Why I'm Putting All My Cash Into Gold

This article is part of our Rising Star Portfolios Series.

Commercials advertise "Cash for Gold," but as I see it, the far smarter move is "Gold for Cash." Cash loses purchasing power dramatically over time, and with a global currency war and sovereign debt crisis just beginning, this threat is heightened. There aren't many liquid money alternatives except gold, and because gold is still very attractive in relation to cash, I think buying gold is the right thing to do. Below, I'll explain further why I'm putting my entire Rising Star Portfolio cash hoard of almost $5,000 into gold. Tomorrow, I'll tell you the safest, most convenient way to do it.

Cash is really government debt
First, I'm not doing this because I want to make money -- gold is money, and who ever got rich buying money? I'm doing this because I want to protect what I have. Today, you've got two choices for money: currencies issued by central banks, or hard assets like gold. Remember that in a debt crisis, debtholders worry about getting their money back. Well, it's a similar situation in a sovereign debt crisis, except that governments that borrow in their own currencies can always pay debtholders back by creating more of it, diluting the existing currency's value. Therefore, by holding cash, you expose yourself to the very real risk of losing significant purchasing power as a sovereign debt crisis unfolds. 

But maybe this crisis has made gold expensive while simultaneously putting paper currency on sale. After all, gold is at an all-time high -- but in nominal terms, not in real terms. The market value of the U.S. gold reserve is 4% of M2, the money supply measure that includes cash, checking & savings accounts, money market accounts, and small time deposits. In other words, a very small percentage of dollars are backed by gold. In January 1980, gold peaked at $850, and the reserve represented roughly 15% of the money supply at that time. Valuing gold at 15% of money supply, applied to today's M2 and gold reserve figures, implies a gold price of $5,000 per troy ounce.

Not buying gold is the risk
Given current dynamics, I consider a $5,000 price very likely in the future, so let's look at our upside and downside potential in the next few years. At $5,000, we have $3,600 of upside from the current $1,400 price. My estimate of downside is $1,100, just above where India bought gold from the IMF last year, meaning we're risking $300 ($1,400 minus $1,100). This means we have $3,600 of upside and $300 of downside, a 12:1 ratio. In other words, our initial capital of $1,400 could increase 260% or decrease 20% in nominal terms.

But because our only other choice for money is paper currency, if we don't buy gold, we are risking $3,600 in purchasing power for a potential $300 gain, a 1:12 ratio. This is why your real risk isn't in buying gold, it's in staying in cash, which has an excellent chance of decreasing in relation to gold.

What they don't teach you in business school
The standard argument against gold is that because it doesn't produce income, it can't be valued. I disagree with this statement because valuation at its heart is about predicting the future. For stocks and bonds, this means estimating future cash flows. But if an asset does not have cash flows, you need to fall back to economic fundamentals and predict both supply and demand for that asset in the future.

Consider artwork. Art dealers know how many paintings exist by a particular artist, so supply is easy. They also know how deep demand is -- whether it's a new artist with possibly flaky support or an established name with many buyers who will enter the market should prices fall. This, and a wealth of information gathered in the business, allow them to determine whether a painting is good value or not.

Similarly, with gold, the supply side is easy to determine: it increases by roughly 1% to 2% per year. The tricky part is gauging future demand and how it will change. But it's really not that hard-demand is off the charts. India and China and other emerging powers know they don't have enough gold relative to their reserves and the size of their economies, and they're desperate to diversify away from dollars. The same goes for investors and ordinary folk worried about the ongoing destruction of the dollar.

So instead of income flows, valuation centers on an analysis of supply and demand. Gauging demand may involve different techniques like geopolitics, emergent behavior, and complex system dynamics, but it doesn't mean informed judgments can't be reached on a range of future values for gold. Just like an art dealer can value a piece of art because she is intimately familiar with the supply and demand dynamics that drive prices, you can do the same with gold.

Listen to the professionals
If that's too daunting, here's an easy alternative: listen to the professionals, the gold and silver analysts that have followed metals for years. I do. Not for positive reinforcement, but because they spend all day studying and thinking about precious metals, and consequently understand the dynamics multiple times better than those who haven't done any research. And right now, most of the people who know the most about the sector are overwhelmingly bullish, while many with bearish sentiment know relatively little about gold. There is the risk that tunnel vision can creep into some analyses, but the difference in knowledge and time spent on the subject is in many cases 1,000 to 1, so as I see it, it's a no-brainer to whom you should listen.

Choose the best odds
My $5,000 is sitting in cash and quite frankly, making me nervous. Eventually I plan to allocate it into equities, but at the moment, given the choice of making a 12:1 bet on gold or a 1:12 bet on cash, I'm going for gold. Tomorrow I'll show you a safe, convenient, and low cost way to do so. Hint: It's not SPDR Gold Trust, the most popular exchange traded fund. Tomorrow, I'll tell you why not.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Andrew Sullivan, CFA, owns shares of no companies listed above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On December 15, 2010, at 3:24 PM, pondee619 wrote:

    "Eventually I plan to allocate it into equities, " Why not equities now instead of later? You make it seem like your only choices are gold or cash but then say equities will be the place to be.

    "Why I'm Putting All My Cash Into Gold" Are really putting ALL of your cash into gold? Shouldn't you hold some cash in an emergency fund? Or are we practicing pocket economics?

  • Report this Comment On December 15, 2010, at 3:54 PM, lewellen180 wrote:

    Let me start by saying i do have a position in gold, so this isn't a blind bash.

    "But if an asset does not have cash flows, you need to fall back to economic fundamentals and predict both supply and demand for that asset in the future."

    Okay. One key question is, what is driving that demand?

    In the case of materials such as copper, silver or palladium, it's pretty clear - these are materials that are used extensively in diverse sectors of the economy.

    Gold? It's not used much as an industrial metal. Other conductors of electricity are almost as good and far more abundant. It is pretty non-reactive (which is why it stays shiny) so it's used to plate connectors and such; but that's a minimal use of material.

    So humanity basically values gold because we like how it looks.

    "Consider artwork. Art dealers know how many paintings exist by a particular artist, so supply is easy. They also know how deep demand is -- whether it's a new artist with possibly flaky support or an established name with many buyers who will enter the market should prices fall. This, and a wealth of information gathered in the business, allow them to determine whether a painting is good value or not."

    I see the point, but two things here - nobody needs art to survive (at least physically), and tastes in art come and go.

    The simple fact is, nobody needs much gold to live in the modern world. Its utility is therefore fairly limited. Granted, the taste humans have for gold has been fairly steady for, oh, millenia. But, still, the intrinsic usefulness of the stuff is pretty limited, so I'd still worry about how much of the "demand" for gold is tied up into emotion compared to how much the world actually needs to consume to get by.

  • Report this Comment On December 15, 2010, at 5:17 PM, TMFAleph1 wrote:

    Andrew,

    The notion of comparing gold to the money supply is interesting. However, the trouble with using January 1980 as a benchmark for establishing a current price target for gold is that it was the culmination of an extraordinary bubble.

    If you are suggesting that the current gold bubble could reach similar proportions, then I agree with you -- the government and the Fed are certainly doing their level best to promote that. If you ask me to join you in betting on this outcome, then I'm afraid we will have to part ways.

    Furthermore, putting money that you expect to invest in equities within the short- or even medium-term into gold would be folly, as the price of the yellow metal is much too volatile to act as a store of value over anything but the extremely long term.

    Take a look at my article for more ruminations on this fascinating topic:

    Warning! Gold Could Drop Below $500

    Nov. 2, 2010

    http://www.fool.com/investing/etf/2010/11/02/warning-gold-co...

    Best,

    Alex Dumortier

  • Report this Comment On December 15, 2010, at 6:20 PM, dividendgrowth wrote:

    Motley Fool now starts hyping gold?

    One more top sign!

  • Report this Comment On December 15, 2010, at 6:26 PM, langco1 wrote:

    at almost $1,400 a oz there is nothing wrong with putting money in gold as long as you are short!!

  • Report this Comment On December 15, 2010, at 6:32 PM, MichaelHamilton wrote:

    best investment will be equities, as bond will become very unattractive as interest rates rise then lots of money will start flowing into equities from bonds. Bonds are just too dangerous and unattractive at this time. Gold has run too high, it is a typical bubble that will one day burst we just don't know when

  • Report this Comment On December 15, 2010, at 6:53 PM, TheDumbMoney wrote:

    And, here I go again. I can't help myself, I'm sorry.

    In 1980, at or about the real adjusted high of $2551/oz, the Iranian Revolution had just happened, toppling the Shah and Iran's oil production, Iraq was also invading Iran, and the USSR had also just invaded Afghanistan. There was a related large oil shock, at least the second of the decade, and inflation was already at the time running around 12-13%, and had been rising inexorably for a few years. New Yorkers were terrified that the USSR was going to nuke them, and apocalyptic new age religions were on the upswing throughout America. A decades-long artificially-low-fixed price for gold had ended in or about 1971, and government sales of gold had wound down even more recently. So that's the real context for the last high. Gold as inflation hedge and as crisis hedge and as new-found hot investment of the genius American investor, many of whom were convinced that the new pure-fiat system woul end immediately in disaster.

    Then from 1980 to 2000, over twenty years, gold proceeded to lose 84% of its purchasing power against the U.S. dollar, though Reagan and deficits and H.W. and tax increases and Clinton and Monicagate, inexorably.

    Then a highly unnerving and destabalizing Presidential election decided by the Supreme Court (rather than the Congress, which should have decided it, even if they would have come to the same conclusion) happened, then 9/11 happened, and Afghanistan, and Iraq, and gold went ever higher and higher. Then in 2008 we had a huge liquidity crisis and everyting dropped, gold among the most precipitous of drops, as we all had to sell everything, including gold, to pay our rent, because landlords don't accept shares in GLD. Then everybody started freaking out about inflation and global sovereign default, and it shot up again. Might we get to $2551 or $5000 in real dollars? Sure, maybe. But be sure you understand the geopolitical as well as economic fundamentals behind that prior crisis/inflation/demand-based peak, related to where we are now. The technical basis of the decision to go 100% is particularly odd: the data seems arguably just as consistent with the idea that gold as a percentage of money supply will simply decline over time, since 1971, unless the current system ends.

    As to experts, the problem with gold experts is that too many have been obsessed with gold since $400/oz, are obsessed now, will be obsessed at $5000/oz, and will be obsessed if it drops, and so on. Every hour they spend studying just makes them more obsessed. Maybe they are mad geniuses. But if you're going to trust an expert, my money is on guys like Jeremy Grantham and Buffett, who are cold, nasty, objective asset allocators. When Jeremy Grantham tells me to put all my money in gold, then maybe I will. When Buffett bets on gold rather than derivative bets on the future level of the stock market and on BNI, maybe I'll buy. Some gold expert who has been studying it, and advocating for it, since 1971, or 2000? Not so much. Short term speculators like Paulson and Soros? Not so much. Unless I feel like speculating too.

    Inflation worries ? The classic simple monetary exchange equation is MV = PQ. M being the number of dollars. V being velocity. P being average price of good sold. Q being the quanity of goods, services, etc., sold during the year. M only increases inflation, other things being equal, if V is assumed constant. But V is simply not constant, per all data, despite what some ideo-theorists, and presumably also Ron Paul, say. We have had a huge drop in V since 2008. There is currently no danger of infation, which is not to say there isn't future danger if the economy improves more quickly than expected by the Fed, in which case, stocks will do well, too. Ultimately, inflation can't be successfully predicted, because V can't be. But a terrible or mediocre economy is not, in this non-expert's opinion, going to lead us into inflation by mere virtue of the fact that monetary printing is going on.

    Might all currencies "depreciate" against gold? Sure. But who cares? This doesn't change my purchasing power if there is no inflation here in America. Or, I should say, by not buying gold now it changes it no more than my failure to buy shares of priceline.com in 2002 has changed it, no more than my failure to buy the next hot stock now will change it. Note: that is only true if there is no ultimate change to a gold standard, which of course is exactly what the gold bugs want. Then, yes of course, I will have lost tons and tons of purchasing power in the new gold-based economy, and the bugs will be self-validated. But, I am not willing to bet this change is going to occur, as it only will occur if there is a total systemic collapse of our entire present money system. I realize of course that far smarter people than I am think that such a collapse is inevitable, including I believe Milton Friedman, who thought it.

    But, with all due respect, I think this is a mistake, particularly if it's a short term strategy. Gold may be good in the long run, particularly if Ron Paul succeeds in ending the Fed and effectively wiping out our paper wealth in the name of a stability panacea that is no panacea (and that already has had to be abandoned once in the last century due to a failure of international cooperation, but which is now ironically advocated for by the very people who tell us the internationalist UN is an unrealistic pipe dream, which of course it is, just as a gold standard is). As for stability, everyone, be aware that as things stand now, gold is about as stable a store of value as a kayak with an elephant standing in it. Buying it now has to be based in large part on the idea that things are going to get much worse than they are now. That may be a good idea. It may be a bad idea. It certainly has strong intellectual support and many powerful, insightful, accomplished names backing it up. But it is absolutely a speculative idea, not to mention a pessimistic idea and a defeatist idea.

  • Report this Comment On December 15, 2010, at 7:04 PM, TMFAleph1 wrote:

    @dumberthanafool

    Absolutely first-rate perspective. A useful, dispassionate look at $1,400 gold. Terrific stuff!

    Alex Dumortier

  • Report this Comment On December 15, 2010, at 11:33 PM, ozzfan1317 wrote:

    I respect your opinion but I don't see gold as being anything beyond speculative at these levels. If you look at history today feels alot like 1980. Lets say stocks stay flat for the next two years that would give us roughly 14 years where they went nowhere sound familiar? Also Gold and Silver were at all time highs then anyone know what happened next ? If you were in Gold and Silver it wasnt pretty ;)

    I think if you want to buy an Asset at these levels common stock and real estate are the most reasonably priced. I don't know enough about Real Estate so I'll stick to buy great companies at a reasonable price :)

  • Report this Comment On December 16, 2010, at 3:17 AM, ChrisFs wrote:

    Gold at $5000? whenever people make this prediction, they always neglect to put in any sort of time range. This makes the prediction useless.

    During it's entire run from 2000 to today, gold has not increased more than 30% in any one given year. To state that it's going to triple or quadruple it's value in one or two years (?),(300-400%) is completely out of line with the last 10 years of performance. To state that it will take longer is really making a lot of guesswork. The economy could improve considerably after 2 years and those changes will cause people to dump gold and get into equities (just as you expect to do), so if it doesn't happen in two years, I don't see it as likely to.

    Secondly you're confusing investing with speculating.

    You can value items with an income flows, because you know that at the least, they are worth that income flow.

    The problem with your supply/demand comparisons is that ultimately, for those items (artwork, or gold), are only worth as much as someone is willing to pay for them and eventually the game of musical chairs ends and some sucker is holding gold as the price collapses, not just for a week, but for years at a time.

    Buying something with no income stream on the hope that someone will pay more for it later 'just because' is not investing, it's speculation. It's a foolish thing and not a Foolish thing to do.

  • Report this Comment On December 16, 2010, at 7:43 AM, Usnzth wrote:

    Kill the cat and eat the Spam

  • Report this Comment On December 16, 2010, at 11:50 AM, jrod87 wrote:

    Silver coins are the best and cheapest option. Or if you must have gold. Buy gold coins...you can buy this stuff on e-bay. Now gold and silver has its place in my portfolio but the real way to protect your self is the job you have and the industry you work in + the ratio of your cost of living to the income you make. Want to truly "protect" your self from inflation???? PAY OFF PERSONEL DEBT instead of buying gold or silver. As much as you can stomach including making over the minimum on your house payment (if you own). Personal and finical freedom comes from owning your car (or leasing if you have a business for tax purposes) owing your home, and owning your checking account. Meaning NO credit card debt!!!! but if you look at my caps you’ll see im very bullish on credit card company's...why b/c in American were more focused on "putting our money to work for us" then paying off debt and living debt free. -jrod87

  • Report this Comment On December 16, 2010, at 12:16 PM, TMFAleph1 wrote:

    <<Want to truly "protect" your self from inflation???? PAY OFF PERSONEL DEBT instead of buying gold or silver.>>

    Actually, inflation creates a disincentive to pay off debt, since it reduces debt's real value.

    Alex Dumortier

  • Report this Comment On December 16, 2010, at 12:45 PM, wasmick wrote:

    <i>First, I'm not doing this because I want to make money -- gold is money, and who ever got rich buying money? I'm doing this because I want to protect what I have. </i>

    This is a great idea.

    Three years ago. Now it's a good idea.

    But since "gold is money" the same way all commodities are money (grain, oil etc), it's just one good idea alongside many other good ideas.

  • Report this Comment On December 16, 2010, at 3:20 PM, lewellen180 wrote:

    "Actually, inflation creates a disincentive to pay off debt, since it reduces debt's real value.

    Alex Dumortier"

    This is true in principle.

    However, there's also an emotional component to not having a lot of debt hanging over one's head - peace of mind is worth a lot, although it's hard to put a number on the value.

    For things like home loans, sure; I'm actually rooting for inflation. I have a low fixed interest rate, and my salary in theory gets a cost-of-living adjustment, so inflation only reduces the fraction I spend each month on the mortgage.

    However ... interest rates - in my experience - can and usually will go up a lot faster than my salary will respond. It takes time for employers (including the Federal Gov't, for those out there who work for them) to make such adjustments; call it up to a one-year lag on the cost-of-living adjustment, and then you have to ask whether the inflation number they use actually matches what your costs are. (Again, my personal experience says otherwise.) Meanwhile, your credit-card interest rates are going up monthly, and your ARM is adjusting as often and as hard as it is allowed to.

    Even if the salary increase rate matches that of inflation, if there's a lag between when inflation starts up and the salary adjusts, the salary will always be trailing behind.

    Finally, in the US at any rate, any additional dollars you get from a cost-of-living adjustment will be taxed at your highest marginal tax rate, not your average tax rate.

    Let's assume you're single, no dependents, making $10k a year, contribute nothing to a retirement plan and take the standard deductions. (KISS principle)

    Your estimated tax liability would be $6344, for an average rate of 12.7% and a marginal rate of 25%. Your usable take-home would be $43,656 for the year. (That's the adjusted gross income of $50k less the federal tax due.)

    (I'm doing the calculation using the one here: http://www.calcxml.com/do/inc02)

    Now assume inflation is running at 5%. To keep steady, your take-home would need to rise to $43,656 * 1.05 = $45,838, or a difference of $2,182.

    If we apply a 5% adjustment to your gross income, it rises to $52.5k; and the tax liability rises to $6,969.

    Your take-home is then $52,500 - $6,969 = $45,531.

    Due to the marginal tax rate being applied, the 5% adjustment to your salary netted you only a 4.3% adjustment to your ability to pay your bills, buy collectible doilies, or whatever.

    It's less than a percent, and it might not seem like much, but this effect will compound, too, and it gets worse as you move to higher tax brackets. And, of course, unless the rate your actual bills go up, match the "average" inflation, all bets are off.

  • Report this Comment On December 16, 2010, at 3:21 PM, lewellen180 wrote:

    Sorry ... typo - the initial assumption was making $50k per year, not $10k. My bad.

  • Report this Comment On December 16, 2010, at 5:17 PM, TheDumbMoney wrote:

    I just came across this article today on abnormalreturns. I couldn't have said it better myself, and didn't. It is must-reading for those interested in this thread.

    http://pragcap.com/commodities-the-year-bear-market

  • Report this Comment On December 16, 2010, at 8:21 PM, TMFAleph1 wrote:

    @dumberthanfool

    SocGen's Global Strategy team (of which Grice is a member) really produces outstanding, non-consensus research -- well worth reading. Thanks for the link.

    I think you might enjoy an article I wrote in which I came to the same conclusion as Grice by constructing an inflation-adjusted price series for gold going back to 1851:

    http://www.fool.com/investing/etf/2010/11/02/warning-gold-co...

    Best,

    Alex Dumortier

  • Report this Comment On December 17, 2010, at 7:39 AM, MarkPerkins1 wrote:

    Alex, going back to 1851 or actually anytime before the end of the gold standard in the early 1930s is disingenuous. With the gold standard the price was "fixed" then. See?

  • Report this Comment On December 17, 2010, at 10:35 AM, TMFBent wrote:

    Thank you for putting all the variables into the equation that the TV's, Internet's, and Radio's shrill, inflation-hawkers keep getting wrong.

    "The classic simple monetary exchange equation is MV = PQ. M being the number of dollars. V being velocity. P being average price of good sold. Q being the quanity of goods, services, etc., sold during the year. M only increases inflation, other things being equal, if V is assumed constant. But V is simply not constant, per all data, despite what some ideo-theorists, and presumably also Ron Paul, say. We have had a huge drop in V since 2008. There is currently no danger of infation, which is not to say there isn't future danger if the economy improves more quickly than expected by the Fed, in which case, stocks will do well, too. Ultimately, inflation can't be successfully predicted, because V can't be. But a terrible or mediocre economy is not, in this non-expert's opinion, going to lead us into inflation by mere virtue of the fact that monetary printing is going on."

    Let's also add that the Fed has many, many tools that can arrest inflation with a much higher likelihood of success than the war its fighting now.

    Turning low inflation or (if we get there) deflation: ie, or pushing on a string is much more difficult, as a couple of year's worth of unprecedented monetary policy have shown.

  • Report this Comment On December 17, 2010, at 11:45 AM, TheDumbMoney wrote:

    @TMFMarathon, thanks, I'll take a look. And thanks for your thoughts. Hopefully we're right. As my father-in-law likes to say: "Maybe in error; never in doubt."

    @Max, if my memory serves, the Grice piece is looking at ALL commodities, not just gold. Do please at least read it....

    @Bent, first, because we do not know what the world would look like if the Fed had not acted as it did, I respectfully think there is simply no basis, certainly yet, for saying it has been pushing on a string..., other than the fact that that is the phrase-Du jour of Fed-haters. Second, the Fed's policies actually in my non-expert view, have at least four purposes, whether stated or unstated: a) help maintain low interest rates in the wake of unprecedented treasury borrowing (see these charts as an example: http://www.ritholtz.com/blog/2010/12/the-illustrated-history... by soaking up demand, b) allow banks to make easy money, so they can recapitalize themselves and not implode as they write off billions in bad loans, thereby also indirectly subsidizing borrowers, c) increase the money supply, M, to counteract the decrease in V over the last two extraordinary years, as I was speaking about above, d) support home prices by maintaining interest rates at below-historical levels to support refinancing and new purchases. To a certain extent, these are the same or similar things, but not entirely. All ultimately serve the Fed's statutorily-mandated goals of maintaining price stability, avoiding deflation, and maximizing employment. The unhappy fact is that just as capitalism is the best of many horrible systems, just as democracy is the best of many horrible systems, so a fiat Fed is the best of many horrible systems, as far as I can tell. For example, if you want to know what a worldwide gold standard would look like, look at what is happening in Europe right now: that's what happens when everyone is tied to a single currency value regardless of their fiscal policy and regardless of the productivity level of their economy. I thank God or god or dog every day for the independent Fed, when I think about the alternatives: Congress and/or any president in charge of setting money supply as well as tax and fiscal policy (under that scenario, hyperinflation would be the terminal stage of our fiat currency, as it almost was in 1779 when our government printed money, or in the Civil War, examples of pure political money printing); worldwide fixed or even semi-fixed exchange rates under something like a gold standard. Shudder. The Fed is not the government. The Fed will dump money from helicopters to kill deflation, as Bernanke said in 2002 and people have finally started to pay attention to. But the Fed will also unhesitatingly throw money into a shredder to kill inflation, consequences to the politicians be damned. That is why Congress' potential upcoming attempts to subvert and dilute Fed independence are so disturbing (and are unsurprisingly advocated by the wing-nut extremes of each party): Ron Paul will allow us to deflate into misery to serve his ideology, Bernie Sanders will inflate us into misery to serve his. In my view.

    Finally, just as a side note to all: anytime someone shows you an historical chart of the money supply without also relating it to the V the historical P and the Q in the MV = PQ equation, run. Doing so is essentially the equivalent of bemoaning the fact that gas used to cost only $0.10 a gallon without also indicating that income used to be equivalently (more than equivalently, actually) low. Finally, I don't mean to be a 100% cheerleader of the Fed, and I don't support everything it has done, but as I said I just don't see a better way.

  • Report this Comment On December 17, 2010, at 11:50 AM, TMFAleph1 wrote:

    <<Alex, going back to 1851 or actually anytime before the end of the gold standard in the early 1930s is disingenuous. With the gold standard the price was "fixed" then. See?>>

    I'm afraid I don't see. There is nothing disingenuous about it -- Looking at real prices is the only way to judge how effectively gold has acted as a store of value. Whether or not the price of gold was fixed at one time or another is irrelevant.

    Alex Dumortier

  • Report this Comment On December 17, 2010, at 11:18 PM, JavaChipFool wrote:

    dividendgrowth had it right on- Motley Fool hyping gold?

    Another sign I saw a year ago was someone said "When gold prices are announced with the DOW in the evening news, time to sell"

    Speculation (repeat ad nauseum)

  • Report this Comment On December 17, 2010, at 11:40 PM, JavaChipFool wrote:

    Oh, the link to TPC http://pragcap.com/read-fed-print-money

    also has some comments on how Glen Beck (I love that man!!!! man crush, mancrush!) was telling people to buy gold because the Fed was "money printing". A sure sign we are at the top of gold- well, it could still go up 20%, but the fall is coming.

    Be sure and go to the TPC link above as well.

  • Report this Comment On December 18, 2010, at 12:49 AM, CarelessCad wrote:

    DEAR GOD. Gold? Really? Its a bubble, i wish you luck in selling at the right time.

  • Report this Comment On December 18, 2010, at 2:23 AM, TMFAleph1 wrote:

    <<And right now, most of the people who know the most about the sector are overwhelmingly bullish, while many with bearish sentiment know relatively little about gold. There is the risk that tunnel vision can creep into some analyses, but the difference in knowledge and time spent on the subject is in many cases 1,000 to 1, so as I see it, it's a no-brainer to whom you should listen.>>

    The same could have been said about the real estate finance professionals who told hedge fund manager John Paulson that it was folly to bet against the housing market. The experts had spent entire careers in real estate finance, while John Paulson was a novice in this market (his training was in M&A and risk arbitrage).

    As it turns out, the experts' deep involvement in the real estate market was what prevented them from seeing what was glaringly obvious to an outsider like Paulson -- that the housing market was in the midst of a bubble of unprecedented size.

    John Paulson ended up making $3.7 billion personally in 2007, while many of the real estate experts are now looking for different careers.

    Alex Dumortier

  • Report this Comment On December 18, 2010, at 2:28 AM, TMFAleph1 wrote:

    Of course, as I have noted in numerous articles, John Paulson happens to be bullish on gold as a novice to this market, too...

    Alex Dumortier

  • Report this Comment On December 19, 2010, at 5:58 AM, riffdex wrote:

    Excellent post dumberthanafool

    I've always been skeptical of all the ones advocating gold over the last years, and I have never bought any gold stocks. However, I have recently been considering buying a few thousand worth to basically hold for at least 15-20 years (of course, my decision still is not final - I don't try to buy on an impulse and usually take a lot of time with my decisions). I am still quite young and I think that a gold investment could be very profitable by then. I think the main problems I have with this article is the idea of putting ALL of your cash into gold, as well as the implications that gold will be a worthwhile investment in anything but the long term. If you are putting all of your remaining cash into ANY investment, there is a problem. The market is too unpredictable for this... if some crisis occurs tomorrow and I need money right away, why should I be forced to sell my securities (potentially at a loss)? Generally, I do not use credit cards so any money I need comes straight out of my pocket.

  • Report this Comment On December 20, 2010, at 3:18 PM, TheDumbMoney wrote:
  • Report this Comment On December 21, 2010, at 2:21 PM, 123spot wrote:

    Just today, I saw a report on Bloomberg TV about the population in gold mining Africa suffering from lead poisoning and dying, especially children, from the lead dust released by the gold extraction process. The poor farmers are forced to work in the mines for income since their farmland has been appropriated for more mines in the face of robust gold demand. I have bought and sold gold at a nice profit, but never again. I need to make money, but not at this cost to others. Wealth disparity is one thing. Killing the poor for gold is something different altogether, and not Foolish in my opinion.

  • Report this Comment On December 21, 2010, at 7:26 PM, globalsailor wrote:

    This article looks like hype. The numbers that were used were way too rough. Nonetheless, I also try to get into hard assets and away from the USD.

    I don't like the evaluation you came up with. You talk about none of the suppliers or buyers of gold.

    It seems very very hard to compare the price of gold to the dollar. It's like comparing apples and oranges.

  • Report this Comment On December 22, 2010, at 7:43 PM, rgon1969 wrote:

    I have to agree with "123spot" on his/her point. Diamonds are another blight on our greedy culture.

    I also agree that gold has no income stream, therefore it is similar to residential housing. They're worth what someone is willing and can afford to pay for them. Housing, of some type, is essential, whereas gold is minimally necessary.

    Bubble, bubble, toil and trouble. I predict, ta-dah, that gold prices will crash at some point. When..? Ah.... if I knew that, I certainly would be a fool to tell anybody else. Fool on.......

  • Report this Comment On December 23, 2010, at 5:40 PM, TheDumbMoney wrote:

    Here is another excellent article to read about our current prospects for inflation. http://macroblog.typepad.com/macroblog/2010/12/an-inflation-...

  • Report this Comment On December 24, 2010, at 8:27 PM, Wally620 wrote:

    What I don't see anyone addressing is what is going to happen to the value of gold when the world no longer uses the U.S. Dollar as the Reserve Currency. This will happen in the near future as soon as China and oil producing countries get tired of taking dollars for their product. All the printing of dollars is making their buying power decrease by the day. Look what has been happening to the price of oil, grains and industrial metals! Gold is more likely to go to $5,000 per oz than to $500.

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