soared into the "stratosphere." This is similar to avoiding investing in a company because its price has already doubled. The real question is whether or not the current price is too high. I believe $672 per ounce rests firmly on terra firma, because prices are driven by supply and demand.

Despite high prices, gold supplies are falling, not rising. Mine production decreased again in 2006, and central banks have reduced their sales of gold. High prices have cut into jewelry demand, but industrial and investment demand continues to increase. Furthermore, current investment in gold is a tiny fraction of the total investment universe. If the market experiences a bit of fear or increased inflation, I expect this demand to increase dramatically.

Finally, the price of gold is still far from its all-time high of $850 per ounce, set in 1980. On an inflation-corrected basis, gold would have to soar to around $2,275 an ounce to reach the same level of exuberance. If the stock market goes sour and we see blood in the streets, investors will likely run to gold, pushing the price much higher. If gold soars, maybe I'll change my tune. Until then, I'll take the gold.

You're not done with the Duel yet! Go back and read the other arguments, then vote for the winner.

Fool contributor Robert Aronen owns a gold wedding ring, but does not own shares of any company mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 525295, ~/Articles/ArticleHandler.aspx, 10/26/2016 1:18:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,224.98 55.71 0.31%
S&P 500 2,142.35 -0.81 -0.04%
NASD 5,267.93 -15.47 -0.29%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 1:02 PM
ABX $16.58 Down -0.31 -1.84%
Barrick Gold CAPS Rating: ***
PG $87.25 Up +0.28 +0.32%
Procter and Gamble CAPS Rating: ****