Ask the Fool: Is Gold a Bubble?

With economic uncertainty still running rampant, the price of gold is higher than Cheech and Chong put together. Is this precious metal the new long-term king of commodities, or will its reign come crashing down when we least expect it?

On The Motley Fool's Twitter feed, Foolish follower @hutsell215 asked:

Is gold a bubble? I know investors are "high" on gold right now, but I'm contemplating a long-term short on the precious stuff.

We posed that question to a gaggle of gilded Fools, all with their own perspectives on gold's future. Bear in mind that any stocks, ETFs, or other investments they mention aren't 24-karat recommendations -- just suggestions to kick off your own further research.

Anders Bylund, Fool contributor
Is gold bullion the new tulip bulb? Looking at a long-term chart of gold prices, it's hard not to reach that conclusion. The glinting stuff has tripled in value in five short years, and it's currently riding a rocket sled of seemingly speculative gains.

But there's nothing intrinsically valuable about gold. You don't eat it, you can't sleep on it (unless you're Scrooge McDuck), and the metal has rather limited real-world uses in general. Stocks rise over the long term because people work at making the underlying businesses better and more profitable. Gold? Eh, dig up some more.

If all you want is a rock-solid long-term investment that won't go away in the next 20 years, you're better off with a whole-market index fund or a handful of truly solid stocks. I intend to ride Google (Nasdaq: GOOG  ) for decades, though the more income-oriented among you might prefer Coca-Cola (NYSE: KO  ) . Take your pick. When the gold bubble pops, these value creators will keep on growing.

Christopher Barker, Fool contributor
Any serious discussion of a gold bubble must first concede that a vast graveyard of similar failed calls has characterized this entire bull market. When gold began a grueling 18-month correction in March of 2008, I encouraged bubble-declaring Fools to keep their gaze on the underlying fundamental drivers supporting sustained strength in gold prices.

Now that we stand at another key crossroads beneath $1,250 an ounce, I remind Fools that the very same fundamental drivers remain firmly in place. The only difference today is that the U.S. dollar is experiencing a near-term rally because of a more acute crisis in the euro. However, the scale of deficit spending, and the duration of this zero-bound interest rate environment, do not bode well for sustained strength in the greenback.

I understand that many investors out there look upon the gold price with a very different pair of eyes from my own. Because all gold investors must be prepared to endure gut-wrenching corrections, conviction is a key ingredient to successful gold investing. If you are not convinced, as I am, that gold will reach $2,000, or that my top pick, Silver Wheaton (NYSE: SLW  ) , will reach par, then by all means, stand on the sidelines.

However, even those who may be 100% convinced gold is in a bubble are strongly encouraged to abandon any thoughts of shorting gold. As I said in early 2009, I could scarcely conceive of a riskier activity.

Andrew Sullivan, Fool analyst
It's very simple. Gold is money. Dollars are simply a promise that competes with gold. If people become less confident in dollars, gold goes up in paper terms -- precisely what is happening now, because of inflation, enormous fiscal deficits, and high debt levels.

To put the current price in perspective, gold's 1980 high was about $7,000 in today's dollars when using the original CPI methodology, and $2,200 when using the new methodology. On that basis, today's price looks cheap. More importantly, China, India, and Russia all want to diversify away from the dollar, and central banks have turned into buyers from sellers, creating something of a price floor.

Inflation is another worry. The deflation arguments ring hollow, when you consider that inflation is a fundamental tenet of the postwar financial system, and a trend that's almost certain to continue. Physical gold is also in short supply compared to all the claims against it, which could lead to upward pressure. Finally, there is the not-so-insignificant risk that the entire financial system might collapse.

With a price floor and huge upside, gold is still a very good bet. Bullion is a good choice, but better returns are likely to be had in mining firms. One mining fund that hasn't fully recovered from the beating it took in 2008 is U.S. Global Investors' World Precious Minerals Fund (UNWPX).

Alex Dumortier, Fool contributor
I've given this question enormous thought since I first wrote about gold in February 2009. My conclusion, so far, is that there is no gold bubble. In its most recent issue, Barron's has an interview with John Hathaway, the manager of the Tocqueville Gold Fund, who has an illuminating way of framing the question:

The price of gold as quoted in dollars -- or in Zimbabwe dollars, to make it a really absurd example -- can look like a ridiculous chart. In terms of bubble analysis, it might look very dangerous. But then you look at what is driving it and you say, well, what is the real bubble? It really has been money creation.

In other words, although the appreciation of gold in dollar terms may look spectacular, it is simply the natural result of an extreme debasement of the U.S. dollar, or the anticipation of such.

Even if you are convinced gold is a bubble, and you're interested in shorting the SPDR Gold Shares ETF (NYSE: GLD  ) , for example, I would recommend extreme caution. If I were to short gold, I would want an identifiable catalyst for lower prices. Unfortunately, all the catalysts on my radar point to higher, not lower, gold prices: A rising sovereign debt crisis in advanced economies, the near-term risk of deflation combined with a longer-term inflation risk, and central bank purchases, among other factors.

Even if he or she is proved right over the long term, anyone shorting gold today should be prepared to experience massive amounts of pain along the way.

Jim Royal, Fool financial editor
While I agree with the sentiment that gold itself (as opposed to gold miners) is a poor long-term investment, you don't have to short gold just because you think the price is high. In this era of uncertainty, a short on any asset class that has the propensity to spike countercyclically -- that is, when the market tanks -- is doubly dangerous.

Imagine that you short a profitable gold miner, and investors flee to gold for safety, causing gold stocks to soar. You'd likely face losses, and perhaps even a margin call. Just when stocks are cheapest, you'll be unable to purchase high-quality names on the cheap.

If you have to own a commodity-focused business, why not opt for oil producers instead? In contrast to gold, oil is vital to the global economy, and the long-term prognosis clearly calls for price appreciation. Rather than focus on ETFs that purchase oil directly, consider highly profitable businesses such as ExxonMobil (NYSE: XOM  ) or Petrobras (NYSE: PBR  ) , the latter of which has struck massive finds in the last couple years.

Morgan Housel, Fool contributor
Buying gold should make sense as the global economy rots. I just question whether the timing is right, given the massive run-up.

Frankly, the confidence of the gold bulls scares me. They don't think they're onto something; they know they're right, and naysayers are wrong, and stupid you for thinking otherwise. I'm not a mining expert, nor do I follow the gold industry or even particularly care about it. I just know that this behavior more often leads to disappointment than riches.

Here's why I'm wary:

  • Retrospective back-patting: Gold has essentially gone vertical for 10 years, which bulls somehow find bullish. Really? All it means is you should have bought 10 years ago.

    There's also a sense that gold must go higher because it hasn't hit the record highs reached in the early '80s. Count me out. I don't think a level that in hindsight was clearly overvalued and set up a devastating collapse should be strived for.
  • Celebrity endorsement: Forget Glenn Beck. There's a great commercial where G. Gordon Liddy (of Watergate fame, now apparently a respected gold analyst) says, "Gold is the time-tested currency that goes up, not down!" No further comment needed.

    Gold bulls are quick to point out that this is tabloid economics and doesn't matter. Like hell it doesn't. Name an asset that had celebrity endorsement and didn't collapse.
  • The scarcity fallacy: Gold can't be a bubble, some say, because it's finite. But so is land, and look what happened. No asset is immune to overvaluation, and all assets can become disconnected from reality.

I don't know whether gold is a bubble. I just know that it's giving off the aroma of something that smells like one. Buying a little bit as a disaster hedge might make some sense. Buying a lot in an attempt to make money seems dangerous.

Jim Mueller, Fool editor
Sure, I think gold is in a bubble-like condition. I just don't understand why. Traditionally, gold has been touted as an inflation hedge. Yet over the past five years, as gold prices climbed from roughly $420 per ounce to the current $1,230 or so, inflation in the U.S. has been very low, climbing just 12% or 2.23% per year. Major disconnect. Plus, it's not a currency, it costs money to store, and it has no cash flows to pay you with.

Should you short it, though? That'd be pretty dangerous, in my opinion. Remember the old maxim that the market can stay irrational longer than you can stay solvent.

What should you do instead? Find a distressed mining company bleeding cash to short. On the flip side, find a profitable mining company, and go long. The need for metals certainly won't diminish over the long term. BHP Billiton (NYSE: BHP  ) is one idea. It mines aluminum, copper, iron, and zinc, and it's into coal mining and crude oil as well, so it's certainly well diversified in the resources it produces. It even mines gold! Plus the price is down about 20% over the past couple of months. I'd say BHP deserves a look, at least.

Mike Pienciak, Fool contributor
Buy gold? No, thanks. Short it? Never in a million years.

Let's be clear -- I don't count myself among those who point to the Fed's money printing, ,, sound the inflation alarm, and immediately buy wheelbarrows full of bullion to protect against a falling dollar. The onset of rising prices is more complex. These days, I mostly side with the bond market's view that deflation remains the word of the hour.

The trouble, however, is that gold's only fundamental is investor sentiment, which means that we can never really know why gold is rising or falling, or reasonably predict its next move. Currently, I'd say that general uncertainty is buoying gold prices, and I wouldn't be surprised to see macro fears drive prices much, much higher.

Furthermore, noted market strategist David Rosenberg reminds us that during the deflationary cycle of the 1930s, bullion doubled in sterling terms. (At the time, FDR had fixed the dollar price of gold.) In other words, there's no reason to suspect that gold prices will necessarily drop when the widely feared double-digit inflation never materializes.

That said, we could see a major short-term pullback in gold should the market tank, prompting traders to "sell their winners" in order to raise cash. Recall that following the Lehman collapse, gold dove from $900 to $720 an ounce, most likely as part of a global margin call.

If an investor wanted to speculate on such an occurrence, I'd recommend a July or August bear put spread on the SPDR Gold Shares ETF. Implementing this type of options strategy would define one's risk and limit potential losses -- something that's impossible to do when shorting common shares.

But tread carefully, and recognize that such a trade is tantamount to a lottery ticket.

We want your questions!
Thanks to Hutsell215 and the other Fools who've sent us questions thus far. We'll be answering more of them in the days to come. If you have a question about investing or personal finance, and you'd like to mine a few nuggets of wisdom from our Foolish mother lode, Tweet your queries to us @themotleyfool, or post them in the comments below!

Coca-Cola and Petrobras are Motley Fool Income Investor picks. Coke is also an Inside Value selection and a Motley Fool holding, while Google got the nod from Rule Breakers. Try any of our Foolish newsletter services free for 30 days.

Christopher Barker owns shares of Silver Wheaton, and Anders Bylund owns shares of Coca-Cola and Google, but none of the other contributors own any of the shares they've written about. Fool online editor and lead Tweeter Nathan Alderman holds no financial position in any of the stocks mentioned above. The Fool's disclosure policy secretly wishes it could have been one of the Solid Gold Dancers.


Read/Post Comments (42) | Recommend This Article (58)

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.

  • Report this Comment On June 14, 2010, at 5:32 PM, fuzzydon1544 wrote:

    I have been buying gold & silver coins for

    over 40 years. The numismatic prices have compensated me very well and I spend many hours searching for bargains. I have only a small amount of gold ming stocks, but a large portion

    of my portfolio is in gold. Most of my coins were bought when gold was under $ 800 so I am willing to sit and wait for a rise in gold.

  • Report this Comment On June 14, 2010, at 5:49 PM, goalie37 wrote:

    Remember that all bubbles start with an idea that is true. Just because a solid argument can be made for gold does not mean that speculation can't happen.

  • Report this Comment On June 14, 2010, at 6:52 PM, park94 wrote:

    Gold is a magical metal. It has superpowers and unlike other metals it can resist inflation and you can eat it in case of famine. Gold is also widely used by several XV century kingdoms so it's accepted almost everywhere.

  • Report this Comment On June 14, 2010, at 6:54 PM, ernieslog wrote:

    i did not bother to read this article, i am 82 years old, i have been watching gold (and silver) ever since the USA stopped fixing the price of gold at 32 dollars, gold has always been a sucker's play, the only way you can make money on gold (and silver) is accurate timing, something Buffett does not believe is possible. My prediction, the price of gold (and silver and copper and so on will drop at least 50% from its highs. The ONLY question is when.

  • Report this Comment On June 14, 2010, at 7:01 PM, ryanalexanderson wrote:

    Sinch has done a great job of assembling many of the pro-gold arguments in other articles, so I won't repeat them here.

    The main one for me is this: gold's image is any one of these, in order of increasing value perception:

    1) a "barbarous relic";

    2) a commodity of limited use;

    3) a method of storing wealth that cannot be quickly diluted by the government;

    4) a method of storing wealth that has no counterparty risk;

    5) a way of keeping your wealth close to you, beside your ammunition and 2-year supply of Alpo.

    There will always be people who live in all of these categories (I'm somewhere between 3 and 4). But it's not just the spectre of inflation driving the migration from 1) further down to 5). And given that central banks are moving from net sellers to net buyers, this shift is happening on a reasonably large scale.

    And a quick note on the finite-ness of land vs. gold. There's a lot more land than gold out there, compared to our financial system. It's not as finite, nor as universal.

    Land has many tangible value measures by which it can can have a measure of bubble rationality - rents, crop yields, whatever.

    Gold doesn't. When it's in "currency" mode, as it has been for most of human civilization, its value reflects the lack of trust in banks and governments, rather than some objective P/E-like ratio. And this trust, squandered away in the last couple years, won't be coming back any time soon. We'll have destabilizing deflation, hurting banks and causing 4), or inflation, causing 3). Only a Goldilocks economy can make both of these issues go away and bring back 1) and 2). And I'm not holding my breath for that.

  • Report this Comment On June 14, 2010, at 7:39 PM, TheDumbMoney wrote:

    I heart this article.

  • Report this Comment On June 14, 2010, at 8:10 PM, TMFKopp wrote:

    @ryanalexanderson

    "Land has many tangible value measures by which it can can have a measure of bubble rationality - rents, crop yields, whatever."

    So wait, are you arguing that it's tougher for gold to be a bubble because it's difficult (impossible?) to assess the rationality of its price? Ie, it can't be a bubble because it's more difficult to prove that it's a bubble...

    Matt

  • Report this Comment On June 14, 2010, at 10:37 PM, bigengine1518 wrote:

    Gold is an uncertainty!!!!!!!!!!THIS IS NOT 1980. I WAS IN ON THAT PLAY AND DID WELL...We are a whole different society..Gold is used to manipulate the market now days...OIL IS where to be....At least for awhile . market player since 75

  • Report this Comment On June 14, 2010, at 10:41 PM, xetn wrote:

    How can there be a bubble in gold when so few people own it?

    Gold is not an investment in the sense of stocks or bonds; it is money. Real money. Fiat currencies have no value (less than the paper they are printed on) except for the fact that the government has mandated it to be legal tender. Take that away and nobody would use paper (that was not convertible).

    The US constitution states that the only money is gold and silver coin!

    The talk of the increased price of gold (and silver) is not an increase in those commodities, it is a decrease in the paper currencies the the gold is priced in. For example, since the Fed was created in 1913, the US (paper) dollar has lost over 95% of its value. The value (purchasing power) of gold has maintained it value.

    No fiat currency, in the whole history of the world, has ever survived! Gold, on the other hand, has been real money for over 5000 years.

    By the way, money is nothing more that a unit of exchange, used to make exchange more efficient. Since the concept of money came into being (when direct barter was the only way to exchange) only a few commodities have been recognized as money and gold has maintained that status due to its unique features.

  • Report this Comment On June 14, 2010, at 11:02 PM, bigengine1518 wrote:

    so what should we do ?????we dont live in egyptian times or roman times when gold and silver were actual monies...We live in a total diffeent ara..............

  • Report this Comment On June 14, 2010, at 11:56 PM, TMFHousel wrote:

    "Fiat currencies have no value (less than the paper they are printed on) except for the fact that the government has mandated it to be legal tender."

    That's a pretty serious "except." If paper money has no value, I'd be happy to take it off your hands for you. You can email me at mhousel@fool.com. I'll take all you've got. I'll even pick it up for free.

  • Report this Comment On June 15, 2010, at 1:10 AM, dgmennie wrote:

    When the nagging ads found on talk radio shows and TV infomercials, are regularly pushing something on the general public (remember the riches promised from "no money down" real estate investing?) it is long past time to find an alternate strategy. Gold "investments" are now in this category.

    Gold purchases are not going to help most people simply because the only possible gain is from the "greater fool" theory (e.g., someone will "always be there" to pay even more than you did). This can only end in disaster for the late arrivals and remains the basic flaw in any commodities investment.

    Sure, the professional with more than a bit of skill and luck to fall back on, can sometimes spot a trend early enough to make a winning bet. Everything from wheat to crude oil to pork bellies gets kicked around by this crowd on a daily basis. But when the "great unwashed" get involved too, it can only help fatten the wallets of the lucky/talented few who at least presume to know what they are doing. For everyone else it is bath time.

  • Report this Comment On June 15, 2010, at 2:54 AM, easynow7 wrote:

    The way i look at it what currency do you want your money in? Sterling debt levels at 12% of GDP - No thanks. The Euro - Enough said. Or the green back. National debt increasing by almost a trillion $'s every year and to combat this MASSIVE problem they increase the deficit.

    The fundamentals behind gold as a currency lie in the fact that the gold price is directly relative to the strength of other currency and its not underpinned by idiotic governments or central banks. The gold market has always been used a barometer to measure the value of currency. Nothing has changed there.

    Is it in a bubble - who cares. Are we seeing any economic data back from the US, Eurozone, or UK that suggest any of these currencies are more likely to lessen in value or strengthen. You then have your answer as to if you should invest in gold.

  • Report this Comment On June 15, 2010, at 3:44 AM, brizzlekizzle wrote:

    Lets take a look at a hard fact, the intrinsic value of gold. Now you are probably not a precious metals expert, but if I asked you to trade me your watch for a 1/10 ounce coin of gold, you would think about how much you payed for your watch and how much that coin was worth. If I had offered a 100 oz bar of gold, you would trade faster than I could finish my sentence. You dont know the exact value of the bar, or the short term future of its value in whatever currency, but you know its worth more than your watch was, and that is the intrinsic value of precious metals, human nature cannot overcome it. However the dollar or any other currency will not hold this value forever. If I offered you 1 dollar for your watch you would probably say no, if I said 100, 1000, 10,000 etc, at some point you would say yes, unless there was hyperinflation at the time and no amount of currency that could be carried around would make an attractive trade. I am sure that at least in my life this will remain the same, with gold keeping its intrinsic value and paper money loosing its going value. Now its impossible to put a permanent value on gold, but its more valuable than it was a few years ago, and with the fundamentals screaming disaster for some notes of debt backed by themselves and nothing more, its a smart choice for someone looking at preserving some portion of wealth, even in purchasing power was lost. Again, there is the intrinsic value it holds. The only bubble possible for gold is if the price were to exceed its intrinsic value, which is a very hazy grey area, but at this point I dont think it has, and really, can gold ever exceed that value? Its value changes in currency depending on the outlook of the currency being used. You have to actually buy the gold and own it, making the supply and demand change. Well my point is simply I dont think its near a bubble, or that it ever will be.

  • Report this Comment On June 15, 2010, at 3:51 AM, videophool wrote:

    Gold will be a bubble when Infomercials are selling gold, not buying it. Gold will be a bubble the two-page newspaper adds are selling gold, not buying it. Gold will be a bubble when every major magazine has it featured as the cover story, and all sorts of crazy gold instruments are created to allow leverage. In the mean time, gold is a hedge against the fed's printing presses, no more, no less.

    With the fed holding rates at near 0, all investors are forced to speculate or accept .8% for savings. Interest rates have only one way to go, and how much will those 4% bonds be worth when interest rates rise? Govt debt is the bubble, because there is no way the US govt will pay off over $100 trillion in debt and liabilities.

    One last point, the housing market was clearly a bubble. How can anybody who did not call that bubble, claim any credibility when passing judgment on gold. And BTW, I bought physical gold between $250-400 oz, and my USAA Precious metals fund investment is up nearly 150%..

  • Report this Comment On June 15, 2010, at 5:39 AM, ryanalexanderson wrote:

    @TMFKopp:

    "So wait, are you arguing that it's tougher for gold to be a bubble because it's difficult (impossible?) to assess the rationality of its price?"

    Bluntly, yes. If I take a generally accepted definition of a bubble as "trade in high volumes at prices that are considerably at variance with intrinsic values" [from economics sources, via Wiki], then I wouldn't call it a bubble, because of the lack of expectations for gold to do anything of intrinsic value.

    This is semantics, to some degree. I don't deny that a proportion of the population are obviously buying gold to make a quick speculative buck. But the arguments for gold being "overvalued" could just as easily be made at $400 as $1200. Just like the value of a dollar bill, which has even less intrinsic value than a piece of gold. And these arguments of "non-utility" certainly come up earlier in the rise in price of such currencies, keeping things a bit more orderly.

    And, just like a currency, some people are buying it to increase risk exposure; other large parties are buying it to reduce risk exposure. Like large governments. "Bubbles" can burst when faith in the system is lost, and when sources of capital stop loaning to lunatic dot-coms, houses, railroads, whatever. But a general flight from risk will be a much more neutral, if not positive, force for gold prices.

    So, yes. Again, it may be semantics, but I don't think gold is in a bubble. The price will go up and down as our faith in banks, printing presses, and government balance sheets fluctuate. But I don't think our perceptions of these things have a rosy outlook for anytime soon.

    Having said all that, it would be remiss of me to ignore the price patterns of the early 1980's. An inflation-adjusted chart follows:

    http://www.resourceinvestor.com/News/2009/5/PublishingImages...

    One could have called this spike a "bubble" - but remember, Volcker took the unprecedented and unexpected measures of raising interest rates to 20% to "burst this bubble", and decades of gold-selling and leasing to bring it down to its 2002 low. So was gold indeed in a bubble? Or was it just a conservative investment thesis that failed due to massive government action?

    And would that action ever happen again? With debt at 100% of GDP? And gold at near half the inflation-adjusted 1980 high?

    I think this horse has a lot more room to run.

  • Report this Comment On June 15, 2010, at 5:55 AM, XMFkmoney wrote:

    I get confused with the whole "gold is a hedge against inflation" argument. While I understand that this is theoretically true is there any evidence it has ever worked that way? I find it especially confusing when people, like Andrew Sullivan, mention that it's below its inflation adjusted high. If gold, after having gone up significantly, is still below its inflation adjusted high, doesn't that mean it's NOT hedging against inflation.

  • Report this Comment On June 15, 2010, at 6:50 AM, outoffocus wrote:

    Gold may possibly be a bubble but it has yet to reach its "parabolic stage", typically characterized by giant leaps in price right before the fall. I was saying that the DOW was overvalued at 12000, yet it hit 14000 before it finally fell. I called the oil bubble at 120. But oil hit 147 before it fell. So on and so forth. So when gold starts jumping 100s per ounce in a day or even a week, that's when I'll be convinced that the gold "bubble" has peaked and that's when I'll sell. But as Sinch stated, the fundamental drivers of this "bubble" are still in place. There are still some shoes that haven't dropped. Until those shoes fall I don't expect this "bubble" to pop anytime soon.

  • Report this Comment On June 15, 2010, at 6:52 AM, AUricle wrote:

    Gold's value has ALWAYS been in inverse proportion to the fiat currencies it is measured against. That's not to say it's PRICE always accurately it's value. Because of the relatively small size of the gold market, rivers of paper fiat can distort the price/value equation, but do not make the mistake of thinking that manipulation can forever supress the gold price.

    The world is awash in paper, and inflation is hidden by central bank and governmental machinations which distort true inflation for a number of reasons, primarily to limit entitlement payment increases which are tied to the CPI or other inflation rate measurments.

    As with the securities bull market of 1981-2000, gold has entered secular bull market which will last upwards of 25 years. None of the reasons that made gold attractive to those who understand what makes gold 'move' have changed. In fact, thae case for gold has only strengthened since 2002.

    Here is some food for thought in case you're wondering if it's 'too late' to enter the gold market:

    Gold as 'money' tried to 'balance the books' of the U.S. in 1980 when it briefly rose toi over $800 per oz. (External debt of the U.S divided by the number of ounces reportedly held by the Treasury) That debt was a pittance compared to today, AND the paper money supply has EXPLODED since then to boot.

    I'm not predicting this balancing will necessarily happen this time, but if it did, we'd be looking at gold in the $30,000+ range..........

    Remember, gold seeks to preserve wealth against devaluation of it's paper 'proxy'. So unless you are leveraged to the hilt, even a move to such lofty paper valuations won't make you rich.

    ....but in terms of where you'd be if all your wealth was in paper or other derivatives, gold owners will still at least 'tread water' in real terms, when a loaf of bread costs $200 paper dollars. As such, it cannot attain the 'bubble' status that paper derivatives can.

    If you need a concrete example, try this.' Back when', a $20 gold piece (1 oz.) and a $20 bill could both purchase a quality men's suit....but today that same quantity of gold could still purchase that quality ($1000+) men's suit, where as that moldy $20 bill won't even get you a cheap tie! So it's all relative, but I'm not going to lose any sleep for a LONG time, worrying about whether it's time to sell.

    The whole world is turning to gold, and only the 'paper pusher's' of the world, who can't profit from your ownership of REAL gold, are against it.

    Don't let them fool you again!

  • Report this Comment On June 15, 2010, at 6:55 AM, outoffocus wrote:

    PS: The dollar is currently overvalued. Treasuries are overvalued. But I dont hear screaming from the hills that either of those are "bubbles".

  • Report this Comment On June 15, 2010, at 7:30 AM, BMFPitt wrote:

    Gold: The world's shiniest fiat money.

    Gold is absolutely a bubble and will absolutely have a massive pop one day. But I have no interest in trying to time that pop, because irrational markets that have gone on for far longer than my own lifetime are not the type of thing I want to try to deal with predicting.

    If I wanted to be in metals, I'd be in useful metals.

  • Report this Comment On June 15, 2010, at 8:41 AM, susan400 wrote:

    1 why is sullivan using the cpi method? GC doesn't follow th CPI and commodities go down over time in real terms.

    2 gibber jabber with clever sounding insights and you ahve nothing. People own GC for insurance against a disaster. You just own some and DON"T try and predict it. If th9ngs blow up, it come in handy.

    3 TMF- if the TMF is seeing bubble, most probbably the bubble hasn't even started to forn yet.

    susan400

  • Report this Comment On June 15, 2010, at 9:07 AM, ryanalexanderson wrote:

    "Gold: The world's shiniest fiat money."

    "Fiat: a command or act of will that creates something without or as if without further effort."

    Been dabbling in some armchair alchemy, have we?

  • Report this Comment On June 15, 2010, at 9:51 AM, ernieslog wrote:

    i find the suit buying comment interesting (a 20 dollar gold coin will buy a good suit, if the coin is converted to paper money but a 20 dollar bill will only buy a cheap shirt). Instead of buying gold a couple of decades ago when it hit 900 bucks, i bought some part of the dow i would be able to buy the suit with the current dividend. Of course i had to buy P&G not beth steel or better yet one of the stocks the touts brag about like buffett's company.

  • Report this Comment On June 15, 2010, at 10:08 AM, actuary99 wrote:

    "Gold: The world's shiniest fiat money."

    "Fiat: a command or act of will that creates something without or as if without further effort."

    Assume that remark is not facetious, it's the "value" that's created, not the gold.

    Of all the assets that could be used to hedge against inflation, why gold? It's price is so much higher than its intrinsic value simply because of its popularity as a hedge against inflation.

    Why would gold be any better of a hedge against inflation than all of the following: oil, land (without a house on it), silver, diamonds, copper, aluminum, canned goods with lots of preservatives, Van Gogh paintings, gardening tools, lumber? Obviously a lot of these take up a lot more space that gold, which is inconvenient, but I think you get the idea.

  • Report this Comment On June 15, 2010, at 10:25 AM, ryanalexanderson wrote:

    "Gold: The world's shiniest fiat money."

    "Fiat: a command or act of will that creates something without or as if without further effort."

    The upper quote appeared nonsensical to me, and the lower one is from Miriam Webster. Paper money - or digital money - is created without any effort. Gold is not. There is a limited supply. "Value" is an abstract idea. Gold is physically scarce.

    And gold is not just an inflation hedge. It's an uncertainty hedge. All of your alternatives except one are subject to additional uncertainty. If I was to subdivide your suggested alternatives, I'd do this:

    oil, copper, aluminum - These are commodities whose values correlate with a healthy economy. They're bets on inflation + robust economy.

    land (without a house on it) - subject to the healthiness of the local economy.

    canned goods with lots of preservatives, gardening tools, lumber - bulky, as you say. And they degrade with time (even with preservatives. I don't care how well preserved circa-1995 beans are. I won't buy them.)

    Diamonds, Van Gogh paintings - these are artificial creations with subjective cultural value that may vary with fashion, unlike raw gold.

    Silver - absolutely! Although there is a manufacturing use, so there is a bit of an economy correlation.

    Any of these may be good alternative investments. But they are less pure hedges against uncertainty.

  • Report this Comment On June 15, 2010, at 11:24 AM, Vineconimcs wrote:

    Lots of pros and cons to this discussion. Intrinsic value of gold is nothing more than the price of the metal vs. the printed value on a gold coin. On a bullion piece intrinsic value is whatever gold sells for. So a $100.00 face value Coin that weighs 1 0z currently has an intrinsic value of @ $1150.00, nominal value of $100.00.

    Barely touched in this discussion is the production cost of new gold.. Old Gold, unlike most commodities is not "destroyed" after it is purchased. It is held for resale, made into coins, jewelry or little bricks which have no use value, except possibly door stops or bookends.

    Even though the pro gold folks may be right on the price of gold vs. Modern currencies, I can't bring myself to invest or buy any of the commodity itself, there is no use value to it, I don't like gold jewelry, don't collect coins, it holds no interest for me.

    I do like to invest in growth businesses, so Mining companies are a completely different consideration. There may be an opening here and if the price goes up just a couple hundred dollar higher per ounce. The mining companies will create this bubble everyone is talking about.

    I have no statistics to cover, but I am certain there is more gold sitting in tailing piles throughout the world than has actually been processed. BHP Billiton probably knows to the last ton, how much they could produce and how much it will cost them per ounce. When the price hits the point that the MIning companies can Sell future production and be 100% certain of covering the new production costs, the bubble scenario will be set in motion. Is gold a good investment? Check the production rates of the major mining companies, this will tell the tail...

  • Report this Comment On June 15, 2010, at 1:04 PM, BMFPitt wrote:

    "The upper quote appeared nonsensical to me, and the lower one is from Miriam Webster."

    If you don't understand the first quote, I don't think you understand the second one, either.

    "Paper money - or digital money - is created without any effort. Gold is not. There is a limited supply. 'Value' is an abstract idea. Gold is physically scarce."

    Lots of things are rare. Much more rare than gold. Why do you think gold is a better currency than 1950's baseball cards not thrown out by your grandmother?

    Value is not an abstract idea. That you think it is explains why you don't understand gold. Value is what you can get (and expect to get in the future) in exchange for what you have.

    "And gold is not just an inflation hedge. It's an uncertainty hedge. All of your alternatives except one are subject to additional uncertainty."

    And gold's price is based entirely on speculation that there will be a greater fool sometime in the future. How is that not uncertainty?

  • Report this Comment On June 15, 2010, at 2:16 PM, ryanalexanderson wrote:

    Right. Starting with:

    "Why do you think gold is a better currency than 1950's baseball cards not thrown out by your grandmother?"

    Referring to my comment of 10:25AM EST, a 1950's baseball card is delicate, culturally subjective (try selling it on the streets of Riyadh), and doesn't have millenia of universal historical value perception behind it. Nor is it divisible. Rarity is a necessary but not sufficient condition for a medium to be used as a currency.

    "Value is not an abstract idea. That you think it is explains why you don't understand gold. Value is what you can get (and expect to get in the future) in exchange for what you have."

    I don't base all my counter-arguments on Merriam-Webster, but...

    Abstract: disassociated from any specific instance; difficult to understand; expressing a quality apart from an object.

    Value is -totally- an abstract idea regarding gold. That doesn't make your third sentence incorrect. Just that compared to the value of wheat, wood, or steel, gold's value is abstract. As is the dollar's.

    "And gold's price is based entirely on speculation that there will be a greater fool sometime in the future. How is that not uncertainty?"

    You can apply your "speculation" and "greater fool" quote to any asset in existence. But nothing has the long-term perception of value like gold, without the counter-party risk, reliance upon a debt-laden economy, blind trust in government institutions, etc. One should certainly have a portion of their assets in this asset class to partially mitigate these risks.

    Now, a question: could you indeed explain your "Gold: The world's shiniest fiat money" comment? I still don't follow the connection between your use of the word "fiat", and "value". Are you suggesting that the value of gold is arbitrarily created by a "command or an act of will"? Who did that? Is there a Global Federal Reserve of gold? It would seem to be that each civilization on this planet, throughout history, came to esteem gold independently without the command of any particular entity.

  • Report this Comment On June 15, 2010, at 3:12 PM, dbooze wrote:

    Gold in a bubble? Hmmm; I don't recall the Fool website presented that question to its members in 1999 with regard to stocks. I think we can all agree that was a major bubble.

    I do have to comment on several of the posts that stated buy gold is speculation. Your darn right it is. So is that stock you are buying. You are not investing. The organizers of the company are investing. You bought the stock on a secondary market. Now you could say that you are investing for the dividends. With yields at 2% generally, who is really doing that when you can get 4% from a 30 Treasury bond. You are SPECULATING that the price will go up!!! We are all speculators.

    BTW, I have been in gold since 2004 and I don't own any stocks. So, I am biased. When P/Es are 6 again, I will be the biggest stock bull out there. Waiting for that day is getting boring.

  • Report this Comment On June 15, 2010, at 3:36 PM, dbooze wrote:

    I just can't resist. I have to add another comment. If gold were in such a massive bubble, why is there not 50 bulls bashing the neighsayers for every one bear? I bet on the Google blog if you posted a negative comment, you would be bashed ten times in 5 minutes. Here on this article, there is one post every 30 minutes.

    Who do you know that owns gold? Have you seen a gold coin? Everyone you knew owned tech stocks at the end. Am I right? Everyone you knew was buying real estate, or were trying to get in!

    I was told at an interview in Boston in November of 2004 to immediately buy a condo, don't rent when I moved there. I couldn't believe my ears at the time. That is what you hear in a bubble!!!

  • Report this Comment On June 15, 2010, at 7:13 PM, MattCohn wrote:

    At least the tech bubble had some uncertainty to it. The Golden Bubble Bugs' only hope is for a greater fool (that has money) to come along. I hope that the goverment sells thier stok piles now before the burst. Even if they sell all the Gold in Fort Knox and in Area 51. I like my chances of still being able to buy a double cheeseburger for a American buck.

  • Report this Comment On June 16, 2010, at 11:26 AM, dwightex wrote:

    Just hold a gold coin in your hand. If you find that you don't like it, sell it and buy 8 shares of AAPL. You must admit that Gold has been an outstanding investment for the past 10 years. Trend is my friend, I'm betting that it goes higher.

    Also, run down to your local coin shop. Watch the geezers come in and sell their scrap gold. Then see the young Indian and Chineese couples standing in line to buy Gold coins. This is happening all of the time. Chineese, Russians, Indians all know what real money is when they see it.

  • Report this Comment On June 16, 2010, at 12:09 PM, ernieslog wrote:

    someone wants me to hold a piece of gold to see why it is popular. i have a dozen or more gold coins, modern and old, some in a cabinit in my living room, united states and foriegn, i, on occasion, buy my wife 22 k gold jewelery and i still say gold as an investment is for suckers and will decline 50% or more from its current highs i am not selling my modest amount of gold because i did not buy it as an investment but i still say gold will decline 50% or more in my lifetime and i am 82

  • Report this Comment On June 16, 2010, at 2:23 PM, dbooze wrote:

    It already has declined 50% in your lifetime. (1975). Who knows, maybe the end is near.

    I do know that the last bull market ended with gold going up 250% in less than 6 months. The Nasdaq went up 110% in its last bull market year.

    When my selling conditions are met I will sell that day. Maybe I will buy google or palm or Fannie Mae at that time.

  • Report this Comment On June 16, 2010, at 4:40 PM, MasterKung wrote:

    Ever notice how few of those opposed to gold ownership are dispassionate and objective about it? The vast majority are seriously peeved that someone could preserve their wealth with such a simple notion that gold represents a perennially enduring value. All of their technical advice to the effect that government-consecrated paper is value, that ZOOM!-dot-com is value, is suspect. At the same time virtually NONE of those with an anti-gold psychosis are going to put up or shut up by shorting gold. Show me the "expert" who (1) can, without serious rhetorical heartburn, admit that gold can be useful in our current uncertainty and (2) can back up the yap by putting his own money on shorting gold, and I will listen to him.

  • Report this Comment On June 17, 2010, at 11:40 PM, ernieslog wrote:

    i do not short anything, shorting is for experts with more guts than i have, shorting is negative, i believe that we will continue to grow and i am positive about it, i have predicted in every post here that gold will be selling under $600 in my 82 year old lifetime, i just do not know when and to be a sucess at shorting you have to know when. by the way, i expect to at least see 90 so i am predicting gold will be under 600 dollars by november 2017.

  • Report this Comment On June 18, 2010, at 2:54 PM, bngbuck wrote:

    Fully as ancient as Ernieslog, I too am 82 years old, realistically looking forward to my mid-90's (because of excellent genes and excellent current health.) I have approximately $50k (cost) in TRUE (IRS exempt) semi-nusmismatic gold and silver coins (US gold and silver eagle 1oz proofs). I am still buying, when available, $50 gold eagle proofs and $1 silver eagle proofs from the US Mint. These physical gold and silver investments today have a high premium over their bullion value [1 oz gold eagle proofs are currently being bid ($1800) at about 45% over spot ($1260/oz); 1 oz silver eagle proofs are being bid ($50) at about 62% over spot ($19/oz) with much higher premiums for three or four mintage years in the mid-90's].

    These coins were bought over a 25 year period from the US Mint at about 10-15% over spot.

    I am currently cost-averaging @ about 2k per month in NYSE:SIL -- a brand new (April 2010) silver miners ETF. Today it's @ 15.8 and going up. I have high hopes.

    I fully expect the metals to hit 1800-2000 spot (gold) and 35-40 (silver) within the next two-three years before crashing. Too soon to guess the ETF, but theoretically, it should out-perform silver spot if the metal bull market continues. I'm looking for money I can use in my lifetime. Silver looks better than gold to me right now.

    Any comments on my sanity?

  • Report this Comment On June 18, 2010, at 5:32 PM, achumpage wrote:

    Given the increasing predilection of politicians around the Globe to overspend wildly I personally do not see gold being a "bubble" commodity in the intermediate term. It will continue to be seen as a safe hedge and store of value. Given increased wealth in developing countries, notably India and China, demand can only increase.

    But let's say 'm wrong. Who cares? If one purchases gold in the correct vehicle (I like GLD, backed by hard assets) AND uses appropriately set trailing stops, what's not to like? Enjoy the upside and hedging while protecting against the downside.

  • Report this Comment On June 18, 2010, at 9:44 PM, Noexpert2 wrote:

    Amazing how many people are suddenly experts in precious metals and as Jim Rogers said, amazing how many people suddenly became experts on China overnight. Ahem... well... as for me, I am no expert but here is what Dr Marc Faber (I guess he could be perceived as someone who knows a thing or two about economics) said on the gold situation:

    "I opined before that I have been highly critical of US monetary policies under Mr. Greenspan and Mr. Bernanke, which created bubbles in all asset classes all over the world between 2002 and 2007. I also noted that the “illusion of wealth” (read US credit bubble) did not have a beneficial impact on the US economy (less people have now jobs than in

    1999 although the population is up by 30million): it brought about an enormous increase in the US current account and the trade deficit."

    "I am aware that some pundits think gold to be “a bubble.” But let me point out the following. Gold prices have not increased much compared

    to other assets, which reached bubble phases, such as the Nikkei Index between 1970 and 1989, US high tech stocks in the 1990s, and home

    prices after 1995 (see Figure 18). Gold has also risen far less since 1999 than in the 1970s when the gold price increased by more than 20-times.

    People who think gold to be a “bubble” also will also argue that it is an “over-owned” asset. Let me shed some light on this point. Every year I attend numerous investment seminars, corporate meetings, and conferences. I frequently

    ask who among the audience owns some gold. Usually a maximum of between 3% and 5% of the participants own some gold or other precious

    metals (one exception was the Mises Institute Conference: there about 50% of the participants owned gold but bear in mind that these are the

    true hard core “sound money” protagonists). In fact, given all the money printing that is going on around the world I was rather shocked that when

    I attended recently five different conferences and group meetings with investors I consider to be “sophisticated,” prudent, and “intelligent,”

    hardly anyone among them owned any physical gold or silver (usually among 200 people maybe 3 people). I can assure my readers that I have lived through a huge gold mania when gold really became over-owned. That was in the late 1970s, when I was running the Drexel Burnham Lambert’s Hong Kong office, which had more in common with a sleazy casino than with a brokerage office.

    Day and night clients would come by (I kept the office open 24 hours a day) and gambled through our dealers in “London gold” or in futures.

    Also, when you traveled in the late seventies, people everywhere in the world knew the price at which they could buy or sell gold and silver.

    Nobody then was interested in equities or bonds! That was the time when precious metals were over-owned and when they were in the

    midst of a huge mania. But now! If anything gold is significantly under-owned. So, I should like to categorically state that anyone who says that

    gold is over-owned and in the midst of a mania is completely clueless about the nature of asset markets and about what happens in the late

    phases of an investment mania when speculation gets completely out of hand."

    And finally from another Fool:

    “We naturally imagine that the spot on which we

    ourselves stand is fixed, and that the things around us move. The man who is in a boat seems to see the shore departing from him, and it was the doctrine of the first philosophers that the sun moved round the earth, and not the earth round the sun. In consequence of a similar prejudice, we assume that the currency which is in all our hands, and with which we ourselves are, as it were,

    identified, is fixed, and that the price of bullion moves; whereas in truth, it is the currency of each nation that moves, and it is bullion, the larger article serving for the commerce of the world, which is the more fixed.”

    Henry Thornton, An Enquiry Into the

    Nature of the Paper Credit of Great

    Britain, 1802

  • Report this Comment On June 22, 2010, at 4:53 AM, afamiii wrote:

    Gold is both money and insurance.

    No one is forced to accept it as a medium of exchange (unlike soverign currencies which are enforced by a friendly gun held in sight,) but nations and individuals do so because there is no risk of it beind debased. They have done so since recorded history and are likely to do so for the rest of history.

    The price of Gold is today high (almost double its marginal cost of production.) Demand is also high AND NEW supply is fairly inelastic over the short to medium term.

    This will only sustain as long it is required to provide insurance value, against the possibility that soverign states will debase their currencies in order to manage their debt.

    Given China's recent decision to free the Yuan (i.e. reduce its purchases of US treasury debt - be careful what you wish for Gaetner.) This risk is getting bigger.

  • Report this Comment On September 27, 2010, at 1:00 AM, Jahnavipat wrote:

    However, the gold market is volatile in the short term. The spot price the next day can not be predicted that short-term rates are based on pure speculation. repair of, however, shows the value of the real price. And quite complicated to understand as the spot price of gold is determined. Its price is determined on the basis of contracts in a country in the world.

    http://www.financeandmarkets.net/spot-gold-price.html

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