Is It Time to Jump on the Gold Bandwagon?

After a big decade, gold bulls still see big things ahead for the yellow metal. Whether the target is $1,500, $2,000, or $10,000, the message is clear: It's still a good time to be buying gold.

I remain unconvinced though, and I think when we take a closer look at what gold is -- and, more importantly, what it isn't -- we can uncover why you can feel OK skirting the hoopla around gold.

Gold the commodity
I won't spend much time with this because this is already a well-worn point. Commodities are valuable because they are useful. Oil propels our cars, steel forms the skeletons of our skyscrapers, and coffee makes Monday mornings tolerable.

And because many commodities are in almost constant demand, blips in supply or demand can send prices shooting up. We just saw this last week when the U.S. Department of Agriculture announced the lower-than-expected corn crop, sending the price of corn up along with seed and fertilizer producers like Monsanto (NYSE: MON  ) and Mosaic (NYSE: MOS  ) .

Gold doesn't fit this mold. The metal is used widely for jewelry, but the industrial and everyday consumer uses are minimal. But like I said, this isn't exactly breaking news.

Gold as a currency
Among people "in the know" when it comes to gold you'll more often hear talk about gold as a currency. They'll talk about the lack of value in fiat paper currencies and point to government policy as a reason why you can always expect your paper money to lose value over time. Gold, on the other hand, is a rock-solid store of value that you can count on.

Though gold isn't actually used as a currency anywhere currently, I'll let that sentiment stand. Long-term inflation in the dollar is a reality and a saver would actually be pretty disappointed if he or she simply kept their retirement nest egg in cash.

But here's the problem: If we were to say that gold is ideal as a replacement currency, what we'd want to see is that it maintains a stable purchasing power for common goods that a consumer might buy. The U.S. consumer price index tracks the prices of a basket of consumer goods -- food, housing, clothes, medical care, education, etc. If the currency argument on gold were true, we'd expect that the ratio of the price of gold to that index would remain relatively constant as gold maintained a steady purchasing power over that basket of goods. We haven't exactly seen that.

Source: Kitco and the U.S. Bureau of Labor Statistics.

We could also look at many individual products and get a similar view.




Source: Kitco, The National Cotton Council of America, United States Department of Agriculture, University of Wisconsin-Madison, U.S. Department of the Interior, MetalPrices.com.

Now it's notable that the charts for oil and some metals like iron ore show a ratio close to the long-term median. But given the supply and demand concerns associated with oil and some industrial metals, there's an argument to be made that the price of those commodities should actually be climbing in gold terms.

Plus, if we're really going to say that gold is a currency, should its price track certain industrial metals or the goods and services that we use on a daily basis?

Will the real gold please stand up?
So if gold isn't really a commodity or a currency then what is it? It's a fear gauge. When investors are feeling fearful about the future, they turn to gold.

Unfortunately, it hasn't been all that long since we left the Bretton Woods system, so we don't have a wealth of worthwhile information on gold prices. But the last time gold prices spiked was back from the late 1970s into 1980 -- a time not only of inflation, but of serious concern over the U.S.' economic future. We then had a prolonged period of relatively smooth economic sailing, and over that period the price of gold languished because investors simply didn't think they had anything to be afraid of. In fact, that period was so smooth that it engendered the phrase "The Great Moderation."

But now fear is back in a big way. Investors are very concerned about the future, and gold is spiking once again.

So, do we or don't we?
I don't pretend to know how long the spike in gold prices is going to last, but what I do know is that the best time to buy an investment asset is when it's underpriced. Go back up and glance at the charts above. In the late 1990s and early 2000s, the ratio of gold to all of those goods was below the long-term median. Nobody really cared then though because gold didn't have a decade of stellar returns behind it -- it had a decade of losses and stocks were flying high.

Today it's a very different story. Gold's been the hot spot and stocks have languished. There's no shortage of pundits pointing to the past decade as proof that long-term stock investing is dead. Meanwhile, gold bulls slap up charts of gold's price shooting up and to the right and are dead set that the good times will keep on rolling.

I'm not adding gold to my portfolio. I'm also staying away from gold-producing companies such as Barrick Gold (NYSE: ABX  ) , Yamana Gold (NYSE: AUY  ) , and Goldcorp (NYSE: GG  ) .

On the other hand, I'm happy to hear that "experts" are shying away from stocks. That allows me to continue to find solid, dividend-paying, blue-chip bargains such as Kimberly-Clark (NYSE: KMB  ) and Abbott Laboratories (NYSE: ABT  ) . Both stocks currently pay a dividend greater than 3%, have a forward price-to-earnings below 14, and are backed by strong, successful companies.

But I want to hear what you think. Have I missed something when it comes to gold? Head down to the comments section and sound off.

All of this government spending is going to have to come from somewhere and Warren Buffett thinks he knows the best place to get it from.

Monsanto is a former Motley Fool Inside Value recommendation. Kimberly-Clark is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a synthetic long position on Monsanto. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Matt Koppenheffer owns shares of Abbott Labs, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.


Read/Post Comments (51) | Recommend This Article (28)

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 October 14, 2010, at 11:10 AM, TheDumbMoney wrote:

    Couldn't agree more. I hate myself for not thinking to buy gold in 2000. But I will not buy it now -- not in an era of gold ATMs, calls for the government to sell its stockpile, buy-sell gold stores popping up on high-profile shopping streets, gold coin ads in every media source, tons of articles about it. I recognize that if fear gets worse, or if things get worse, gold may spike even more, but I'll take my chances with the ABTs of the world. Also, isn't interesting to note that while gold is not at its inflation-adjusted high, versus the dollar, it IS at or in fact well above its purchasing power highs as against the charts you note (pork, cotton, milk, coffee, etc.). Not a good time to buy, not a good time to buy any commodity really, despite (or because of) the recent spikes. Bully for those who bought in the early and mid-2000s though.

  • Report this Comment On October 14, 2010, at 1:42 PM, TMFHousel wrote:

    Love those pictures, Matt. Great work!

  • Report this Comment On October 14, 2010, at 1:49 PM, TMFDiogenes wrote:

    Great stuff.

  • Report this Comment On October 14, 2010, at 2:18 PM, TMFKopp wrote:

    Thanks all!

    And if anyone needs to know how to find historical coffee or pork prices... well, I'm now your guy!

    Matt

  • Report this Comment On October 14, 2010, at 2:18 PM, skypilot2005 wrote:

    Matt,

    With all of the money that is being created by our government, I think it is prudent to be looking at companies that mine minerals, including gold.

    Finding a well-managed minerals producing company can help an investor diversify their portfolio. It will provide protection against inflation and also, participate in an economic recovery. I submit that is a win-win situation.

    Buying gold bars and placing them in your safe deposit box is a form of speculation.

    Buying a well-managed company that produces gold is not. You provide portfolio diversification and a hedge against inflation at the same time. Something I think is perfectly reasonably for a long-term investor to do.

    One of the companies you are “staying away from” is AUY. AUY has a P/E of 33.6 (with a Gold cost of approximately $103, per ounce in the 2nd quarter.)

    You like ABT P/E 15.6, With Obama Care coming soon. KMB P/E 14.2, Real close to a 52 week high and competes head to head with P&G.

    In this comparison, I like AUY.

    You ask, “Have I missed something when it comes to gold?”. I think so, because you aren’t looking at the companies, just the commodity in this article.

    Thanks, for the “other side” of the argument, though.

  • Report this Comment On October 14, 2010, at 2:45 PM, lazytype wrote:

    So right, It's way overpriced and risky

    Gold now is pure speculation, you've to find a bigger optimist during a bubble or loose heavily

    And the really funny part is that when the real crisis comes, you won't be able to eat gold. Its value equals, weight to bread or corn. I refer to 19th century US gold rush stories.

  • Report this Comment On October 14, 2010, at 3:16 PM, goalie37 wrote:

    Recipe for Goldman Sachs' Homestyle Gold Bubble

    Take one part truth and mix with equal parts leverage and speculation. Add irrational exuberance to taste.

  • Report this Comment On October 14, 2010, at 3:25 PM, TMFKopp wrote:

    @ varsovia

    "And the really funny part is that when the real crisis comes, you won't be able to eat gold. Its value equals, weight to bread or corn."

    I've always held that if you do want to buy gold, it'll be worth most in a true crisis if that gold is in the form of a golden sword so that you use it to pillage things that are actually useful... like food.

    Matt

  • Report this Comment On October 14, 2010, at 3:29 PM, TMFKopp wrote:

    @skypilot2005

    Yes, but it's gold and the price of gold that those companies live or die on. Is gold the same as the companies that produce gold? No, not exactly the same, but it's going to be an uphill battle for those companies if gold boom doesn't continue.

    That said, if forced to choose between the two, I'm with you -- I'd prefer the companies over the metal.

    Matt

  • Report this Comment On October 14, 2010, at 3:58 PM, ETFsRule wrote:

    Great article. And unless I'm mistaken, the gold/oil ratio shows the same thing (although possibly to a lesser extent than the commodities you mentioned). Gold/oil is around 16 right now, compared to its historical average of 12.

  • Report this Comment On October 14, 2010, at 5:24 PM, pkluck wrote:

    At ETF'sRule, oil is consumed gold is not (at least not materially) oil is used in just about everything, at some point (now?) the oil ratio will continue to climb.

  • Report this Comment On October 14, 2010, at 7:03 PM, kydderr wrote:

    Well, fellas.......this is the deal. Gold is real and tangible. Paper money is not and will never be. ESPECIALLY when the Feds are printing dollar paper like crazy ( meaning ) to devalue the dollar. Bet on the dollar falling and you win. Buy foreign currencies and you win. Own gold and silver and other precious metals and you win. Commodities are also a big win.

  • Report this Comment On October 14, 2010, at 8:27 PM, extremist wrote:

    It's good to see this kind of article. The time to jump OFF the gold bandwagon will be when such articles stop appearing.

  • Report this Comment On October 14, 2010, at 8:40 PM, Purpleheartfool wrote:

    Don't know the answer. I'm buying gold in bulk and tiny (1/10 oz) pieces as well as silver (poor man's gold). I'm using "extra" money, so if it tanks, won't hurt. The socialization of our beloved country continues apace, Quantitative easing will flood the country with worthless paper (fiat) money. I expect that when paper money becomes worthless (a wheelbarrow full won't buy a loaf of bread) and food will be the most important item in the budget, gold will become even more valuable. Barter will only work for a little while, then people will want something to buy things with that doesn't require carrying "stuff" to the swap meet. Just wish I could afford a swimming pool full like Scrooge McDuck!

  • Report this Comment On October 14, 2010, at 9:07 PM, xetn wrote:

    I think the following addresses the question: is gold a currency, a commodity or just a fad:

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

    In fact, gold is the only protection one has to the actions of the world's central banks inflating their respective currencies. If gold was only responding to one currency, you might just buy some competing currency via an international stock; a good idea. But the above shows that gold is advancing in other major currencies. Ask yourself why.

    Also ask yourself why foreign central banks are now net purchasers of gold.

    As for the comments that you can't eat gold, can you eat paper? It is a silly idea. You can take gold anywhere in the world and its value will remain, but fiat will not.

  • Report this Comment On October 14, 2010, at 9:36 PM, xetn wrote:

    "But here's the problem: If we were to say that gold is ideal as a replacement currency, what we'd want to see is that it maintains a stable purchasing power for common goods that a consumer might buy."

    This is a common thinking error. The value of all commodities fluctuate based on supply and demand. This is true of fiat currencies as well. In fact, money (any money) is no different than any other good or service in that supply and demand will determine its price (value). But there are exceptions as in the case of government price controls, wage/price freezes, and the influence of tariffs.

    As an example, during the recent downturn, people have reduced their purchases of many types of products. In the case of reduced demand for a certain good, the result is an increase in the value of the dollar with respect to that particular good. This is sort of like the effect of hoarding money and has led to the Fed's fear of deflation.

  • Report this Comment On October 14, 2010, at 9:44 PM, DDHv wrote:

    We've been learning & using things like: backyard garden, canning, a pantry, solar heat for the house, bicycles for close transportation, combining trips to cut long distance transportation a bit, etc. Among other things, it is saving us enough to allow over a quarter of our income to be used for investment.

    Anyone else wanting to look into this kind of thing should check out the Mother Earth News magazine. They realized there would be a coming oil crisis before 1970, when they started publishing.

  • Report this Comment On October 14, 2010, at 10:03 PM, xetn wrote:

    And this just in:

    http://blog.mises.org/14239/ppi-jumps-%E2%80%93-talking-head...

    So, what effect do you suppose this will have on the dollar price of gold?

    And of course, the Fed believes it must increase the rate of inflation to "save the economy". Right.

  • Report this Comment On October 15, 2010, at 12:03 AM, Purpleheartfool wrote:

    Interesting - Social Security has again this year determined that no increase in monthly checks is warranted. Guess they know what's best for us, but I still like meat and have to drive to get it.

  • Report this Comment On October 15, 2010, at 1:35 AM, tdiaczok wrote:

    Simplistic discussion as to the factors causing gold to rise, little understanding of how likely a financial crisis is and how important gold will be as insurance in that crisis.

    Gold is absolutely no bargain now but if the SHTF it will be the bargain of a lifetime to those who have it at any previous price. It's not an investment, it's insurance against the idiotic Keynesian economic solutions currently being proposed.

    Look at how many 'trigger points" there are in the US economy alone that could lead to a spectacular crash" O.

    Simple article written by someone with little understanding or empathy for the subject.

    4/10

    Must address all aspects of the question in future.

  • Report this Comment On October 15, 2010, at 3:07 AM, kmacattack wrote:

    Tdiaczok, regarding your reference to Keynesian economic solutions being "idiotic", even Richard Nixon came to the realization that the opposing economic theory, Herbert Hoover's "trikle down" was a farce. Wealth does not trickle dowm. Will Rogers commented on Hoover's promises of "a chicken in every pot" and "prosperity is just around the corner" if America would just go along with giving large sums of money to insurance companies and banks to restore the economy. Rogers said "If you place gold at the top of an economy, IT WILL FLOAT THERE", which was a true statement 80 years ago, and it's still true today. Clinton replaced the "trickle down" system with Keynesian principles, based on the idea that a "rising tide lifts all the boats, not just the yachts."Hoover produced a DEPRESSION, Eisenhower 2 recessions, Nixon 2 recessions and a market crash, inflation, plus the beginning of huge deficit spending, Ford continued Nixon's recession, Reagan produced 2 recessions, a market crash in '87 caused by de-regulation and corruption, largely in the banking and mortgage sectors (sound familiar?), huge tax cuts which didn't do anything but swell the deficit, followed by the largest tax increases in history, 10 percent unemployment in 1985 along with 18.5 percent fixed mortgage rates. The economy was in such bad shape at the end of Reagan's term, George Bush l was 25 points down in the polls 60 days before the election to Micahael Dukakis. The race-baiting Willie Horton ad turned the election around and Bush won. After 4 years,and yet another "trickle down" republican recession, the country turned to Clinton and his Keynsian advisors, Rubin and Reisch, who produced the best economy and stock market, and a $4.25 trillion SURPLUS in 8 years. "W" Bush turned again to the "trickle down" de-regulated model, produced a market crash and recession immediately, and another crash along with the "great recession" in 2008, the worst recession in history, again largely caused by allowing big business to steal the public blind, write their own energy bill and regulations, etc. "Trickle down prosperity" has to be the poster child for Oxymorons, worse than "Jumbo Shrimp."

    I hate deficit spending, but it was necessary to avoid a depression according to about 90 percent of the country's most revered economists, who are mostly republicans. Deficits or Depression? Which would be worse for THE COUNTRY (I'm not referring to what would give the republican party a bigger advantage in an election. According to their leaders, they would have preferred a course which had a significant risk of causing a depression. The country would be the big loser but their party would probably win the next election cycle, which seems to be their greatest wish, ahead of the best interests of the country as a whole.

  • Report this Comment On October 15, 2010, at 3:23 AM, kmacattack wrote:

    In case you didn't figure it out, the republican presidents since 1928 have had a miserable economic record. A 100 percent batting average of producing either a depression, or recessions, or, in "W" Bush's case, a "great recession" which was destined to be a depression if congress hadn't intervened with TARP and stimulus packages. The Dow was about 6,400 in October of 2008, just before Obama won the election, and it's now at 11,000 plus. More and more American companies are reporting record profits and will be forced to hire employees back in the coming months to meet production demands. This is despite a republican record of obstruction, deceipt, race baiting, corrupt ties to big business such as Big Oil (a $1 billion donor to republicans in 10 years) and the US Chamber, which should change it's name to the Chinese Chamber of Commerce, because they are doing everything in their power to move all manufacturing to China. The US Chamber is "donating" $75 million to republican candidates this fall, and it is very likely that large sums of this money are illegal contriburions from China, India, and other third world countries which are stealing American jobs.

    People who work for a living and vote republican are like chinckens flocking to the polls to vote for Colonel Sanders. I'va personally had enough "trickle down prosperity" to last me a lifetime. The concept should be considered a social disease, because the American people end up paying the cost after getting scr..wed by big banks, oil companies, insurance companies, etc.

  • Report this Comment On October 15, 2010, at 10:09 AM, tdiaczok wrote:

    Hi kmacattack. Thanks for your response which shows more depth of anaysis than the original article !!

    One thing though, I don't consider the "trickle down effect" to be the opposite of Keynsian theory. To me the Austrian school of economics is the "opposite", or at least very different to Keynesian theory in that Capital is derived from savings, not debt which means the economy must defer consumption to grow in the long run. This type of growth is stable and of real substance as opposed to the bubble bound growth of the current Keynesian era.

    To be fair though, I don't think Keynes is completely to blame here. However, combine his theory with a fiat currency, centralised interest rates,a floating exchange rate and the status of the world's reserve currency and you have a recipe for economic disaster via political means.

    Keynes in it purest sense is probably fine to a point,but where no monetary or fiscal discipline need be applied the theory fails, as it is now and that's why gold is still the best insurance against the lack of economic discipline of the US.

    Back to the original article, the author is instantly dismissive of the reasons for the fear in the market and without a valid critique of this fear the article is weak.

  • Report this Comment On October 15, 2010, at 11:07 AM, XMFSinchiruna wrote:

    Hi Matt,

    Always nice to have a range of perspectives on any topic, and I do appreciate that you've tended to link to some of my positive discussions of gold within this and prior discussions.

    I do not think your price charts achieved your goal of suggesting that gold is not a currency. Gold's currency role was severely muted by Nixon's closing of dollar-convertibility in 1971, and aside from that tumultuous period culminating in the 1980 peak, until the recent bull market gathered steam the world set about confidently trying to forget that gold existed or mattered. We are still in the early stages of a shift back to the realization that gold does matter ... because without it the world has no barometer for the condition of its free-floating currencies. Gold is gaining purchasing power (outpacing USD price inflation) as it retakes its rightful place in financial markets and carefully-balanced investment portfolios the world over. To expect even, steady purchasing power through a resurgence of this sort is to misunderstand the events under foot. Over the very long-term horizon, such that events like the ditching of a gold standard and later convertibility are smoothed out, that is where the stability of gold's purchasing power begins to take shape.

    Meanwhile, former Fed chairman Alan Greenspan, as quoted in my "Death Knell for the Dollar" article that you linked to above, recently offered clarity on the role of gold in the modern financial system: "Fiat money has no place to go but gold ... Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central bankers should pay attention to it." I think we can all agree that Alan Greenspan is qualified to ascertain what is or is not money.

    The last point I'd like to make is a delicate one, and please know I mean no disrespect whatsoever. In fact, I appreciate that in the passage I am about to cite, you conceded that the concerns of gold bulls were not "totally unfounded". Many of the voices urging caution regarding gold over the past several years have not been as kind. I also appreciate that you were open minded enough to lend serious consideration to gold mining stocks even when you were not staunchly bullish on the prospects for gold prices. Those are substantial points to your credit, and I mean that.

    But I do consider it relevant for readers trying to decide what's best for them today to consider that the overall message contained in the present article is substantially similar to that contained in your January 2008 article "Got Gold?".

    http://www.fool.com/investing/general/2008/01/23/got-gold.as...

    "This all assumes, of course, that gold will continue its outperformance -- which, frankly, is highly questionable. The moment when a gold investment seems to make the most sense may actually be the exact wrong time to jump headfirst into gold and gold stocks. I've steered my portfolio clear of gold so far, but I certainly can't say that the concerns of gold bulls are totally unfounded."

    Gold was $890 per ounce on that day. It stands today at $1,367 per ounce, some 54% higher in U.S. dollar terms. Two months earlier, before I was writing for the Fool, I was issuing the very same price targets for gold and silver that I maintain as conservative goalposts today: $2,000 gold and $50 silver.

    http://caps.fool.com/Pitch/SVRCF.DL/1018650/the-management-h...

    It is a scary time, to be sure, to be adding fresh positions in gold and silver. That sentiment is well understood. Significant corrections are a near certainty along the way. But a holistic analysis of the economic landscape continues to support further strengthening of gold and silver prices over the next several years through at least the targets I have espoused.

    Thank you for taking these comments in the good nature with which they are truthfully intended.

  • Report this Comment On October 15, 2010, at 11:21 AM, pedorrero wrote:

    I'm with Bill Bonner of thedailyreckoning.com on this one: He (I think him) said "We don't buy gold because we know what's going to happen, but because we don't know what's going to happen." Gold may be way overvalued, but I'm one of those who has a low average cost compared to today's prices. Also, I was an adult when the the 1980 peak hit. Then, stocks were the greatest investment (because everybody was avoiding them.) Such is not the case today ... DOW would have to drop to perhaps 3000 or so for that ... If I had a lump to invest now, I am not sure that I would put it in gold or stocks ... either can well lose you 50% in just a few years. Look at what happened to gold in the 1980s-90s.

  • Report this Comment On October 15, 2010, at 11:35 AM, TMFKopp wrote:

    @TMFSinch

    "We are still in the early stages of a shift back to

    the realization that gold does matter ... "

    ....

    "Gold is gaining purchasing power (outpacing USD price inflation) as it retakes its rightful place in financial markets and carefully-balanced investment portfolios the world over."

    It's this kind of language that I think is most dangerous about the gold issue. Much of what you say in the first part of your comment could just as easily justify gold at $100,000 as it could gold at $2,000.

    "Don't look at any historical measures," this line of reasoning says, "they don't matter because gold should be worth more because... it's worth more."

    "I think we can all agree that Alan Greenspan is qualified to ascertain what is or is not money."

    It's often hard to tell sarcasm in the written word. Is this a joke?

    Don't most gold bulls like gold so much because Greenspan led the charge in destroying the dollar? How is it that he's suddenly become the poster child for monetary sanity? I think you may be doing a little quotation cherry-picking there.

    And finally, kudos for digging up my past commentary to try and undermine the data above. Surely if I was wrong before, then what's above is wrong, right? Because as all investors know, it's the price movement, not the underlying fundamentals that matter.

    Back in the late 90s there were a lot of people that looked wrong, wrong, wrong by being concerned about Internet stocks. They were laughed at when they pointed at the lack of fundamental backing for the massive valuations and were "proven wrong" by the ever-increasing stock prices. Then, all at once, they were right.

    There was a similar story in 2006/07.

    Could I be wrong? Absolutely. But I can only call it like I see it and while I think gold buyers ten years ago were super sharp, I think investors are better off avoiding it today.

    And hey, if I continue to be wrong, I'll be in good company right? The Austrian crowd has been telling the same story about fiat money for decades and being "wrong" hasn't done much to deter them. :)

    Matt

  • Report this Comment On October 15, 2010, at 12:17 PM, XMFSinchiruna wrote:

    Matt,

    I guess that part about taking my comments in the good nature with which they were intended did not have the desired effect. Sorry to have touched a nerve.

    All I said about Greenspan was that he is qualified to ascertain what constitutes money. Nothing more, nothing less. I will freely concede he is a walking paradox.

    The remainder of your retort takes my comments wildly out of context. The underlying fundamentals behind gold absolutely do matter, and I've been carefully documenting those fundamental drivers all the way up.

    http://www.fool.com/investing/general/2010/08/19/tomorrows-p...

    http://www.fool.com/investing/international/2010/08/05/china...

    http://www.fool.com/investing/general/2010/06/23/why-gold-wi...

    http://www.fool.com/investing/general/2009/11/18/wrap-your-h...

    http://www.fool.com/investing/general/2009/09/23/biggest-mar...

    http://www.fool.com/investing/general/2009/09/04/the-untold-...

    http://www.fool.com/investing/general/2009/06/02/the-top-10-...

    http://www.fool.com/investing/general/2009/05/26/the-top-10-...

    http://www.fool.com/investing/general/2008/10/02/700-billion...

    I meant no disrespect. I am happy to see myriad perspectives on gold here at the Fool. Fools are encouraged to weigh all perspectives before rendering a conclusion of their own.

    Fool on,

    Chris

  • Report this Comment On October 15, 2010, at 12:51 PM, jrj90620 wrote:

    Good read.You may or may not be correct in the short term but I don't see many signs of Americans willing to do what we need to fix our problems.As long as most Americans remain short term greedy and long term stupid the country will continue declining and it's common stock,the U.S. Dollar,will fall with it.As a gold stock investor it is good to read that there are so many negative on gold.

  • Report this Comment On October 15, 2010, at 1:03 PM, jrj90620 wrote:

    I followed precious metals during the last run up when they topped out at $875 gold and about $50 silver.I remember Volker raising interest rates to double digits in the early 1980's to break inflation and the commodity bull.I actually received over 21% the peak week in the largest money market fund.Do you think the Fed could raise interest rates to anywhere near what Volker did?What would happen to the economy if he did,with our much greater debt than in 1980?I'm sensing this may be the end of the dishonest fiat currency run.The U.S.and other countries may have to go back to a currency backed by real money to restore confidence.

  • Report this Comment On October 15, 2010, at 1:39 PM, moda0306 wrote:

    Kopp,

    Couldn't have said it better myself. Some people are getting too wrapped up into the politics that it's blinding them to the value of gold compared to other commodities.

    If one considers 1) what little intrinsic value gold really has, 2) what other kinds of inflation hedges you can buy for the same price of 1 ounce of gold (think rice, gas, canned food, ramen, generator, guns), then there's no other conclusion to come to than Gold has to be overpriced.

    If the SHTF for real, who would really care about a shiny yellow metal if they didn't think everyone else did? While recognizing than its inability to be "printed," I don't see gold as having much more intrinsic value than a paperweight.

    That's where I've yet to hear a sound argument... someone answer me... what value does gold store beyond its limited industrial value and collectible jewelry value? In a collapsing economy, do you really want to be holding onto something in the same category as your signed Micky Mantle baseball card and your wife's necklace?

  • Report this Comment On October 15, 2010, at 3:49 PM, TMFKopp wrote:

    @TMFSinch

    For what it's worth, it's a lot easier if you try to sum up your position in comments rather than link out to a whole bunch of articles. I understand that you've written a lot on the subject, but many of the points overlap from article-to-article and would be pretty easy to put into bullets in your comment.

    In any case, I read through them all. Here's the problem: Over and over again you run through a variety of themes that are having an impact on the gold market. You float those themes out there with an implied "Here, look at this." And then you make a leap to say that gold is going higher -- specifically, to your $2,000 target.

    An analyst looking at Yum! Brands (owner of KFC) might point to the growing middle class in China, the extent to which fried chicken is really delicious, and the potential for getting a foothold in other emerging markets, but that doesn't mean that the analyst can justify any ol' price for Yum!'s stock. He has to take those broad themes and translate them into what they'll specifically mean for Yum!'s bottom line.

    Nowhere did I see any work-up of how you get to that $2,000 number. The closest I found was:

    " 8. Gold remains cheap

    Then-Fed Chairman Paul Volcker faced some tough challenges containing inflation in the late 1970s, but in terms of scale, his predicament was undeniably tame compared to the pickle we're in today. And yet, gold remains more than 50% below the inflation-adjusted peak from 1980. Given the fundamental deterioration of the dollar's outlook over the past year, I consider gold primed to establish last year's high above $1,000 as a new long-term floor."

    Not only is it not a convincing argument to say that (adjusted) prices were higher and therefore today's prices can go higher, but let's not forget that in the early 80's we didn't have visions of high inflation dancing in our heads -- there was actual double-digit inflation.

    After all of it, I'm left with little that suggests why $2,000 in particular was chosen as the target. Maybe I missed it, but I wasn't able to find anything in your articles that couldn't just as easily be used to justify gold at $100,000 -- or hey, why not $1,000,000? -- as gold $2,000.

    I've heard some look at gold as being overbought but being an interesting speculation based on the aura of fear and the momentum behind it. That's a tricky game to play, but I can get on board with that.

    However, I have a lot of trouble with the view that there is some vague justification of the current price and that this is a safe -- and, in fact, the safest depending on who you talk to -- investment for the masses. It seems to be a thesis resting on a lot of unicorns and lollipops (or since we're talking fear maybe demons and ghouls...), and that always makes me worried.

    Matt

  • Report this Comment On October 15, 2010, at 3:57 PM, TMFKopp wrote:

    But after all of it... maybe I'm dead wrong. After all, I pity the fool (Fool?) that's going to argue with Mr. T:

    http://dealbreaker.com/2010/10/this-is-a-bloomberg-tv-interv...

    Matt

  • Report this Comment On October 15, 2010, at 5:33 PM, moda0306 wrote:

    Kopp, well we both could be wrong, but at least we're guys who are willing to admit it.

    Harry Browne's Permanent Portfolio...

    Nuff said.

    The lesson from him is that despite being an Austrian economist and libertarian, he kept half of his portfolio in either cash or long-term bonds, and "only" 25% in gold. He saw how they worked together, and didn't let his political leanings blind him to an almost bulletproof portfolio.

  • Report this Comment On October 15, 2010, at 11:51 PM, thatmulk wrote:

    Monetary systems not based on precious metals have had a history of short lives. The Dutch had one for 400 years. None surviving today come close to their record.

  • Report this Comment On October 16, 2010, at 11:12 AM, silverminer wrote:

    It will be my pleasure to respond, but it will require more time than I have available at the moment. Stay tuned.

  • Report this Comment On October 16, 2010, at 12:51 PM, ilovesumm wrote:

    Matt

    My take is your point is that if it looks like a bubble , walks like a bubble and smells like a bubble then maybe......

    How about the miniscule returns on treasury bills?

    Tech had one , real estate had one and everyone was still buying and denying as it was crashing .

    How bout Bre X , Enron , Madoff , Nortel .

    The risk / reward for gold is not there.

    If the SHTF how safe are you gonna be with a brick or 2 of gold? People will be desperate and you could be in danger.

    The herd, fear and propaganda are telling the little guy to be a sucker again.

    Why didn't all these "smart" guys tell me to buy gold in 2000 when it was cheap?

    Instead: tech 2000?

    real estate 2006?

    oil 2007?

    gold 2010?

  • Report this Comment On October 16, 2010, at 1:29 PM, Manrico1962 wrote:

    Take a dollar out of you wallet. What intrinsic use does it have? You can't even make jewelry out of it. It used to buy a half gallon of milk, but won't today. It constantly loses its value. Sounds a lot worse than gold. Gold over the last 40 years has beaten the Dow by 2.4 times. To be sure, the road from there to here was pretty rocky. Is its value too high now? It's a guess, but with the world printing paper money faster than paper can be made it likely will go up. I bought it at 400 and recently sold half. It could go back to 400 and I'd still be way ahead. At least 10%, perhaps as high as 20%, of a portfolio in the metal seems a prudent investment. To eschew it as being overvalued needs context. The Fool is the same outfit that's pushing Netflix which has a PE ratio of about 160.

  • Report this Comment On October 16, 2010, at 2:14 PM, moda0306 wrote:

    Manrico,

    Nobody's questioning the intrinsic value of the dollar, they're simply questioning its value as a hedge against inflation, when rental property, other commodities, etc may perform better. Plus, gold has little/no intrinsic value either. Have you looked at everything you could by for $1,400 today? How does an ounce of gold hold that much value?

    Are you that confident that yellow won't go out of style with the wealthy jewelry wearers when our currency finally does collapse?

    Lastly, how in God's name has gold outperformed stocks by 2.4 times? Is that taking into consideration dividends?

  • Report this Comment On October 16, 2010, at 2:28 PM, ChrisFs wrote:

    Those charts are excellent.

  • Report this Comment On October 16, 2010, at 2:33 PM, ChrisFs wrote:

    "Gold over the last 40 years has beaten the Dow by 2.4 times"

    I don't know about the Dow, but I did the math for the S&P 500 yesterday, and from 1973 to today, gold returned 10.2% CAGR where the S&P500 returned 9.78% including dividends.

    Both figures are before inflation and before taxes.

    Dividends are taxed as ordinary income or below, where gold is taxed at 28%. And unless you store it at your house, you have to pay for it to be stored elsewhere. Which also eats into your returns.

    Given the Dow and S&P track pretty close, there's no way gold beat the Dow 2.4 times.

  • Report this Comment On October 16, 2010, at 2:36 PM, moda0306 wrote:

    Correction... GOLD'S value as a hedge agianst inflation... not the dollar's.

  • Report this Comment On October 17, 2010, at 3:05 AM, ljdean wrote:

    I like dividend plays also. But I also like miners look at these miners for example-ABX,AEM,AUY,GOLD,KGC,RGLD,SVM. All miner's and all pay dividends! Not the biggest but they are the best of both worlds for my investing money.

    Dean

  • Report this Comment On October 17, 2010, at 5:40 AM, nofoolno2 wrote:

    The best investment? "happyiness is a warm gun"... seeds are a good investment. you can eat seeds or plant them and eat the fruit. any of you stock gamblers trusting in your number system have seeds. miracle seed are... i made 20% from SLV in less than 2 months and about the same from AUY... thought the purpose was to earn income... why then do you refuse to invest in an obvious winner. dont get stuck in one form of investment. and remember pick up some seeds and keep them in a dry cool place. numbers will not feed you.

  • Report this Comment On October 18, 2010, at 7:23 AM, TMFBent wrote:

    TMFBant tell you ALL about dyeing DOLLAR a "long" time ago!!! Entire economy built on realistate ponzi scheme??? No! Now gold is next ponzi. Anyone who tell you worthless GOLD can be currency of future never tried to SPEND GOLD!

    Detales to be found in Orginal "posts" here!!!

    http://caps.fool.com/Blogs/blogging-on-caps-for-fun-and/2710...

    http://caps.fool.com/Blogs/gold-is-worthless/271614

  • Report this Comment On October 18, 2010, at 9:06 AM, NOTvuffett wrote:

    TMFBent, give me all your worthless gold, no skin off your nose, lol.

    Is gold in a bubble? Maybe. Will gold be worth something even if dollars aren't? Certainly.

    It is interesting how you compared gold prices to other commodities and the CPI. Maybe you should dig up a chart for the declining purchasing power of the dollar. Up until the early 30's a $20 piece was a fairly large gold coin.

  • Report this Comment On October 18, 2010, at 12:26 PM, TMFKopp wrote:

    @TMFBent

    Oh come now... I wouldn't go that far! Even in the form of a gold bar gold makes a formidable weapon. What happens when someone with a lump of yellow metal sneaks up behind you, whacks you on the head, and takes your chickens?

    Maybe the gold fans are onto something after all...

    @NOTvuffett

    So what you're saying is:

    The dollar is losing purchasing power therefore you should buy gold.

    Hmmm... sounds like yet another line of reasoning that could justify gold at any price.

    Gold will always be worth _something_ but so will iron, water, oil, gravel, labor, land, wax, calculators, horses, timber, manure, and perhaps 1980s vintage Star Wars action figures (I have a Chewbacca stashed in case of Armageddon).

    The issue isn't is gold worth _something_ -- it's what is it actually worth.

    Matt

  • Report this Comment On October 19, 2010, at 2:49 PM, Pawn107 wrote:

    Interesting article.

    My Father made my family buy a few ounces of gold in 1999 on the possibility that planes fell out of the sky on Jan 1, 2000. We actually didn't think it would happen, but having something recognizable at the local hardware store as valuable just in case all currency in the world blew up at once didn't seem too bad of idea. I only wish we were more finacially sound at the time, we had little money so only bought a few thousand dollars worth.

    I would not buy OR sell now. It has nothing to do with what we hold, but the fact that some guy down the road will give me a chicken for an ounce just because it IS universally recognized as valuable. The value of gold: no clue. The value of those few ounces for my security: priceless. Investing in it in the future portfolio? Probably not. I have my security, and I am smart enough to figure out how to survive if that runs out (I liked the golden sword comment).

    One of millions,

    Pawn107

  • Report this Comment On October 19, 2010, at 6:42 PM, RaulChapin wrote:

    Matt: If you are interested in what could be a likely target value for gold, you could think of one scenario where gold would go much higher:

    Most people start using it as a security blanket.

    If you want to estimate what the possible upside of this is, try and research what portion of the total US Dollar is stored outside of the US for stability purposes (not just held by central banks but preferably also by individual savers), perhaps add other "Hard Currencies" for good measure, and then ask yourself what is the possibility that these reserves could be switched for Gold and what impact would that have on its price (relative to Dollars, or goats or whichever thing you wish to use as currency) that price could give you a good estimate of when to get out if you were momentum trading, or just wanting to lock in some gains.

    Now I know you probably will not do the above...

    So for those who would like a balanced view on Gold... take Matt's and other gold bears' arguments and use that as the: Worst Case Scenario for gold... then do the investigation I suggest, put in your own measure of what is reasonable in that scenario (perhaps you thing 20% of the reserves currently held in cash or near cash products (Treasury Bills etc) is a good estimate to use for Gold's potential).

    Then decide if gold is cheap or not and at what point you would be a buyer, seller, shorter etc.

    I personally am happy with 5% of my portfolio in gold... not enough to make me rich on the upside, but not too much to worry me on the down side... And no that 5% is not my wedding band LOL

  • Report this Comment On October 20, 2010, at 9:12 AM, nphrn1 wrote:

    Matt:

    You've shown gold to commodity ratios.

    You've missed the gold/dollar comparison.

    For that money compare gold to printed Euros, Yen etc.

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

    Andy

  • Report this Comment On October 20, 2010, at 12:49 PM, ETFsRule wrote:

    On October 16, 2010, at 11:12 AM, silverminer wrote:

    "It will be my pleasure to respond, but it will require more time than I have available at the moment. Stay tuned."

    It's been 4 days... I think we would all be interested to see how you came up with the specific price target of $2000.

  • Report this Comment On November 30, 2010, at 10:43 PM, GOLDOIL wrote:

    Your charts are excellent...BUT, with the current world debt crisis and sovereign defaults, gold (rather Silver, Palladium) are the only safe haven. Portfolio theory is dead and so is charting...Unfortunately.

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