Gold Is Now 3 Times Overpriced!

Last November, with gold trading at $1,351 per ounce, I warned investors that gold could eventually drop below $500. With gold achieving new nominal highs, I challenged gold enthusiasts to refute my quantitative argument last week. One member of the CAPS community, Dave in Qatar (whereaminow), took up my challenge. Reflecting on some of the points he raised and updating my pricing model has solidified my conviction that gold is now overpriced by a factor of more than three.

It's all about inflation
Gold enthusiasts -- including my challenger -- are always going on about the runaway growth in the money supply and they extrapolate wild price targets for gold on that basis. However, it makes more sense to focus on inflation, since that is what investors should be concerned with when they evaluate an asset as a store of value. In plain terms, nobody cares about the size of the money supply when they are spending accumulated savings. What they care about is whether their savings buys the same, fewer, or more goods and services than they used to. Why focus on a proximate cause (the money supply), when you have a measurable variable (inflation), which is exactly what you're after?

A fair price for gold: $475/ounce
My updated $475 fair price estimate for gold is based on the long-term average of inflation-adjusted gold prices going back to 1833 (I use the same methodology here to show that silver is also a massive bubble.) My challenger wants to exclude any data prior to 1971, arguing that fixed-price regimes are irrelevant to this analysis, even declaring that "there is no historical mean price of gold." I entirely agree with that last statement -- if we are referring to nominal prices. However, the data suggests that inflation-adjusted prices do have an average that looks pretty stable (see graph below). This is consistent with a notion that is very dear to gold investors -- that of the yellow metal as a stable store of value.

Source: Kitco, Handbook of Labor Statistics, U.S. Department of Labor, Bureau of Labor Statistics.

Real vs. nominal
Under classical and managed gold standards, the nominal price of gold was fixed, but that didn't prevent real gold prices from adjusting. Real gold prices varied with the supply of gold, the allocation between monetary and nonmonetary gold and the returns on real assets, including stocks and bonds. The fact that real gold prices were less volatile prior to 1971 is not reason enough to throw that period out. Changes in volatility regimes aren't incompatible with the existence of a stable average.

Inflation is understated?
Another objection that gold enthusiasts raise constantly is the notion that the consumer price index published by the Bureau of Labor Statistics no longer provides an accurate picture of inflation because of some technical changes in the calculation methodology. I don't think that gold enthusiasts' criticisms of the CPI withstand scrutiny; in fact, some of them are based on outright falsehoods.

However, for the benefit of those who cherish that argument, I derived a second estimate by substituting an alternative CPI series for the post-1969 years. Shadow Government Statistics, the research firm that produces the series, claims it is free from the alleged distortions contained in official CPI figures. On that basis, the long-term average real price of gold in current dollars is $1,523, which suggests that gold is fairly priced at its current level.

I want to emphasize that I consider that this estimate contains a significant upward bias and investors shouldn't rely on it as a benchmark for gold pricing. The only reason I am publishing it here is to show that even if we accept one of the gold enthusiasts' primary fallacies, there is no evidence that gold should command a premium to current prices. Investors are, of course, free to pay more than three times the fair price for gold ($475 per ounce) in the anticipation of hyperinflation, but they should recognize that they are making a high-risk bet.

Gold is in a bubble
Let me be clear about what I am and am not saying. Gold is in a bubble, but I'm not predicting an imminent fall in its price. There is no way to time the bursting of a bubble; it could happen several months from now, just as it could take several years. My best guess is that gold prices will decline significantly by the end of 2012, with multiple interest rate hikes by the Fed as the catalyst. But that is nothing more than guesswork; the only thing I am reasonably confident of is that the price will eventually decline by roughly two-thirds (or more!).

Gold investors: Check yourself before you wreck yourself
In that context, owners of gold bullion, the SPDR Gold Shares (NYSE: GLD  ) , or other gold products should accept that they are living on borrowed time. Shareholders of gold miners including Yamana Gold (NYSE: AUY  ) , Freeport-McMoRan Copper & Gold (NYSE: FCX  ) , and Goldcorp (NYSE: GG  ) should review the assumptions regarding gold prices that are implicit in the miners' valuations. And neither group should seek safety in the iShares Silver Trust.

For reliable protection of your purchasing power, I recommend high-quality dividend stocks instead, when they are purchased at reasonable valuations. Readers can take a look at Abbott Laboratories (NYSE: ABT  ) or Intel (Nasdaq: INTC  ) , for example -- both stocks look like they meet those criteria now (to track these stocks by adding them to your watchlist, click here).

With gold prices at historic highs, one little-known company is making a fortune. Find out which Tiny Gold Stock Is Digging Up Massive Profits.

Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the stocks mentioned in this article. You can follow him on Twitter. Intel is a Motley Fool Inside Value choice. Intel is a Motley Fool Income Investor recommendation. The Fool owns shares of and has bought calls on Intel. The Fool owns shares of Abbott Laboratories and Intel. Alpha Newsletter Account LLC owns shares of Abbott Laboratories. 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 April 29, 2011, at 3:27 PM, tsteinbach wrote:

    Wow, your ignorance of what is going on is amazing! Do you not see how quickly the dollar is dropping! Do you not see the lack of a plan to recover the value of the dollar? Do you not see that the only solution to correct the dollar is to raise rates, but then the US would owe double/triple, etc. in interest, which means we would still have to print (borrow) more money to pay the interest (never mind the principal). What is the value of an ounce of gold when the dollar is worthless and you need a wheelbarrow to carry it around? I advise you to read "When Money Dies" and then come back and present your argument. Meanwhile, gold and silver will keep going up as the eyes of more people are opened to the reality of our economy.

  • Report this Comment On April 29, 2011, at 3:39 PM, TMFAleph1 wrote:

    <<Wow, your ignorance of what is going on is amazing! Do you not see how quickly the dollar is dropping! Do you not see the lack of a plan to recover the value of the dollar?>>

    As I wrote in the article, if you expect hyperinflation, you are welcome to pay three times the current fair price for gold. My analysis is based on the facts and data that are available today, not a highly improbably scenario regarding the dollar.

    Alex Dumortier

  • Report this Comment On April 29, 2011, at 3:43 PM, tsteinbach wrote:

    Meanwhile, the dollar just keeps dropping...

  • Report this Comment On April 29, 2011, at 3:48 PM, jimmy4040 wrote:

    If I was your client, I would say that your continued employment was living on borrowed time. Being wrong is one thing, but then doubling down on it is just stupidity. This piece of advice is particularly helpful:

    "There is no way to time the bursting of a bubble; it could happen several months from now, just as it could take several years. My best guess is that gold prices will decline significantly by the end of 2012"

    It's really hard thought to say that's a more ridiculous statement than this though:

    "Last November, with gold trading at $1,351 per ounce, I warned investors that gold could eventually drop below $500. With gold achieving new nominal highs, I challenged gold enthusiasts to refute my quantitative argument last week"

    So you were wrong by $200, and you want to challenge people to PROVE that you were wrong?

    Say, have you ever heard of buying a put as a hedge?

    I know I've seen dumber investment advice than this before, just not sure when.

  • Report this Comment On April 29, 2011, at 4:03 PM, jimmy4040 wrote:

    OMG, I just realized you actually recommended INTC, which has only been as high as $27 for one week in five years, seriously. Why not add MSFT and CSCO for the "classic rock" version of investing?

  • Report this Comment On April 29, 2011, at 4:19 PM, jesterisdead wrote:

    "Another objection that gold enthusiasts raise constantly is the notion that the consumer price index published by the Bureau of Labor Statistics no longer provides an accurate picture of inflation because of some technical changes in the calculation methodology... I derived a second estimate by substituting an alternative CPI series for the post-1969 years. Shadow Government Statistics, the research firm that produces the series, claims it is free from the alleged distortions contained in official CPI figures. On that basis, the long-term average real price of gold in current dollars is $1,523. ...there is no evidence that gold should command a premium to current prices"

    No evidence? The current price is $1351. You just provided evidence that supports it should be even higher! Whether you believe their is a bias or not is irrelevant - many people believe the current rate of inflation IS greatly understated and are willing to pay for the security of this precious metal.

    Based on the facts we have today, the government spent $1,700,000,000,000.00 more than it pulled in on tax revenue of only $2.2T. The annual deficit is nearly double the income in a year. That's like having a $40k/year job and running up at $40k credit card charge every year. Our public debt is $14.3T and the White House is projecting the interest rate on the debt to be almost $1T/year in another decade. On tax revenue of $2.2T, that's over 40% of what we pay in tax just to service the debt! Worse, they have zero plans to fix it and are planning to add at least another $8T over a decade. We have ~10% unemployment, already the highest corporate tax rate in the world and illegal immigrants pouring in and draining the economy even more.

    Based on all of that, you are trying to sell people on the belief that hyperinflation will end by 2012? Get real!!! "Highly improbable situation regarding the dollar" my @ss.

    Buy gold. The dollar is doomed.

  • Report this Comment On April 29, 2011, at 4:25 PM, Bernankonit wrote:

    So I looked through this article to find out how they justified the money base growth compared to the price of gold, but they failed to even mention it. Put a 10 year chart of M2 next to a 10 chart of gold and its eerily similar, coincidence I think not. Common these paper fiat dollars are shooting out of thin air in every country, and do you think it will stop. Bottom line is no one can tell if gold is in a bubble, all bull markets do end in a bubble and this will be no exception, but I don't think momentum of confidence in paper money is not coming back with a vengance anytime soon. I would like to see the fed raise rates dramatically, nobody believes that will happen, first off the fed needs to stop QE2, then they need to let their holdings expire without buying more treasuries, then they will need to see how things go after that to raise rates. So we will have Fed tightening with the first 2 steps above, higher taxes from Obama, less spending from the GOP (with most gov spending flows to GDP and gov income), hmm doesn't sound like we will be ready for aggressive rate hikes. In fact by time all this stuff happens Bernank will most likely be more dovish, if thats possible. Remember Bernank believes the main reason for the depression was tightening too soon, that why the market knows hes not raising rates anytime soon and gold will continue at least a few more years onto the current 11 year bull market. Bonds had a 30 year bull market, no its golds turn.

  • Report this Comment On April 29, 2011, at 4:29 PM, TMFAleph1 wrote:

    <<No evidence? The current price is $1351.>>

    Did you just wake up from a 6-month slumber? Today's price for gold is above $1,523.

    <<Based on all of that, you are trying to sell people on the belief that hyperinflation will end by 2012?>>

    You're right that hyperinflation will not end by 2012, but that is mainly because it never began in the first place.

  • Report this Comment On April 29, 2011, at 4:31 PM, unthoughtknown wrote:

    sooooo... gold is in a bubble but the dollar is not in a bubble when the Bernank can come up with trillions of dollars out of thin air?? makes sense Alex.. Also, gold will fall when interest rates rise??? maybe at first but anybody with half a brain knows that the higher the interest rate, the more money the US govt will have to pay on their debt which means more money printing on top of the money printing.. also, if you know anything about history gold went UP in the late 70s WITH rising interest rates. Gold was NOT a bubble in the 70s until Volcker had the balls to raise interest rates to 20%..the US cannot even afford interest rates to go to 5% do you really think we can afford to get to 20? seriously dude, you need to do some research on fiat money.. I know, our society/leaders are smarter than ever single society since the beginning of man so the dollar will be fine...

  • Report this Comment On April 29, 2011, at 4:51 PM, whereaminow wrote:

    Alex,

    Thanks for your response. I'll read this one carefully.

    And I am extremely grateful for the kind words.

    David in Qatar

  • Report this Comment On April 29, 2011, at 5:04 PM, Gato337 wrote:

    wow, such negativity! i guess i should have expected that you golden boys would be diehard apocalyptic prophets.

    regardless of where the dollar is going, You should always try to ferret out the fair value of anything you invest in in order to get good value out of it. Investing in overpriced assets is rarely (if ever?) a good idea.

    @Alex, I thought it was a good article with an interesting approach to the analysis, thank you for your thoughts

  • Report this Comment On April 29, 2011, at 5:15 PM, jimmy4040 wrote:

    Gato: I'm not a normal gold investor. I just know that you can't hold dollars.

    Now eventually the price of gold will fall. At that time Alex will crow about how right he was, while ignoring the years worth of profits he didn't make.

  • Report this Comment On April 29, 2011, at 5:19 PM, TMFAleph1 wrote:

    <<So you were wrong by $200, and you want to challenge people to PROVE that you were wrong?>>

    Apparently, you don't know the difference between process and outcome. Recommend you learn the difference if you want to become an investor.

  • Report this Comment On April 29, 2011, at 5:20 PM, dsc07 wrote:

    A fair price for gold of $475/ounce when it costs on average $850-900 to get an ounce out of the ground???

    Look, gold is priced in dollars. The supply of dollars is doubling every 3-4 years. So is gold. Bubble? Do the math. You don't need a degree in economics to figure that out, you need a 3rd grade arithmetic course.

    The only bubble in the last 10 years is the financial press' use of the word Bubble.

  • Report this Comment On April 29, 2011, at 5:31 PM, shoemaker17 wrote:

    I got a question. How much does it cost to bring the gold out of the ground? I know each site is different, but I read it costs $700 per ounce on average. So right now, gold costs a little over twice the amount it costs to get it out of the ground. From what I have read, it seems that it will be more and more difficult to get it out of the ground in the future. If it costs $700 to get it out of the ground, does $500 sound even possible? maybe in the very short term, but that would signify an almost ridiculous buying opportunity that won't last long.

  • Report this Comment On April 29, 2011, at 5:42 PM, reflector wrote:

    alex,

    i look forward to seeing gold 5x "overpriced" in the not too distant future, if this is 3x overpriced.

    i got quite a chuckle out of this comment:

    "A fair price for gold: $475/ounce"

    fair? you're kidding me, right? since when does fair have to do with anything? supply and demand set prices, not some pie in the sky idea about what's "fair".

    maybe you should also inform the oil companies that a "fair" price for gas is $1.25 per gallon.

  • Report this Comment On April 29, 2011, at 5:59 PM, ETFsRule wrote:

    "My challenger wants to exclude any data prior to 1971, arguing that fixed-price regimes are irrelevant to this analysis, even declaring that "there is no historical mean price of gold." I entirely agree with that last statement -- if we are referring to nominal prices. However, the data suggests that inflation-adjusted prices do have an average that looks pretty stable (see graph below). This is consistent with a notion that is very dear to gold investors -- that of the yellow metal as a stable store of value."

    Using the inflation-adjusted price of gold only adjusts for inflation of the US dollar.

    Don't forget that the global supply of gold also increases over time, as people continue to dig up more gold every year - you could call this "gold inflation", which people often forget to include in their analysis. This is probably why the inflation-adjusted price of gold actually showed a steady decline from 1830-1970, as we see in your graph. It's a decline of about 0.7% per year, which is pretty close to the annual increase in the gold supply.

    That's why Paul van Eeden correctly uses the "value of all mined gold" instead of just looking at the price of gold, for the gold side of his analysis.

    For the other side of the analysis, I'm not sure that using the CPI is entirely valid. Why not just use the US money supply?

    I was a bit late in posting in the earlier conversation, so I'll re-post some links to van Eeden's analysis, which show how he arrived at his fair price of $886/ounce:

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

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

    http://www.paulvaneeden.com/the.gold.model.updated

    http://www.paulvaneeden.com/Gold

  • Report this Comment On April 29, 2011, at 6:03 PM, TMFAleph1 wrote:

    <<For the other side of the analysis, I'm not sure that using the CPI is entirely valid. Why not just use the US money supply?>>

    I continue to be mystified with the obsession with the money supply over inflation.

  • Report this Comment On April 29, 2011, at 6:31 PM, dbtheonly wrote:

    M. Dumortier,

    You surprise me if you thought that you could write articles such as this & the associated silver article without bringing out the "Gold Bugs" in force. If they hadn't been predicting the same hyper-inflation for the past 30 years, I might be inclined to listen. Those advocating for a gold currency have absolutely no knowledge of history but certainly are vociferous.

    To answer your question, they focus on money supply because it is easy to quantify. They ignore that the money supply as an absolute number is irrelevant. It only matters in comparison to the goods & services available for purchase. Now, let's watch them go off on me for this heresy.

    Equally I was stunned by the one comment that suggested that you were predicting, to the hour, the collapse of the Silver market. If you are that good; I'd suggest we punt these jobs & spend the day at the race track, where you can call winners enough for the both of us.

    Now, to my real question; is the mean relevant for that time when gold bullion was not available for purchase in the US? Without the ability to buy the product, there can be no price. I'd also question your figures for the price of gold during the war years of 1861-1865 & 1914-1918.

    I'd also suggest you consider the 16-1 (or 15-1 or 15.5-1) silver to gold price as being the mean ratio.

  • Report this Comment On April 29, 2011, at 6:32 PM, kernc wrote:

    doesn't money supply almost inevitably lead to inflation?

  • Report this Comment On April 29, 2011, at 7:07 PM, xetn wrote:
  • Report this Comment On April 29, 2011, at 7:20 PM, xetn wrote:

    I forgot to add that virtually (probably) every other country's central bank is inflating their money supply just like the US. If gold is only in a bubble compared to the US dollar, then what about the price of gold in other currencies?

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

  • Report this Comment On April 29, 2011, at 7:26 PM, TMFAleph1 wrote:

    @xetn

    Thanks for those references. The first chart supports the notion that gold and silver are a bubble.

    I used part of the CPI data series you link to (up to 1913) in order to calculate real gold and silver prices.

    As far as the second graph, I can't say this inverse correlation is surprising, except inasmuch as some of the other major currencies are losing value.

    Alex Dumortier

  • Report this Comment On April 29, 2011, at 7:34 PM, workalone wrote:

    What is this graph supposed to show? For years I have been reading that if adjusted for inflation from the late 70s, gold should be priced at 2000.00 in today's dollars. Why is every jeweler gemologist in American buying gold for the last 4 years and paying top dollar for it? I do agree that it will bubble because prices of commodities always fluctuate..i.e. gas & steel are tied to supply & demand. However not that the developing world has always prized gold 18k gold and 24k gold and now that they are lining their pockets with cash in China, India and Brazil to name a few PLUS the possibly irrational fear of inflation fueling the price for an item that really has no use and no gold backing money supply except to decorate humans and create wars, robbery, plundering and pillaging. It is also true that since we have more haves vs have nots gold is becoming a big time status symbol. In the USA people only bought jewelry for special occasions and modest jewelry at that for MOST Americans but now there are so many designs and Americans travel more and are buying bangles like they do in Turkey, India for their daughters, wives etc. It may not be something you would want to load up on too heavily and I agree stocks may be a great value now. A lot of people were burned badly by stock and real estate and countries like China, Indonesia, Brazil are buying hard assets and that is what gold is. I think the gold market will be bullish until 2012 and then we shall see what happens..another bursting bubble or not? Depends upon a lot of things and the world is crazy now, from weird weather, disasters and change like the Freedom Fighters in the middle east. So how can you say this with absolute certainty in a time of no absolute certainty? This is a woman (hey my daughter cringed at your Warren Buffet invests like a woman story....gag me! No one takes more risks that someone working for themselves and leaving a secure job like I did...:)

  • Report this Comment On April 29, 2011, at 7:37 PM, TMFAleph1 wrote:

    @jimmy4040

    <<OMG, I just realized you actually recommended INTC, which has only been as high as $27 for one week in five years, seriously. Why not add MSFT and CSCO for the "classic rock" version of investing?>>

    First of all, these are not recommendations, they are ideas for people who are willing and able to do serious due diligence before they make an investment decision.

    Second, as I indicated to another reader, one of the shortcomings of my commentary is that it is forward-looking, i.e. I'm interested in what one should do with one's money over the next five years. However, if you have access to a time machine, I can give you numerous firm investment recommendations that will do very well over the past ten years.

    Alex Dumortier

  • Report this Comment On April 29, 2011, at 8:12 PM, jimmy4040 wrote:

    Fair enough on the recommendation part.

    As to forward looking I'm not that familiar with your work. You seem to be like the perma-bears, who wait for the one time they're right and then crow about it. That ignores of course all the money you would have lost for investing clients even in the past six months referred to in your column.

    Inevitably the price of gold will fall in some uncertain time frame as you allude to. That risk can be hedged in various ways using options.

    Meanwhile you are the one using a "backward looking" model, not forward looking, as you forecast the price of gold not based on current or future conditions but on a pricing model going back to 1833!

    Anyway, you stand up for yourself which I like, but your conclusions are valid only inside your computer model, not in the real world.

  • Report this Comment On April 29, 2011, at 8:20 PM, jimmy4040 wrote:

    TMF:

    As an investor, I know that outcome is the only thing that matters, not process.

  • Report this Comment On April 29, 2011, at 8:27 PM, jimmy4040 wrote:

    BTW, to give your your props, silver really is a bubble. Even though I was hedged, I got out on Tuesday after a gain of 47% in about two months. Sometimes the crazies are a little too crazy, even for those of us who don't mind speculation.

    Furthermore my writing style is bombastic for fun. Please excuse any personal offense I may have given.

  • Report this Comment On April 29, 2011, at 8:37 PM, TMFAleph1 wrote:

    <<Furthermore my writing style is bombastic for fun. Please excuse any personal offense I may have given.>>

    I appreciate the caveat. It's tough to decipher tone over the internet.

  • Report this Comment On April 29, 2011, at 8:49 PM, greedwhenfearful wrote:

    I'm with Buffett, gold doesn't produce anything. Buy companies, they actually produce something.

    If I want something to barter, I'm going with water, whiskey, and wives.

  • Report this Comment On April 29, 2011, at 8:59 PM, ETFsRule wrote:

    "TMFBullnBear wrote:

    <<For the other side of the analysis, I'm not sure that using the CPI is entirely valid. Why not just use the US money supply?>>

    I continue to be mystified with the obsession with the money supply over inflation."

    Look at it this way: money supply is the independant variable, CPI is a dependant variable.

    Or look at this explanation, direct from the BLS:

    http://stats.bls.gov/cpi/cpifaq.htm#Question_12

    "Is the CPI the best measure of inflation?

    Inflation has been defined as a process of continuously rising prices or equivalently, of a continuously falling value of money.

    Various indexes have been devised to measure different aspects of inflation. The CPI measures inflation as experienced by consumers in their day-to-day living expenses; the Producer Price Index (PPI) measures inflation at earlier stages of the production process; the Employment Cost Index (ECI) measures it in the labor market; the BLS International Price Program measures it for imports and exports; and the Gross Domestic Product Deflator (GDP Deflator) measures inflation experienced by both consumers themselves as well as governments and other institutions providing goods and services to consumers. Finally, there are specialized measures, such as measures of interest rates.

    The "best" measure of inflation for a given application depends on the intended use of the data. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase at today's prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period."

    So, there are several different ways to measure inflation, and CPI deals specifically with consumer goods. But, there are other parts of the economy other than just the consumer segment. So it's best to go straight to the source and look at the money supply.

    Anyway I liked your article, despite my disagreements.

  • Report this Comment On April 29, 2011, at 9:51 PM, TMFKopp wrote:

    @Alex

    Well put, good work!

    Matt

  • Report this Comment On April 30, 2011, at 4:27 AM, louchios50 wrote:

    If realestate values could drop 60-70%, and that can be produced, then why does anyone in their right mind not understand that gold could do the same thing. Also there are many gold mines in Africa so rich in gold ore that they are paid not to mine them because it would devalue gold to the value of copper. CU later...

  • Report this Comment On April 30, 2011, at 6:11 AM, hank2800 wrote:

    The unfortunate thing about this article, like many other bear pitches is that it scares away civilized investors who don’t own any gold or metals in their portfolios. Like any asset class they deserve a position . Somebody reading this who was going to buy some gold I hope doesn’t change their mind due to this article or other articles claiming “Bubbles, Parabolic, Glad I’m not on this ship when it sinks” All of these grab people for high drama in Motley Fool and Seeking Alpha among other commentaries. But they are always pretty lopsided. It’s understandable that most financial analysts don’t get metals and commodities. No company with a roof, sign out front, valuations, company president…. It never seems to make sense to the traditional investment methods and the people who practice them. You can’t base a decision like this strictly on charts , graphs and previous history. Too much has changed in the past ten years, the US isn’t the powerhouse it used to be, this is a global market with full media coverage, grey haired ladies are putting their 20kg silver orders into Kitco via the internet and kindly asking the nice young UPS driver to help her put it under her bed….you name it…it’s different. People are now bombarded visually and electronically with Max Keiser, Peter Schiff and others who clearly explain reasons why people should be invested in bullion. These same people when trying to address these questions on CNBC for example are virtually laughed off by the questioning pundits, rolling their eyes thinking ”oh yea here we go with gold again”. I belong to both Motley Fool Million Dollar Portfolio and Global Gains and for the same strange reasons I get no answer why in the portfolio we do not invest in any of these stocks(GLD,SLW etc) as a percentage of our overall portfolio. I currently have an unanswered question from a couple days ago asking exactly this on MDP with no answer. Ironically if Buffet went out and bought 20 tons of bullion tomorrow it would make news with Motley Fool, nothing against Mr. Buffett but I swear there must be a statue of him at Fool HQ. For those interested and want a little Bull side of the coin go to europac.net or bullsource.com and spend an hour listening to a few different views on this. Yes these guys sell bullion and are not going to tell you ”geeze The market may be tanking so don’t buy our gold” but listen to the facts from Schiff, Maloney, Fabor(disregard the doom gloom blah blah), also Maxkeiser.com. These are smart guys telling you what is happening and if for nothing else they have been right all this time while this author is another one who actually has the foresight(or thinks he does) to tell you gold is going to less than $500/oz nearing the end of 2012!! I wish Motley would screen some of these commentaries so such an ignorant statement was not made which could affect a sound investment decision .Luckily I have followed Mr Keiser, Peter Schiff and others to offset my MDP and Global Gains losses. Bubble????Yes everybody owned a house(at least one), most people were invested in Tech..but if this is a bubble why doesn’t most peoples portfolios even own it, many financial planners don’t enter it into a portfolio decision unless the client brings it up and even then it is probably in the form of a miner possibly Barrick Gold. Why a gold miner because the financial planner can look at the numbers, it has a window and doors along with a proper brochure, aha now you get it….it always goes back to the same reasons, has now and has for years. You finance guys aren’t taught this in college and you can’t get your heads around it, commodities, metals and their like have to be forecasted differently and obviously not in the realm of Mr. Dumortier, that’s okay leave it to the pros, but don’t come out and predict the skies collapse and even date it!!…come on…. If you were my neighbor I’d go make you a friendly 100$ bet that by the end of 2012 you were wrong on all counts…. The current global situation and economics along with deteriorating USD among other factors will ensure Silver and gold will not collapse by then, yes there may be pullbacks, buying opportunities and I suspect that once money managers begin to take this more main stream with customers allotting space in portfolios along with Russia, China etc getting rid of withering USD, even bulls and bears probably agree the USD will continue it's slide in the near to mid term…..the list goes on…put bullion in your portfolios people. Darcy

  • Report this Comment On April 30, 2011, at 7:41 AM, skypilot2005 wrote:

    "On April 29, 2011, at 9:51 PM, TMFKopp wrote:

    @Alex

    Well put, good work!

    Matt"

    This comment added absolutely zero to the discussion. Come on....

    Sky Pilot

  • Report this Comment On April 30, 2011, at 7:56 AM, oberta wrote:

    Above briefing is very interesting, especially the historical curves of the price of gold.

    However, as an inhabitant of Europe I am more concerned about gold-prices in euro's/gr. In vieuw of said hyperinflation expectations in the USA. There could be an increasing difference in the graphs dollar - euro.

    Is it possible to accompany the dollar graph with the euro graph?

  • Report this Comment On April 30, 2011, at 10:50 AM, fightingamish2 wrote:

    I am disapointed by the meanspirited responses to this article. Can we not as gentlemen make our points?

    My thoughts are that current devaluation of the dollar is more likely to be slowed down and eventually strengthened again. I agree with the author that there is a bubble forming with gold. No one knows where the peak is, but I agree many people will be harmed by investing too much and buying at too high of a price.

    It seems to me that most of those who are investing heavily and preaching the loudest that gold is the answer are also the ones who believe the sky is falling. My advice is to avoid extreme thinking and seek a balanced portfolio.

  • Report this Comment On April 30, 2011, at 10:56 AM, caltex1nomad wrote:

    If the world economy collapses there won't be anything to buy with your physical Gold and Silver and if you are holding GLD or SLV good luck cashing in. I've got Guns,Bullets,Fishing Poles, Vegetable Seeds and Fresh Water.

  • Report this Comment On April 30, 2011, at 2:13 PM, nobodysfool77 wrote:

    "However, if you have access to a time machine, I can give you numerous firm investment recommendations that will do very well over the past ten years."

    Alex Dumortier

    Time Machine Alex?? I would stop talking before you lose all creditability...

  • Report this Comment On April 30, 2011, at 2:49 PM, nobodysfool77 wrote:

    Let's face it the dollar is doomed, and this is by design. Wall street is corrupt and so is our government, and finally people are waking up to this. The propaganda party is slowly ending, and people have lost their confidence in the system especially the youth and the dollar hasn't even completely crashed yet! This last decade and next will resinate for decades to come. There's your time machine Alex and those who think the dollar will rise again. A global currency will be introduced before the dollar makes a real comeback. Silver will not ever fall back to late 90's and 00's prices because the confidence levels of those years will never return in our lifetime. It was take the next generation that is too young to remember this to be fooled again by fiat currency for them it will be a global currency crash and history will repeat yet again.

  • Report this Comment On April 30, 2011, at 5:17 PM, patternpro wrote:

    Nice work alex. Have to say i agree with you. I think that double short gold,silver will present an opportunity of a life time if/when they offer up a nice spot to get in. right now prices are supported but over the next couple of years i will be watching closely. I think that if we can get some steps in the direction of a real recovery, and start to see rates move up pm prices will be decimated. don't get me wrong that isn't happening right now and I am still long pm stocks however to think gold is not in a bubble here is silly!! and in managing your own personal portfolio I would advise anyone from becoming to one sided, making good investment decisions comes from constanly evaluating both sides of the trade so you can catch on to changing trends. When you stop doing this it can become very costly

    good luck all

  • Report this Comment On April 30, 2011, at 5:31 PM, KCinAustria wrote:

    @Alex...thanks for the article...if nothing else, it has created some interesting/heated debate.

    Everyone leaving comments...please keep it respectful. This isn't CNN/Yahoo/Fox/etc.

    I'd just like to state that it seems to me that the number of emotional responses to this article is further evidence that gold is likely in a bubble. I imagine many people had similar responses to suggestions that stocks were overvalued in 1999. (Of course, stocks DID keep going up...for a while.) It just seems as though a number of people are buying gold based on emotions (mainly, fear of hyperinflation, it seems), not out of logical, rational analysis. At some point that will lead to a bubble (if it hasn't already).

    FULL DISCLOSURE POLICY: This is my first comment on TMF. I have no gold. I have no plans to buy gold anytime soon. If I could go back in time, I would have bought gold in 1999, when nobody gave a second thought to it. If I buy gold in the future, it will be when nobody gives a second thought to it. I am a US citizen paid in Euros, which provides me with a bit of a hedge against catastrophic scenarios for the dollar. (And yes, I am aware that presents its own risks as well...)

  • Report this Comment On April 30, 2011, at 6:52 PM, TMFAleph1 wrote:

    <<Nice work alex. Have to say i agree with you. I think that double short gold,silver will present an opportunity of a life time if/when they offer up a nice spot to get in. right now prices are supported but over the next couple of years i will be watching closely.>>

    Thanks for your kind words, but I would strongly recommend against this strategy. When you are short -- particularly a leveraged short -- timing is everything and, as I emphasize in the article, the only way to get the timing of a deflating bubble right is through sheer luck. Before this bubble breaks, there will be ample opportunity to go broke with a double-short position.

    Alex Dumortier

  • Report this Comment On April 30, 2011, at 7:00 PM, TMFAleph1 wrote:

    @KCinAustria

    I don't understand why so many people who own gold and/ or silver display such an intense emotional response to this type of article. If you are a thoughtful investor, you should be delighted when you are presented with a thesis that is contrary to your own.

    This phenomenon certainly isn't exclusive to precious metals: You can observe the very same thing when you write a critical article concerning a stock. Generally, however, the intensity of the emotional response is less than with precious metals... unless you're writing about Sirius XM, of course.

    Alex Dumortier

  • Report this Comment On April 30, 2011, at 8:19 PM, jimmy4040 wrote:

    Alex:

    The Sirius comment WAS pretty funny!

  • Report this Comment On April 30, 2011, at 8:46 PM, Cubbob wrote:

    Alex - I find it amazing that "non-Gold bugs" like you are so concerned with those of us who invest in gold and silver. We invest in these commodities because they increase in value as the dollar decreases in value. As the US prints more money to pay debts, the dollar weakens and gold and silver increase in value. I am certain you thought it was a joke that gold would reach $1500 per oz. and silver $50 per once. Utah just approved the use of gold and silver as legal tender. Other states will follow as the dollar weakens. Unless the US is willing to cut costs, printing money to pay debts is the only option. This will lead to a weaker dollar and result in higher gold, silver and other commodity prices.

  • Report this Comment On April 30, 2011, at 9:18 PM, TMFAleph1 wrote:

    <<I am certain you thought it was a joke that gold would reach $1500 per oz. and silver $50 per once.>>

    I'm not at all surprised that gold has reached $1,500 and I think the right elements are in place to propel it $2,000 before the bubble in gold bursts. That is by no means a certainty, but I can easily conceive $2,000 gold.

    <<Utah just approved the use of gold and silver as legal tender.>>

    I mentioned this in a previous article, but my understanding is that the bill has passed the Utah legislature, but the governor still needs to approve it.

    With regard to this bill, I share the FT's position:

    In gold they trust, FT, Mar. 25, 2011

    http://www.ft.com/cms/s/0/3b3dee16-5721-11e0-9035-00144feab4...

    Alex Dumortier

  • Report this Comment On May 01, 2011, at 3:35 AM, NOWAYIMRIGHT wrote:

    So, I used your logic to calculate the price of what gas should be. And, found that it should be $2.21 per gallon looking back over the past 20 years. Everyone watch out, don't buy gas its overpriced. The last three sentences are a summary of your argument. It sounds ridiculous. And, the same things pushing up the price of gas, commodities, and the price of almost everything are the same forces pushing up the price of precious metals. I wish you luck, sir.

  • Report this Comment On May 01, 2011, at 3:43 AM, NOWAYIMRIGHT wrote:

    Also, as the people who you didn't listen to said. Look back from 1971 only, the price of gold should be, under your school of thought, $695. So at best its closer to 2 times overpriced. I don't recommend gold as a sure thing, just as no one stock is a sure thing, nor is any one industry or sector of the market. However, investing in gold and commodities is a hedge against inflation and instability in the greater market. When QE 1,2 and if there is a 3 come to an end the stock market will begin to slide once the government blown bubble gets popped. If it turns out that the government hasn't been artificially inflating our economy billions, and billions, and billions, and billions, and billions... and billions (haha) of dollars; then, you will be right and precious metals will fall. I'm only a college student. So, there's no way I'm right. You do you and I'll do me. I'm shorting the market and invested in gold, I own US listed Chinese stocks for speculation (hopefully, they're real), and I'm invested in energy efficiency (renewables suck right now, don't waste your money, anyone heard of Evergreen Solar). Anyway, for your sake, I hope your right.

  • Report this Comment On May 01, 2011, at 10:00 AM, JasonAustin wrote:

    my motto is "prepare for the worst, hope for the invest". out of my liquid asset, I am 1/3 in precious metal, 1/3 in cash, and 1/3 in stocks. coming from this perspective, below are my thoughts.

    Alex, you have made valid points. However, as logical as you might sound, one question remain unanswered. how much is the intrinsic worth of a dollar now? if you treat dollar as a piece of stock and U.S. government as a corporation, then this is a corporation that has very little book value, negative cashflow, and incompetent management. What is a value of stock if a corporation files for bankruptcy? This is a possibility that you can not dismiss. if you are wrong in the next few years(and obviously you have been wrong in the last few months), then the result is catastrophic. However, if a person's asset includes precious metal, that person has "wealth" during the best of times, and the worst of times.

  • Report this Comment On May 01, 2011, at 12:25 PM, JaysRage wrote:

    You'll notice that the rise in gold occurs in the 70s. This is when the U.S. took itself off the gold standard. Until then, gold was necessarily pegged to the dollar. Really, it's that simple. Once you take that into account and you map gold to the availability of the U.S. dollar, you'll realize that gold really should be upwards of $3000 using your own chart. There is just no logic in using a chart that mixes pre and post gold standard graphs. It's a whole different environment.

  • Report this Comment On May 01, 2011, at 12:38 PM, TMFAleph1 wrote:

    @NOWAYIMRIGHT

    <<Look back from 1971 only, the price of gold should be, under your school of thought, $695. So at best its closer to 2 times overpriced.>>

    2x isn't enough of an overpricing for you to refrain from putting your money into gold?

    Alex Dumortier

  • Report this Comment On May 01, 2011, at 3:33 PM, VossPiety wrote:

    Alex, even though I am a bit of a gold bull I appreciate the perspective especially since the true believers tend to take it personal when anything bearish is said. It's hard to get a good counter argument to gold nowadays.

    While you are right that gold will eventually come back to something closer to your long term real average price I think your time frame is way off. Gold will return to its average only when the factors moving the price also return to their averages. Namely the global economy and fiscal and monetary policy. By the end of 2012 I expect the problems of debt, inflation, and loose policy to have only gotten worse and gold and commodities to have continued their runs.

    For an encore perhaps you would like to write an article on the imminent demise of Apple's share price?

  • Report this Comment On May 01, 2011, at 3:41 PM, whereaminow wrote:

    Alex,

    Before I finish my rebuttal, I need clarification on what you mean in a couple of instances. (I also want to add that I'm disappointed you did not address any of the systemic reasons I listed explaining why the real, inflation-adjusted price of gold could not move very far in either direction under the classical gold standard. Perhaps I did a poor job of explaining how the gold standard worked.)

    1. You wrote: ” Under classical and managed gold standards, the nominal price of gold was fixed, but that didn't prevent real gold prices from adjusting."

    What do you mean by "adjusting?" Adjusting to what?

    2. You wrote: "Real gold prices varied with the supply of gold, the allocation between monetary and nonmonetary gold and the returns on real assets, including stocks and bonds."

    Are you saying that these are the ONLY reasons that you can identify that cause real gold prices to move under a classical gold standard? Are there any other reasons that might be significant that you are leaving out?

    3. You wrote: "The fact that real gold prices were less volatile prior to 1971 is not reason enough to throw that period out."

    I am not throwing them out because they are less volatile. If you think that's why, you need to re-read my criticism because you don't understand it.

    4. You wrote: "Changes in volatility regimes aren't incompatible with the existence of a stable average."

    What "stable average"? Are you saying a stable average of gold in dollar prices existed? Or that it should exist?

    The price of gold only changed 4 times from 1792-1973. That was the law. You can't get much more stable than that.

    If you are saying stable price averages should exist, in general, what school of economic thought does this derive from?

    Finally, if the commodity you are measuring was, in fact, the final means of payment during that period, how does it add clarity to adjust it for inflation?

    Step 1. Find price of gold in dollars

    2. Adjust it for a basket of goods priced in dollars

    But the dollars were redeemable in gold

    So in reality,

    1. Gold priced in dollars

    2. Adjusted for a basket of goods priced in gold.

    Kind of circular, isn't it?

    Is that why the nominal gold price chart looks exactly like the inflation-adjusted chart? With no volatility pre-1971, followed by tremendous ups and downs, just lik the "real gold price" chart?

    Any clarification here would help me understand your points and prevent the possibility of a straw man rebuttal.

    Thanks,

    David in Qatar

  • Report this Comment On May 01, 2011, at 4:25 PM, AaronRogers wrote:

    I fully agree with a couple of caveats to everything you wrote. First I will add onto a couple of your points and then I will add a couple of caveats that while I agree the price is way over inflated there is a couple of reasons I think you need to adjust your price upward over 475 to more like 650.

    Inflation argument: M2 has not increased! That refutes all on money supply. Inflation is real but gold is far outpacing inflation.

    The dollar decline argument: The dollar has only declined to where we were pre crisis levels. Yet where is the gold price relative to then? Its way higher. So in the midst of a depression/recession with the dollar stronger gold dipped and then began its surge. Now post crisis levels at the same level of dollar value as before Gold is now hitting even higher. Doesn't make sense both economically and conventional wisdom.

    Go forward: If you look at the chart posted you will notice gold strongly retraced as Volker and interest rates rose. Guess what is coming.

    Basically- Gold's rise defies realities.

    Caveats:

    Global wealth is increasing. While gold has some it really has very little industrial use. So supply is a constant and always has/will be. However, jewelry and investment demands (even during normal gold price times) have increased due to an increase in global wealth. People in China, India and Brazil would like to wear some gold also. I cannot peg an exact percentage to apply but I think a 50% increase in price terms (from your 450 to 675ish) is a fair assesment of this reasonable increase in demand. That's a fair equilibrium belief.

    Currently another caveat is world wide tensions that also demands a prolonged premium. I just don't feel the premium is this high. Currently, Asia from Korea, Middle East and Yes the possible default risk increases of the Dollar, Yen (yes I have made comments about yen funds in my picks) and even Euro issues. However, this caveat makes me laugh. Should world worse scenarios happen what would gold actually be worth. Who the hech has gold and why would anyone care. People don't have gold coins or even dust. Its all held in single secure locations. Hey were all in world war the world is ravaged I'll trade you my gold ring for food LOLOL! Yeah right. Hey Gas X company. I'll mail you grandma's necklace can I have power this month? Gold's use as currency will never return.

    As to defaults once again, I'm not sure how gold would help except to establish a base line for new currency I guess. So default risks I acknowledge gold's ascent however, this bubble bursts if any sign of fiscal order comes to play. As we are heading that way, Austerity is a prevailing wind so bye bye gold premium again.

    Last Thought:

    Gold vending machines. Well that's a crazy exhuberance. People calling for 5k gold. WOW! You mean like Nasdaq 5k. Irrational exhuberance leads to rational meltdown and vice versa remember Dow 5k during this latest recession/depression?

  • Report this Comment On May 02, 2011, at 9:59 AM, dag154 wrote:

    Using historical data to establish the current value of gold is downright wrong and disregards the reality of today.

    Have you ever been to India? Do you know how much they covet gold? To them, it is far more than a rare metal, it is an indicator of social status, a statement of wealth and success and a guarantor of long-term wealth. This market alone is booming and adding to demand every year.

    Now consider the hundreds of millions of people coming out of poverty in emerging markets and how their needs will affect the long term prices.

    Add to this the money-printing frenzy in the US, Europe and Japan, the looming defaults in Europe and you get:

    HIGH gold prices.

    Will they stay as high as they are today? Who knows? But I wouldn't bet against it.

  • Report this Comment On May 02, 2011, at 11:14 AM, StoneyTerp12 wrote:

    Alex,

    Interesting article and thanks for the thoughts. While I personally take the opposite side of your position, I always believe that its important to hear, and listen, to both sides. I sincerely congratulate you in sticking with your positions in the face of opposition.

    To those who would disagree with Alex, I would request that you do it in a more constructive, respectful, manner. I've found this site to be a terrific place for people to shares ideas, and to come on here and blast someone for their opinion is poor form. Its fine if you disagree with a position, but to immediately dismiss the opposing side of your position is a mistake. Always remember that there are two sides to every transaction, and both sides think that the other one is wrong.

    I'm long both SLW and INTC. Personally, I think that SLW is priced at a point that does not take into account current silver prices, and INTC is a cash cow with a price that doesn't appear to reflect it. And you know what, I might be wrong on both counts, but I'm OK with that risk because I've done my own due dilegence and believe in the positions that I've taken.

  • Report this Comment On May 02, 2011, at 12:34 PM, salrycapcasualty wrote:

    Alex,

    While the article is specifically about gold, the general argument concerns good and bad outcomes flowing from both reasoned and poor processes/decisions; always a good topic in my opinion.

    I do have one criticism. This phrase from your article, "updating my pricing model has solidified my conviction that gold is now overpriced by a factor of more than three." bothers me. Shouldn't it be "overpriced by a factor of 2", since overpriced implies the amount above fair price? If the current price matched your fair price you wouldn't conclude that it was overpriced by a factor of 1.

    No position in gold or on the fair price for gold.

    Doug

  • Report this Comment On May 02, 2011, at 12:34 PM, flotsam7jetsam wrote:

    Wow, I really enjoyed reading this article along with all the comments. I do have to say that while comments were, at times, firm, they're along way off from being disrespectful--quite the reverse. My hat to both Alex and the commentators.

    I believe gold is currently underpriced considering all the flim flam that's going on with fiat monies. Gold and other PMs are trailing that money printing momentum, not the other way around. Not only do we need to stop the damage, we need to reverse it--and I see no real signs of stopping yet.

    China is putting a halt to buying U.S. debt like the used to do--by the truck load. And are even trying to rid themselves of it.

    Funny about Buffet's comment of gold not actually producing something (from comment above). We'll maybe not, but it sure does stand for some things like truth, integrity, and no nonsense value. Maybe that was a given in his day--but not in ours. [suddenly, I'm seeing Lady Justice with the scales--and they're holding gold!]

    Also, another thing to consider is mining stocks are actually selling somewhat cheaply compared to the ETF big brother. Some silver stocks, to me, seem to be trading as though silver is back in 2001. So buying the physical versus ETF versus stock maybe a whole other mini-discussion.

    p.s. if QE2 did stop abrubtly, I bet we'd see a small buying opportunity for PMs and the dollar would temporarily gain some value back.

  • Report this Comment On May 02, 2011, at 12:52 PM, ilocke94 wrote:

    Congratulations, Alex. You're one of the few writers I've seen with the cojones to participate in a discussion of what he has written.

    That said, your article reflects an incredible ignorance of US money history in both theory and practice.

    When the 12 private Federal Reserve banks began issuing their notes in 1914, they promised to pay dollars as defined by the Gold Standard Act of 1900. That act defined the US dollar as follows:

    "That the dollar consisting of 25 8/10 grains of gold nine-tenths fine...shall be the standard unit of value and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard, and it shall be the duty of the Secretary of the Treasury to maintain such parity."

    Note that there is no mention of a "price of gold". If you have a standard unit of value, the "price" is everything you can buy in the marketplace using that unit, which of course varies from moment to moment and place to place. The idea of "adjusting for inflation" thus becomes meaningless. By definition, there is no inflation so long as the standard money unit is circulating freely--i.e., serving as an integral part of the currency.

    When government declared that Federal Reserve notes were legal tender in 1934, we got our first fiat currency since the "greenback" (legal tender Govt. IOU) was issued to help fund the Civil War. During that War, gold coins ceased to circulate and the prices of all commodities practically tripled in terms of greenbacks. But the gold content of the dollar was not reduced, and when gold payments were resumed after a seventeen year suspension, prices fell sharply and then gradually returned to slightly below their pre-war levels.

    The gold content of the US dollar, as defined in 1900, has been reduced three times by government fiat. It is presently about 51% lighter. But nowhere in the statutes or in communications with Treasury have I been able to confirm that the gold dollar is no longer our standard unit of value, or that it has been replaced by a Federal Reserve Note bearing the number "one." (If you or anyone else can cite a reliable source that shows I have overlooked some statute or other form of government edict and am therefore mistaken, I'll be eternally grateful.) Ron Paul certainly didn't get an answer when he recently asked The Bernank for a definition of the dollar!

    IMHO, you seem to have bought into the Keynesian mass delusion that central banks create money rather than credit (IOUs for the standard unit money). Keynes saw that selling this delusion was the key to his program of big government deficits funded by unlimited expansion of central bank credit. Thus did he achieve his intent of "revolutionizing" economics.

    So, Alex, you may have the situation exactly backwards, that is: Federal Reserve credit is in a bubble; gold is not.

    But the Fed has the power at any time to radically contract its credit, causing all nominal (fiat currency) prices to crash, as Volcker demonstrated in the early 1980s. In that event, gold may temporarily lose some of its relative purchasing power in a traditional market overstocking, overshoot. Is that what you're counting on for vindication, Alex?

  • Report this Comment On May 02, 2011, at 12:55 PM, kevin311 wrote:

    I've never understood the argument for gold. If the world comes to an amazing financial downfall due to loss in value for paper money, your gold still isn't valuable. The only thing valuable at that point is guns. You can stockpile all the gold you want, but at that point, it just takes one bullet for the gold to belong to someone else.

  • Report this Comment On May 02, 2011, at 1:06 PM, bzhayes wrote:

    On April 30, 2011, at 10:56 AM, caltex1nomad wrote:

    "If the world economy collapses there won't be anything to buy with your physical Gold and Silver and if you are holding GLD or SLV good luck cashing in. I've got Guns,Bullets,Fishing Poles, Vegetable Seeds and Fresh Water."

    Well put Caltex! I often wonder if these people predicting the sky falling realize the actual implications of there predictions. If you really believe the the world economy is going to blow up you should be acquiring 40 acres and enough bullets to defend it.

  • Report this Comment On May 02, 2011, at 1:20 PM, kevin311 wrote:

    Whoops, I only read a few responses...looks like Caltex beat me to it :-)

  • Report this Comment On May 02, 2011, at 4:30 PM, rhutmacher wrote:

    Gold has no "real" value, it is not an especially useful metal such as steel and copper. The only value it has is the value that we place on it because it is a limited resource. If the majority of investors think it is worth $2000 an ounce then it is worth $2000 an ounce. Likewise if investors value it at $200 an ounce, then it is worth $200 an ounce. Only invest in gold if you feel that others will find it more valuable in the future. And in the case of an economic collapse or hyperinflation, I think kevin311 hit the nail on the head.

  • Report this Comment On May 02, 2011, at 5:29 PM, bobr2d2 wrote:

    Selling gold bullion? "90% of spot!" Bah. What kind of lousy investment is gold? I don't think gold is gonna go much higher either. I don't have a lot, so, maybe I'm getting the special shaft. I just inquired on how much I'd get for a 50g Credit Suisse bar, which is 99.99% pure. "90% of spot," was the reply. If it was a stock, it's like paying 11% to the broker for the sale end.

  • Report this Comment On May 02, 2011, at 5:50 PM, TMFAleph1 wrote:

    <<I just inquired on how much I'd get for a 50g Credit Suisse bar, which is 99.99% pure. "90% of spot," was the reply. If it was a stock, it's like paying 11% to the broker for the sale end.>>

    That puts the transaction costs associated with the SPDR Gold Shares in perspective!

    Alex Dumortier

  • Report this Comment On May 03, 2011, at 1:47 PM, eliscoming wrote:

    Just like those models that predicted that housing prices would never tank if unemployment did not tank first, those looking at history to model the future withou a reasonable perspective are going to lose.

    I agree in general that equities are better than gold, but still believe that gold should be considered for every portfolio.

    Basically, gold is a constrained resource. In the past, miners were able to find gold whenever the demand was high. Now, the low-lying fruit (or gold) has been mined and getting it out of the ground is much more expensive. Add in demand from India and China at the consumer level, plus the government demand as China and other governments hedge currency risk, I think it will be a long time before this bubble bursts.

    Comparing our current situation to the models of the past 190 years makes no sense when we are looking at a commodity that is becoming increasingly scarce and increasingly in demand. It is like comparing the price of gas today to the price of gas during the time of Mad Max at the Thunder Dome.

  • Report this Comment On May 05, 2011, at 12:18 PM, BluegrassInNYC wrote:

    I talked everyone in my family into buying gold back in 2003 when the price was around $360. It had already had a fairly good price run at that point, and every one of their financial advisers told my siblings that they were crazy to buy gold - they should buy stocks, 2nd or 3rd houses, ANYTHING but gold. Probably because there wasn't much commission in it. They did, though, and all have since dumped their financial advisers.

    I recommended gold because I was greatly disturbed by the Fed's continuance of the low rates put in place after 9-11, as well as the Bush administration's eagerness to deregulate all areas of finance and allow risk to build throughout the financial system. I had no idea how bad it would get, but the SEC's decision to allow Lehman, Bear, Morgan, Goldman and Merrill to take on 30 to 1 ratios in 2004 was a confirmation, for me, that gold was a good investment.

    Now, it seems like everyone and their brother is touting gold and silver. Some of the few advertisers willing to sponsor right wing radio hosts are the new gold pushers. As the author said, bubbles have a way of lasting beyond any rational expectation, but I had my siblings sell out of gold last month which, at 4x their original investment, they were quite happy to do.

    Good luck to those of you who bought into gold at a high price and are hanging on because you believe what you are told about how President Obama is going to lead our currency to destruction. You're going to get what you deserve - again - because the destruction has already been done.

  • Report this Comment On May 06, 2011, at 12:32 PM, BeSmarter wrote:

    @dag54 wrote:

    <Have you ever been to India? Do you know how much they covet gold? To them, it is far more than a rare metal, it is an indicator of social status, a statement of wealth and success and a guarantor of long-term wealth. >

    Perhaps we should be investing in cows?

  • Report this Comment On May 06, 2011, at 1:32 PM, TMFAleph1 wrote:

    @BeSmarter

    <<Perhaps we should be investing in cows?>>

    Tremendous! Don't forget lotus flowers, sandalwood trees, etc

    Alex Dumortier

  • Report this Comment On May 06, 2011, at 1:52 PM, AK64 wrote:

    I actually find this discussion quite fascinating and the fact that there is such a wide array of views is an encouraging sign that Gold and Silver are nowhere near a top! Sure, there has been some hype in the media recently about rapidly rising gold and especially silver prices, but the reality is that outside of this discussion board, only a very small percentage of investors actually have Gold or Silver in their portfolio let alone own any physical bullion. An even smaller percentage of pension and hedge funds own Silver or Gold in their portfolio (latest stat I read was somewhere in the 0.5% range) so I find it surprising that so many people are talking about a Silver and Gold bubble that is about to burst. The fact is that the vast majority of Americans (including the author of this article as it appears) do not yet fully comprehend or maybe even care what is really happening in the country. We are being crushed by a mountain of debt that is growing by the minute with no end in sight. Most Americans don't understand what that means to our long-term financial well-being and that the only way to finance this massive debt is to continue to print money. The day will come when the vast majority of Americans and fund managers will wake up to the fact that our fiat currency will lose its value even more dramatically than it has already and everyone will scramble to add at least some Gold and Silver to their portfolios. The day will come that our author will realize that there is virtually no limit as to how high Silver and Gold can go when measured in a fiat currency that is collapsing. When that day has come, I will look to liquidate some of my SIlver and Gold holdings.

    Even if you do agree with the author you have to consider that he might be wrong. The signs that he is wrong are all around us. Whatever you do, diversify your investments in a way that you will not be crushed by a collapsing fiat currency. Strong international companies with solid dividends are an excellent hedging strategy against a declining dollar.

    As most of you are aware, Gold and especially Silver have had a healthy pull-back since this article was written. I see this as good buying opportunity for those investors who have not had any exposure to Gold and Silver. It's not too late to start a position here and maybe add a little if the prices drop a little further but I will be shocked if Silver and Gold prices are not significantly higher by the end of 2012 because we will not have done a single thing to reduce our enormous debt.

    Best of luck to everyone.

  • Report this Comment On May 06, 2011, at 4:06 PM, TerpFan90 wrote:

    The fundamental problem I have with gold is that it only has "value" because people think it has "value". It doesn't pay interest or dividends, and you can't rent it out to someone for a prophet. It doesn't have much industrial use. Basically it is used for jewelry and that's about it.

    For all practical purposes gold is equivalent to tulip bulbs, rare orchids, or baseball cards-- they only have value because people think or thought they have value.

    So as soon enough people think that it doesn't have as much value as the going price, then people start to sell and the price drops. And as the price drops, more people could head for the exits, and the price drops even faster, and more people sell and the price drops further, and so on, and so on. That sounds like a bubble bursting.

    The other problem I have with the gold bug doomsday argument is as a form of currency. How exactly is that going to work? Are you going to mail or transfer gold bullion to your landlord or mortgage company, take it to the grocery store with you, pay your utility bills with gold dust? Just exactly how is that going to work.

    If you look back in history, our country has been in far worse shape than we are now and we have recovered, and back then there were many doomsdayers too.

    If you have done well in gold-- congratulations! My recommendation would be to take some if not all your profits. Just like the other two bubbles in the past decade of internet stocks and real estate, gold's price is unsustainable. I would recommend you be the first to exit rather than the last.

    In the mean time I will stick with my diversified portfolio of domestic and international stocks, bonds, preferred shares, and real estate, which have served me well through booms and busts.

    In closing, I liked what Warren Buffet said about gold,and I'm paraphrasing when he said that gold is like no other investment where so much money is spent to dig it up just so it can be buried again.

  • Report this Comment On May 06, 2011, at 6:45 PM, dstanley9 wrote:

    Long term investment is simple once one realises that the needs and wants of the entire human race are the same the world over. Vast and increasing numbers of Chinese, Indians, Russians and soon Arabs have cash that they never had before. So ask yourself what people do when they acquire money to spend.

    They spend it on food, housing, a car, and provision for the future/old age. So investing in food, energy (ch/air con/fuel) and gold and you will not go wrong in the long term. The major paper currencies are all suspect and gold is the best way to maintain value. In the east, they trust gold, not bits of paper and the economic balance of power is switching away from the west.

    Gold is not a bubble but is subject to the normal ups and downs as it trends upwards.

  • Report this Comment On May 06, 2011, at 7:42 PM, Sparticus501 wrote:

    Stay out of the pure gold ETFs and pure silver ETFs and instead invest in gold and mineral miners, especially ABX, TGB, and TC. Many mining companies for gold also mine for other percious metals, such a copper, moly, etc. That way if gold tanks, the mine takes a minor hit. ABX just bought up a huge coper mine company. You still have a gold/silver stake, but a slightly more diversified investment.

  • Report this Comment On May 06, 2011, at 7:46 PM, Computergeeksta wrote:

    I hope Gold goes to $2K that way the US gov sells its gold reserves and use the proceeds to pay down its debt before everyone else catches on. Then when it drops back to inflation adjusted level of ~ $500/oz they can buy it back. I mean seriously, if gold goes to $2k investors will start selling the metal and use the cash to pay for goods or services. How does anyone expect to pay for goods or services using gold? May as well go back to using a bartering system.

  • Report this Comment On May 08, 2011, at 11:32 AM, ilocke94 wrote:

    To write about the "price" of gold prior to 1933 is meaningless nonsense. Until 1873 the US dollar was DEFINED as a weight of silver. In 1873 the US dollar was REDEFINED as a weight of gold (Google "crime of '73). At that time the "price of gold became ONE. The gold dollar became the standard unit of account with a value of 1. Get it? It remained that way until 1933 when the Federal Reserve Note was made legal tender--i.e., we got a FIAT CURRENCY. Of course it is now common to speak of all prices in terms of that fiat currency. But we should never lose sight of the underlying reality when we analyze or debate an appropriate fiat currency "price" for gold.

  • Report this Comment On May 08, 2011, at 9:40 PM, Chowboy100 wrote:

    tsteinbach, Alex is correct, I'm an Australial fool and financial adviser in the price v's value Graham Dodd style as the 'fools.'

    As of late 2012 I'm expecting the US recovery to initiate your fed to start hiking interest rates therefore your $US will gain strength against the Aussie $ and others so please don't be ignorant in your comments - thats just how the cycle works!

    Alex you are spot on 100% in the good old addage of Be fearfull when others like the guys with their 'I love gold' boxer shorts on are greedy, and be greedy when others are fearful.

    You guys with your "I love Gold" boxers shorts on will eventually get burnt playing with an already risen tide. remember Grahams comments about finding unloved assets, something of value that is 'unappreciated'.

  • Report this Comment On May 08, 2011, at 9:48 PM, Chowboy100 wrote:

    I Always notice how when a bubble is occuring there is always heated and passionate debate.

    The same happens here in Australia at the moment over whether our residential housing market is over-priced.

    I'm sure you guys who 'love your gold' would do an investigation of Australian property - and steer well clear!

  • Report this Comment On May 10, 2011, at 6:15 AM, whereaminow wrote:

    Rebuttal

    http://caps.fool.com/Blogs/the-inflexibility-of-alex/589676

    In this particular thread for Alex's article, there are some absolutely god-awful comments.

    "Gold only has value because people think it has value."

    Dude, EVERYTHING only has value because people think it has value. All value extends from the human mind. For EVERYTHING.

    "Gold has no use"

    In what context? Because you can't eat it? So what? You can't eat dollars either. Gold has exchange value, same as dollars.

    I'll see how many economic fallacies about gold I can include in my next post just from Alex's fans. But there is a character limit to my blogs.

    David in Qatar

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