The Arrogance of Investing in Gold

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Gold is a hot topic among investors these days. Some are arguing that the gold run is just getting started. Others argue that we are in a gold bubble that is poised to pop. Still others maintain that gold is a store of value -- a way to protect their wealth. I don't agree with any of these arguments, but I will put forth one of my own: Having a strong conviction about future gold prices is arrogant.

What exactly are you analyzing?
However dazzling, gold comes up short when it comes to:

  1. Cash flow analysis (no cash flows).
  2. Any kind of practical fundamental analysis (there are no bottom-up fundamentals).
  3. Any realistic absolute valuation technique.

What we do have is economic data about gold. The data tell us that total 2010 demand for gold amounted to 3,812 tonnes. On the supply side, mines pumped out 2,543 tonnes of gold in 2010. Adding in "recycled" gold (think Aunt Betty trading in her gold trinkets) coming back into circulation, the total supply entering the market last year was about 3,900 tonnes.

Demand of 3,812 tonnes, supply of 3,900 tonnes ... sounds like market equilibrium! Not exactly.

The real numbers
Those supply and demand numbers are annual figures. Unlike most commodities, very little gold is actually consumed each year (a fact that may preclude gold from being called a commodity). In other words, supply is in a sort of perpetual long run while demand, well, isn't.

World total supply of gold is currently about 162,000 tonnes. Mining output adds just 1%-2% to this supply. To put in context how little that is, consider this: If you were to buy all the gold that traded on the London bullion exchange on an average day, you could purchase an entire year's worth of new gold supply in just four days.

Pure industrial demand -- demand for gold that will actually be consumed in some value-creating activity -- accounts for just one-quarter of 1% of supply. That's essentially a rounding error, and it means three things: (1) gold can't be analyzed based on demand for it in business operations; (2) demand needs to increase about 1%-2% annually just to maintain gold prices; and, most importantly, (3) gold prices change based on investor sentiment, not the underlying industrial value of gold. This last point is key. If you are going to have an opinion on gold, you had better know who owns and trades it.

Where did all the gold go?
If there are 162,000 tonnes of gold out there, and just 420 tonnes or so are consumed each year, the obvious question is, "Who owns all that gold?" Let's divide the owners into three groups.

  1. Central banks. Central banks collectively hold about 30,000 tonnes of gold, accounting for 18% of supply. There seems to be a misconception that central banks have been aggressively acquiring more gold -- in fact, their sales and purchases just about broke even last year.
  2. Exchange-traded funds. Gold ETFs own surprisingly little actual gold. The largest, SPDR Gold Trust (NYSE: GLD  ) , holds only 1,213 tonnes, or just 0.7% of supply. Other ETFs, such as the iShares Gold Trust (NYSE: IAU  ) , own even less.
  3. Everybody else. After subtracting gold held by central banks and ETFs, we still have 80%, or about 130,000 tonnes, left to account for. The two remaining groups are institutional investors and retail investors. It's next to impossible to determine the split between these two, but it seems safe to say that a ton (pun somewhat intended) of gold is held by retail investors. This scares me, and it should scare you.

What's so scary?
All investors can be victims of their emotions, but none suffer worse than the average retail investor. Fund flow data from mutual funds show that investors routinely buy high and sell low, riding alternatively waves of emotion-driven greed and fear at precisely the wrong times.

Why does this make gold scary? Benjamin Graham, Warren Buffett's mentor, said that the market is a voting machine in the short term, but a weighing machine in the long term. What he means is that, in the short term, stock prices are influenced by emotions and popularity, but in the long term, the market will price stocks based on their fundamental value. Well, what happens when the asset not only has no fundamental value, but is primarily owned by the most emotional of investors?

Fear -- of inflation, depreciating currency, political unrest, economic stagnation, or recession -- is a primary driver of retail-level investment in gold. Combine that with the notoriously emotional, fear-and-greed-driven investments these investors make, and one thing is clear: If you are going to reach a conclusion about gold, that conclusion had better be based, at least in part, on your perception of the general investing community's perception of fear-inspiring macroeconomic variables. And if you think you have an edge at reading fuzzy macroeconomic data over millions of worldwide investors, you are undeniably arrogant.

Good luck with that.

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  • Report this Comment On July 25, 2011, at 2:02 PM, kulkarniravi wrote:

    Good analysis, though the post ignores one long term factor. The US dollar may not retain its value for much longer. In the coming decade it is likely to fall precipitously thus increasing the relative value of gold. Correct me if I am wrong.

  • Report this Comment On July 25, 2011, at 2:22 PM, name7865 wrote:

    Gold isn't a commodity or a stock. Gold is a form of money. The 3 things the article says are true of gold are also true of dollar bills. For dollar bills, there is no:

    1. Cash flow analysis (no cash flows).

    2. Any kind of practical fundamental analysis (there are no bottom-up fundamentals).

    3. Any realistic absolute valuation technique.

    OK so what's the difference between dollar bills and gold? The quantity, the supply, of dollar bills is decided by a bunch of politicians (or bureaucrats appointed by politicians). The quantity of gold is what it is: it's outside the control of any politicians.

    Which of the 2 kinds of money do you trust more?

  • Report this Comment On July 25, 2011, at 2:27 PM, ikkyu2 wrote:

    "Fear -- of inflation, depreciating currency, political unrest, economic stagnation, or recession -- is a primary driver of retail-level investment in gold. Combine that with the notoriously emotional, fear-and-greed-driven investments these investors make, and one thing is clear: If you are going to reach a conclusion about gold, that conclusion had better be based, at least in part, on your perception of the general investing community's perception of fear-inspiring macroeconomic variables. "

    Another conclusion to be made from the above would be: No one ever went broke betting on the power of fear and greed to motivate human behavior.

    Is that arrogant, or just realistic?

  • Report this Comment On July 25, 2011, at 2:28 PM, AgAuMoney wrote:

    This analysis would be greatly improved by looking at gold flows by country. Minimal would be net flow, better would be production plus in/out if available.

  • Report this Comment On July 25, 2011, at 2:35 PM, vincecate wrote:

    Investing in gold is really betting against paper money. Paper money always fails eventually. Usual indicator is when government debt is over 80% of GNP and deficit is over 40% of government spending. The US dollar is positioned to fail. The Fed has to keep printing money at this point or the government won't have money to spend. It would be arrogant to think that the dollar is better than all the other paper money that failed when government spending was half from newly printed money.

  • Report this Comment On July 25, 2011, at 3:13 PM, timnich0 wrote:

    As long as the US government runs this high a deficit, and prints money as fast as it is currently doing the value of the dollar will fall against the value of gold. Conservative investors around the world will shift their investments away from US denominated stocks and a portion of this shift will continue to be allocated for gold. More and more short term traders will also take advantage of this trend. I have made more on gold this year than any other investment.

  • Report this Comment On July 25, 2011, at 4:54 PM, davaidesign wrote:

    To add to that, what about growth in terms of # of people having the ability to buy gold? Whether it's access to physical gold, online brokerage accounts (read: Internet access and online banking), etc etc?

  • Report this Comment On July 25, 2011, at 5:34 PM, dmawhinney wrote:

    Great article. Finally putting the lie to gold as an investment. (Using it as a hedge which is what most of you are implying is another story.) As the man said, it isn't used up in manufacturing, it doesn't pay a dividend and in fact it costs money to store, if you own gold outright which is the only way. (Otherwise you're owning a business that sells or produces gold which isn't owning gold.)

    So it's basically just pretty to look at. You can't take it to Wal-Mart or the supermarket or McDonalds to buy stuff. If the dollar's value gets cut in half it has to be relative to other currencies and you might as well own them - but that's hedging again.

    Give me a good well run business that makes stuff that people have to have regardless of the (international) value of the dollar and I'll beat your pants off over the long term all day long. check out the price of a hamburger, or a box of cereal 10 years ago.

    The only way you make money owning gold is if some idiot wants to pay more for it than you did. Otherwise no one ever wants your gold.

  • Report this Comment On July 25, 2011, at 5:37 PM, xetn wrote:

    Why the deviation between gold and fiat. If it was just speculation on the value of the USD, then you might have a point, But the fact is that most, if not all, fiat currencies have been declining against gold.

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

    and here is a chart produced by the Fed on cpi. If you scroll down, you will find a yearly list from 1800. Notice the jump since 1913 (the year the Fed was created):

    http://www.minneapolisfed.org/community_education/teacher/ca...

  • Report this Comment On July 25, 2011, at 6:24 PM, rfaramir wrote:

    dmawhinney:

    "If the dollar's value gets cut in half it has to be relative to other currencies and you might as well own them"

    No it doesn't *have* to be relative to other currencies. All currencies today are fiat currencies, unbacked by anything tangible. They are falling together into the abyss of worthlessness. It does you no good at all to own them instead of the dollar.

    If, by a sudden, draconian, political act, the dollar got cut in half instantly, then yes, it *would* have been better to own some other currency. But if they do that, they'll do it in secret, so you and I won't be able to duck it. Besides, other countries would quickly follow suit. Change "in half" into "by 3% or so" and it is happening each year already.

  • Report this Comment On July 25, 2011, at 7:16 PM, ETFsRule wrote:

    "Any realistic absolute valuation technique. "

    Not true - Paul Van Eeden has already solved this problem, by comparing "the value of all mined gold" (the amount of mined gold times the price of gold), to the global money supply.

    By using this method you can calculate the exact, theoretically correct price of gold.

  • Report this Comment On July 25, 2011, at 9:24 PM, stan8331 wrote:

    If the world is in as dire of shape as some folks believe, we'd all be better off buying bunkers, weaponry and dried food rations. Throwing gold bars at an attacking horde isn't likely to be an effective defense strategy.

  • Report this Comment On July 25, 2011, at 10:56 PM, vriguy wrote:

    most of the gold in the world is not held by investors, whether retail or institutional, nor by ETFs or central banks. Gold jewelry, worn and owned by people all over the globe, is the biggest in proportion.

  • Report this Comment On July 26, 2011, at 9:24 AM, Bonsaiscrooge wrote:

    ...or in other words: gold has a price but no value. Hence, it represents the ultimate greater-fool principle.

  • Report this Comment On July 26, 2011, at 10:12 AM, financeguy85 wrote:

    Well said Bonsaiscrooge, and thank you Alex for this article. Gold is a complete sham. There is no reason to believe gold prices will go up (or down for that matter) because there is no data to analyze. An investor who buys gold is simply doing so because the price has gone up and they think it will go up more. A better example of the greater fool theory I have never seen.

  • Report this Comment On July 26, 2011, at 10:37 AM, pscholte wrote:

    Any comments about investors going into gold as an alternative currency or because they don't trust today's unbacked currencies are ultimately irrelevant UNLESS: (1) you actually have gold in your possession and can use it; (2) and or you plan to shave off portions of your gold bars or use gold coins as currency; (3) and/or you can find merchants who will take it in payment; (4) and/or you have a protection scheme that will ensure the gold in your pocket will remain in your possession (think under conditions that will institute the use of gold as currency people aren't going to try to relieve you of your gold?) until you get to the store. If you invest in gold because you project it is going up in value and you can make a "paper profit," fine; if you plan to use it as an alternate currency, dream on.

  • Report this Comment On July 26, 2011, at 10:46 AM, yzfinance wrote:

    By definition, if you're admitting the fact that gold is a type of "money" (not getting into the argument of what constitutes money here), then it is no better than a fiat currency, except that the supply is limited by what's available on Earth. It would be the real life equivalent of BitCoins.

    I'm not an economist, but from my simple comprehension, if all fiat currencies decrease in value versus gold, then it simply means that there is an imbalance and the supply/amount of fiat currencies increases faster than the amount of gold. So what? You're now just treating gold as a store of value that can hedge against the devaluation of your own currency. Okay, what's next? You still need to live, buy food, go to work, etc. Can you pay for your expenses directly with gold? Unlikely, you would still have to convert into, let's say, USD. True, you may now be able to convert your 1oz of gold into 30% more USD than last year, but guess what, your cost of living has also increased by similarly the same amount. Yes, you've hedged against inflation... and so in a way did companies that produce something, because you now have to pay 30% more for your goods. Their profits would be 30% higher, in that devalued currency.

    My whole point is that yes, holding gold might be (_might_ be) safer than holding your own fiat currency, but in no way is it better than investing in a company that doesn't go bankrupt. Gold is not and never will be an investment, and constitutes in my view the alternative to buying canned food, except takes less space to store (but really? If I'm starving, canned food is worth a lot, and you'll never be able to eat gold).

  • Report this Comment On July 26, 2011, at 10:51 AM, wasmick wrote:

    Gold is not an investment; it's a store of value commodity whose value fluctuates and generally becomes increasing valuable during economic uncertainty.

  • Report this Comment On July 26, 2011, at 10:57 AM, wasmick wrote:

    Insert standard additional pointless comment about how gold is smart and currency (Fiat! Fiat! Fiat!) is stupid here.

  • Report this Comment On July 26, 2011, at 11:24 AM, Sparticus501 wrote:

    Investing in mining stocks, particularly companies that mine gold and other minerals, is a good alternative to just investing in gold. Many gold miners also mine copper, moly and other minerals that protect you from a possible gold downturn. ABX and TGB are both good companies to invest in a gold and other minerals play.

  • Report this Comment On July 26, 2011, at 1:40 PM, t0bes wrote:

    Great to read all this negativity about gold. It makes me more comfortable continuing to buy PM-related stocks

    I think there's plenty more upside, especially in the miners

  • Report this Comment On July 26, 2011, at 1:47 PM, pscholte wrote:

    I wouldn't call it "negativity"; I would call it "reality." Certainly, it could go up. My point was that many people holding it as an alternative currency are fooling themselves (no pun intended). Mining stocks are a different story.

  • Report this Comment On July 26, 2011, at 6:08 PM, xman11530 wrote:

    <<<The only way you make money owning gold is if some idiot wants to pay more for it than you did. Otherwise no one ever wants your gold. >>>

    Since the vast majority of stocks do not pay a worthwhile dividend, the same is true of most of the market.

  • Report this Comment On July 26, 2011, at 6:12 PM, xman11530 wrote:

    <<<but in no way is it better than investing in a company that doesn't go bankrupt.>>>

    Stocks are no panacea.

    How did the nifty fifty investment work out? Or Nasdaq stocks at the turn of the century?

    Or railroads and canal companies in the 1800's? Or steel companies in the 1900's? etc,etc,etc..

  • Report this Comment On July 26, 2011, at 6:18 PM, xman11530 wrote:

    <<<Can you pay for your expenses directly with gold? >>>

    Interesting point.

    In good times, no, but you can convert to paper currency at will.

    In bad times however, merchants will not accept paper money and nobody will give up their hard currency unless for essentials like food,fuel and clothing. See US Confederacy, Post WW1 and WW2 Eastern Europe, Zimbabwe and Germany during Cuban missile crisis as a few of many examples...

    Bottom line: When you really need gold/silver, you had better already have some. When you need it, it is too late to try and acquire.

  • Report this Comment On July 26, 2011, at 7:44 PM, extremist wrote:

    Looks like a classic case of pot.kettle.black... and I'd bet there's no gold in the pot.

  • Report this Comment On July 26, 2011, at 7:50 PM, tonydamato wrote:

    To the those of you who claim to have made so much money on gold. You don't make anything until you sell it. When you sell collectibles tax is due regardless of the time owned. Millions of people made thousands of dollars on real estate and found out how fleeting those unrealized profits can be. It wasn't that far from huge profits to underwater. One of my major concerns with gold is what happens to profits if the government decides to confiscate it for $50 an ounce?

  • Report this Comment On July 26, 2011, at 9:16 PM, ouchtouch wrote:

    Weird to read an article about gold value with no analysis of real interest rates, which are the single real driver of gold prices for about 500 years. The Fed has decided to keep real interest rates for the dollar low or negative for the indefinite future. That is why gold will continue to rise versus the dollar. If you believe that Paul Volcker will take over the Fed and allow real interest rates to rise to normal/market levels, bet against gold. Of course, market level interest rates would make the debt unpayable, so that may not work. Ooops.

  • Report this Comment On July 26, 2011, at 9:24 PM, xman11530 wrote:

    Tony- <<<collectibles tax>>>

    Why do you think the government imposes a higher tax rate for gold/silver?

    Because the government has a vested interest in a weaker currency. Decay in the value of government bills, notes and obligations (like SS) is essential for Keynesian economics. However, the government does not want citizens to realize the presence of currency decay or be protected from inflation.

    Once the US went off the gold standard the US$ (and every fiat currency exchangeable for US$) always loses value. Precious metals are the simplest way for small investors to protect from that risk. This is not good for a Keynesian economy that needs to wipe out 'rentiers'.

    Hence the higher tax rates when in reality precious metals gains should not be taxed at all as they are merely due to government mismanagement.

  • Report this Comment On July 26, 2011, at 9:30 PM, xman11530 wrote:

    <<<market level interest rates would make the debt unpayable>>>

    I disagree. As long as government debt is denominated in US$, the debts are completely 'payable'. The FED can wave a magic wand and monetize the outstanding debt i.e. print more US$. Who has been buying much US debt lately? Check out the Fed's balance sheet for the answer...

    The problem is that the US$ will be utterly destroyed in value. Granny will get her SS check, it just won't be able to buy a cup of coffee.

    Hence the need to own precious metals.

  • Report this Comment On July 26, 2011, at 9:41 PM, wasmick wrote:

    "Great to read all this negativity about gold. It makes me more comfortable continuing to buy PM-related stocks"

    When you're investing with the majority, it's a bit silly to act as though you're some sort of contrarian.

    I've had a PM allocation for as long as I've been investing but I'm reluctant to increase my allocation when my shoe shine guy tells me how he's been buying gold.

  • Report this Comment On July 26, 2011, at 9:44 PM, xman11530 wrote:

    Tony- <<<huge profits to underwater>>>

    I got long gold/silver/palladium/platinum in 2000, because after LTCM and the Nasdaq bubble I recognized that Greenspan was a buffoon at best and quite dangerous. I have added to my positions almost every year since. I sleep very soundly.

    If my profits (which by now are quite substantial and unleveraged) turn to losses, it means that the government has sorted out the debt problem. Not the present posturing bs, but the long term structural deficit that nobody has a clue to solving.

    US$ holders are betting that politicians and the FED are intelligent, wise and honest.

    By going long gold/silver/palladium/platinum, I took the other side of the bet.

    Frankly, I hope that I lose because it means my kids will have a solid chance to live decent, productive lives in the US. (Not holding my breath however.)

  • Report this Comment On July 26, 2011, at 9:49 PM, xman11530 wrote:

    <<<investing with the majority>>>

    Not even close..I work with fairly sophisticated colleagues who thought I was crazy buying pm's ten years ago..They still think I am crazy, but at least nod and smile now. However, only a very few have ever asked how to buy physical gold, or which etf I prefer..

    I suspect less than 10% of serious investors own any PM's despite the 10 year bull market. Compare that to the Nasdaq or real estate bubbles.

  • Report this Comment On July 26, 2011, at 11:31 PM, mpower1969 wrote:

    Idiotic analysis.

    Every argument against gold here is equally true of CASH... except the $USD has been around for a mere 240 years, while gold has been both a hard asset and money for 5000 years.

    If gold is a lousy investment, why is the smart money pouring into gold now? If gold is a lousy investment, why is it hoarded by ALL central banks? If gold is a lousy nvestment, why has it outperformed EVERYTHING since 2007?

    the author's analysis here is so backwards, and so poorly framed, it's difficult to repeat without laughing out loud.

    cash flow? fundamentals? valuation? real wages have been stagnant since 1982, savings accts. now yield less than 1% and real inflation is over 5% and climbing... and this guy is whining about lack of cashflow & fundamentals? What planet are you on, Mr. Pape?

    Please name one single fiat currency that has survived even three centuries...

    While you're scouring Wiki for an answer, you might want to also check gold's track record as a store of value over the past 5000 years.

    You can apologize for this pathetic article when you're done...

  • Report this Comment On July 27, 2011, at 7:52 AM, ChrisHastings131 wrote:

    I love it when people trash Gold and silver.

    It just means that me and the other smart people of the world can continue to accumulate it at lower prices. My guess the author speaks only English and has not traveled much. He is very closed minded and only seems to repeat what that banksters tell him to say. I say this "Gold is nobody’s liability and it can’t be printed".

    Make up your own mind. Trust 5000 years of history or Clinton/Bush/Obama and the banksters that are the puppet masters

    Check this video out for a real lesson in money.

    Video: ‘Gold – Independent Money’

    Asian indices were higher except for stocks in India which fell after the surprise 50 basis point interest rate rise – a sign of risk markets sensitivity to rising interest rates.

    European indices are mostly lower and the FTSE is 0.1% lower after UK GDP data showed the UK may be entering a recession. UK GDP rose just 0.2 percent in the second quarter, slowing from the first quarter’s feeble 0.5 percent growth despite historically low interest rates at 0.5%.

    Calls for a return to some form of gold standard become louder by the day.

    Once the preserve of fringe libertarians and hard money advocates, there are an increasing number of more “respectable voices” calling for a debate on the merits of sound money in order to protect taxpayers and economies from the vagaries of fiat currencies and the modern money printing and digital creation experiment.

    In recent months, joining Ron Paul, the presidential candidate, have been the President of the World Bank, Robert Zoellick, the ‘Father of the Euro’, Professor Robert Mundell and publishing magnate Steve Forbes.

    World Bank chief Robert Zoellick said it was time to "consider employing gold as an international reference point."

    “Gold is nobody’s liability and it can’t be printed,” Mundell told Bloomberg. “So it has a strength and confidence that people trust.”

    Mundell has suggested that an improved global monetary system could be achieved by tying together the US dollar, euro and gold ( see article by Judy Shelton in Commentary section).

    The Swiss parliament is soon to hold hearings on a parallel Swiss "gold franc".

    Utah has already passed a state law that recognizes gold and silver coins as legal tender in Utah. A dozen other states are considering similar laws.

    As the world monetary system and the twin pillars upon which it rests, the dollar and euro, risk unraveling, gold’s time tested attributes as a foundation of stability is being increasingly accepted.

    Contributing editor to Money Week, Dominic Frisby, (who we had the pleasure of meeting with last week) has just released an excellent video - ‘Gold: Independent Money’.

    A picture paints a thousand words and a video hundreds of thousands of words and this is a very informative video about our modern monetary system, fiat currencies and gold.

    It shows how fiat money has led to wars, massive debt, social inequality, economic bubbles, rampant consumerism, and environmental destruction. It shows that a return to a gold standard would help ameliorate today’s monetary, financial and economic ills.

    “A gold standard will not cure every social ill in the world, nor will it stop all senseless wars. Nothing will.

    However, by now it should be clear to everyone that the current fiat system is good only for bankers, brokers, politicians, war mongers, and the already wealthy. Everyone else loses as inflation eventually eats away at what's left of the rapidly shrinking 'middle class'.

    All fiat currencies including the US dollar are doomed. The only debate is the path it takes to get there.”

    ‘Gold: Independent Money’ can be seen here

    http://youtu.be/RvL_Dm2d99A

  • Report this Comment On July 27, 2011, at 8:19 AM, ZoomZoom3 wrote:

    I have made $17,000 within the last year in my gold investment and am down (not lost until sold) $1500 in my FOOL recommended Akamia (AKAM) investment.

  • Report this Comment On July 27, 2011, at 9:04 AM, ChrisHastings131 wrote:

    The "experts" just can't give up on the fiat money.

    Even after the long term charts are shown to them. Take the red pill amigos. Don't fall for the left right false paradgem Bush/Clinton/Obama same old tired New World Order puppets for the banksters.

    They want destroy the middle class and Wall street owns them. I believe in gold and silver in my hands.

    They offer the only protection from the endless wars and bankster/wall street crooks.

    Gold speaks to you, listen.

    ++++Comex Gold Firmer, Sets Another New Record High Overnight

  • Report this Comment On July 27, 2011, at 11:53 AM, WolfSheppard wrote:

    LOL, gotta love the comments about gold being the 'greater fools' bet... Hmmm, so what are those US dollars you are holding? They are 'as good as gold' are they? Printed out of thin air, vs, mined out of the ground, annually increasing a max of 1 or 2% a year?

    The supply/demand argument was highly flawed. Notice all the gold that had to be recycled? What happens to the price of gold when people stop recycling (i.e. all the weak hands have had the gold shook from them) their gold at current prices?

  • Report this Comment On July 27, 2011, at 5:35 PM, XMFSinchiruna wrote:

    I have just bookmarked this link within a browser folder I have named "Open at $2,000 Gold". If $2,000 gold never happens, well then I will be the first to step up and call myself an arrogant fool who thought he could forecast the unforecastable. But if/when we reach $2,000 gold, then the perceived arrogance of my forecasting must be forgiven ... because it was right and helped hordes of people to protect and grow their capital in the midst of historic challenges.

    If it is arrogant to forecast the direction of forward gold prices, then by extension it must be equally arrogant to engage in any sort of commodity investment whatsoever. I wonder whether the author has ever owned an energy stock selected in part because of bullish expectations for forward energy prices. Likewise, any investor engaging in a currency trade of any kind would have to be deemed arrogant by extension of that logic, since forecasting future pricing of currencies is 100% identical to doing the same for gold. I can accept "speculative" as a qualifier, especially since all investments carry a degree of speculation, but not "arrogant".

    My readers are up huge with multi-bagger gains on countless stock picks over the past several years: Silver Wheaton at $2.51. Great Panther Silver at $0.80. Endeavour Silver at $3.30. Copper Fox Metals at $0.80. The list goes on. I would not have been able to make any of those successful calls without an underlying bullish long-term outlook for gold and silvder prices that you deem so arrogant.

    Why is successful investing lauded when it derives from a terrific stock like Apple, but derided as arrogant when it derives from miners of gold and silver (the outlook for which is tied to forecasted metal prices)?

    Why do the same sorts of folks who deify Buffett for his axiom about being greedy when others are fearful seem to find it so easy to villify gold investors for acting in accordance with their macroeconomic concerns.

    Your careless generalization of gold investors as "notoriously emotional, feer-and-greed-driven" is itself an exercise in arrogance. And your reference to "the general investing community's perception of fear-inspiring macroeconomic variables" reveals how poorly you understand the market for gold. The general investing community, despite your assumptions to the contrary, is not invested in gold. U.S. consumer demand for gold (jewelry plus investment demand) fell by 3% in the TTM to March 2011. As Eric Sprott -- who, in contrast, does understand the gold market -- states: "the truth about gold is that most people don't own any ... yet."

    http://www.sprott.com/Docs/MarketsataGlance/2011/02%20_11_De...

    Only about $250B in new gold investment has been added worldwide since 2000, while $98 Trillion in new capital entered financial markets over the period. While U.S. mutual funds have seen $2.5 Trillion in inflows since 2000, precious metal equity funds have seen only $12 Billion cone in. Those who base their analysis of gold on the commercials on TV or the buzz at CAPS inevitably walk away with the false conclusion that they are now in the minority position in their adamant avoidance of and irrational disdain for gold. When you own gold, and most of the other Fools who remain entirely dismissive of gold begin to seek exposure, only then will consider becoming fearful of retail demand for gold.

    Alex, if you're truly happy that you have avoided exposure to gold throughout the metal's quintupling over the past decade, I think it's great that your investing conscience is so clear. But if you think you'll feel the same way with gold above $2,000 as the global debt/currency crisis reaches into maturity, well I have just one thing to say:

    Good luck with that.

  • Report this Comment On July 27, 2011, at 10:17 PM, MichaelDSimms wrote:

    Who wants to go around paying for items with a pocketful of gold? anyone? ok if currencies get so unstable in which that has taken place then total anarchy has probably taken place. Then I would prefer to own and carry lead. Until it gets closer to that moment I will own stocks that are spread out across the globe in various stable countries. Apple, Google, GE all making more overseas than here in the U.S. Until they make the tax system a little more appealing for the U.S. companies. Then companies will continue to move jobs and manufacturing overseas and the profits will move with them. Gold has had a good run, hopefully for all it ends soon.

  • Report this Comment On July 28, 2011, at 11:50 AM, LoadDrive wrote:

    The Same "Talking-Mouths" were around telling people what a Bad-Idea it was to invest in Gold when I started buying it in the Low $600.00 range. (Note the Price of Gold NOW...wink" ) Sometimes it pays to Go with what you know, And not listen to the So-Called... Experts". Also, with whats going on in our Government at this time with our Debt and the Dollar, I trust my Gold coins a little more then the Green-paper dollar. Good Luck to all!

  • Report this Comment On July 28, 2011, at 12:41 PM, egabriellemoranU wrote:

    A response to two points:

    "The argument being made for gold is equally true of the US dollar": I hold dollars really for 2 reasons.

    1. As a medium of exchange. Gold is not easy to exchange for goods.

    2. As a store of value, mostly while I'm waiting for other investment opportunities. Gold is also a store of value, but much less easy to convert to other assets on the spot.

    I do not hold US dollars as an investment. Unless we go Japan and experience deflation, holding USD is a guaranteed negative return at the rate of inflation. That doesn't sound like an investment to me. So yea, gold might have some things in common with dollars, but that alone doeskin make it an investment.

    "If gold is a lousy investment, why has it outperformed EVERYTHING since 2007?"

    You know what else outperformed everything for several year periods? Enron, Nortel, and Tulip bulbs. Didn't make them good investments. Your time range doesnt account for the future. It doesnt account for the longer past, either. Gold was a terrible investment 1975-99.

    http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

    Love this article, and proud to be the author's mentee!

  • Report this Comment On July 28, 2011, at 6:14 PM, xman11530 wrote:

    Michael- <<<Who wants to go around paying for items with a pocketful of gold? anyone?>>>

    A gold standard would not eliminate credit cards or even paper money. It just means that one US$ would be equivalent (and exchangeable for) to a fixed amount of gold (or silver if US went bi-metallic).

    It means that these idiots in DC would have to have some sort of fiscal discipline.

    It means that when someone works their whole life for a pension or savings account they will not be cheated by a decaying currency.

  • Report this Comment On July 28, 2011, at 10:11 PM, wasmick wrote:

    <<<I work with fairly sophisticated colleagues>>>

    My mistake.

    I was completely unprepared for an anecdote about your fairly sophisticated colleagues who have absolutely no PM allocation. Given that, I could never have foreseen the finger-in-the-air 10% statistic.

    Impossible to argue with logic like that. I surrender.

  • Report this Comment On July 29, 2011, at 6:40 AM, xman11530 wrote:

    wasmick- <<<Given that, I could never have foreseen the finger-in-the-air 10% statistic. >>>

    Before you attack me, do some research. Calculate the US$ value of all the gold, silver, palladium and platinum above ground and add the market cap of the miners.

    Compare that sum to the market caps of the major stock markets. As a check, compare to estimated government debt and money supply.

    I have. The percentages are tiny...a helluva lot less than 10%.

    Sophisticated investors are still debating the merits of gold. At the same time, the sheep don't even realize they are being fleeced..

    In five years, no one will trust the idiots in DC, Brussels and Tokyo to control the world's major currencies and the debate will be over. By the way, the sheep will be pissed.

  • Report this Comment On July 29, 2011, at 6:51 AM, xman11530 wrote:

    Currency crises happen in a hurry. Governments need these crises to happen rapidly so that sovereign debt gets wiped before holders have a chance to prepare and react.

    Other than to key insiders, financial repression is never signaled to the market. (See Mexico, Argentina for recent examples.)

    Weimar went from deflation to inflation to hyperinflation very rapidly.

    Prudent to be prepared.

  • Report this Comment On July 29, 2011, at 8:10 AM, TMFBent wrote:

    A great number of the people vociferously defending gold prices here are going to end up exactly like those that were doing the same during the last big runup.

    I know some of those people. I know some whose life saving were shot because they believed in the scare tactics and arrogance of the crowd that believes a yellow metal is anything more than just another form of fiat currency -- but one with an exchange rate driven by fear and ignorance.

    If you believe in the inflation scare (despite the fact that all the data show the opposite) then what makes better sense is to buy depressed real estate with artificially cheap money. Pay those bankers back with worthless future dollars, and in the mean time, at least you'll have somewhere to bury your gold -- that is, if you're buying the real thing, and not the scraps of paper representing gold that you'll never actually see if things really hit the fan.

  • Report this Comment On July 29, 2011, at 11:48 AM, decbutt wrote:

    Well done Alex Pape. People do not want to listen though. They never do when prices are rising.

    Some of the fruity responses confirm what he says about emotional investors.

    The fact of the matter is that you could write and post the exact same article about gold at a historic low, and it would be EQUALLY true.

    The difference is that you wouldn't then have people insisting that "gold is money" or that "cash fails the same tests."

    Nobody would bother to defend gold, because no one would have "mother's love".

    I just hope that somewhere in people's minds the obvious and central fact:

    [GOLD'S value comes from belief, therefore, when people stop believing it will lose value rapidly]

    actually sticks in their mind so that they don't do a dot com/ property crash maneuver on their portfolio.

  • Report this Comment On July 29, 2011, at 12:18 PM, XMFSinchiruna wrote:

    And along comes TMFBent to combine rank illogic with derogatory cheap-shots. To the attribution of "arrogance" proposed by his colleague, he adds "ignorance" to the mix.

    So loathe is he to accept that he's been dead wrong about gold from the get-go that he is prepared to ascribe a 10-year global secular bull market to the "ignorance" of all in the world who ascribe any value to the world's most time-tested currency. To do so while simultaneously referencing "arrogance" is enough to make a Fool's head spin!

    It seems according to TMFBent, one can't simply have opinions about gold. No, those opinions are "scare tactics" designed to prey on the fear of impressionable minds. How convenient for him that he will never have to debate an idea about gold on the merits, since any idea about gold that is not his, is either predatory or ignorant.

    Those people he knows who held gold through the 1980 peak must have understood very little about the currrency market they participated in. As gradually as Volcker raised interest rates to 20%, investors were given ample warning to lock in gains.

    To call gold a fiat currency ... well that's just beyond ludicrous.

    And yet, even amid that tirade, TMFBent stumbled upon one single truth above: it is indeed reasonable to consider that one may "never actually see" "the scraps of paper representing gold" "if things really hit the fan". Sometimes it's amazing where you can find a nugget of truth.

  • Report this Comment On July 29, 2011, at 12:40 PM, whereaminow wrote:

    TMFSinchiruna,

    I applaud your incredible passion and patience to debunk the non-arguments presented in this article and comment section.

    Throwing around agitprop terms is one method of debate. It is what people do when they cannot grapple with the theory that has put you on the right side of the gold bull market.

    If just one gold bear on Motley Fool could get through an entire article without using the word goldbug, I'd be impressed.

    Still, we find nothing here. There is no comment addressing the Cantillon Effects of money creation, the role of bank note expansion in the creation of the business cycle, how the subjective value of money is influenced by the supply and demand of paper notes, or even any appearant knowledge of how prices are formed in the first place.

    Instead, we are left with argumentation from ridicule (arrogant, ignorant gold bugs), appeals to authority ("sophisticated investors say", "Warren Buffet says") and anecdotes ("I know people who lost money once").

    These aren't serious criticisms of sound money. And I find it difficult to understand why they feel their chirping is going to change anything.

    David in Qatar

  • Report this Comment On July 29, 2011, at 12:43 PM, ByrneShill wrote:

    @TMFSinchiruna: "As gradually as Volcker raised interest rates to 20%, investors were given ample warning to lock in gains."

    Had those investors sold their precious metal, the price would merely have fallen more quickly. It's just a question of who would be left holding the empty bag.

    I think gold bugs need to face the fact that gold has no practical use other than being pretty, The ony way to use it is to exchange it for a useable currency first, and to receive a higher amount of said currency than what you gave for it in the first place, you need to find someone who will expect to receive more in the future than what he's giving you for it. In other word, it's pretty much a greater fool theory. The very moment you'll run out of greater fool, someone will be stuck holding an empty bag.

    If you wanna speculate on something, at least go for platinum. It's 30 times less common than gold, and it's got quite a few industrial uses, making sure it's gonna be needed by someone at some point.

  • Report this Comment On July 29, 2011, at 1:15 PM, whereaminow wrote:

    ByrneShill,

    Let's skip to the good part.

    "If you wanna speculate on something, at least go for platinum. It's 30 times less common than gold"

    Tell me: why isn't platinum typically 30 times more expensive? And i don't mean right now. i mean historically.

    David in Qatar

  • Report this Comment On July 29, 2011, at 1:56 PM, t0bes wrote:

    Some of the anti-gold comments remind me of Consumer Reports reviewing a Jag or a Porsche.... Yes of course the Corolla is more practical, more efficient and much more sensible.. Yes absolutely, but I'll still take the Jag thanks :-)

    I'm sure I'll get comments that the Corolla is a better buy from the financial point of view. But it isn't for everyone is it?

    I've followed many of Sinch's recommendations and done extremely well (thanks Chris!) But of course I wont put all my life savings in them and I'm sure there will come a time when the market reverses.

    I would also add that although Chris's enthusiasm is almost always present in his articles, there's a lot of insight and much less hype than a lot of Fool marketing messages

  • Report this Comment On July 29, 2011, at 2:19 PM, ByrneShill wrote:

    @Dave:

    1-Platinum hasn't historically been an industrial metal. There isn't even reliable historical data about gold/platinum price ratio (that I know of. Please enlighten me, since you seem to know so much...). At some point in history, gold was used as an industrial metal (hint: it was minted so it could be exchanged for services or goods). It isn't anymore.

    2-A substance's rarity isn't the exclusive factor for its price (ever heard the expression "As rare as pope's fece*?" I have. But I've never heard "As expensive as pope's feces*". In any case, I won't pay a dime for any pope fece*). Goldbugs should take another hint here.

    3-Mostly: some people are nut about gold. Especially right now. A few years ago it was real estate. Before that it was tech stocks. Before that it was something else. At some point it was gold again. At some point it'll probably be gold again. The fact remains that unless you find someone who thinks he'll get a higher price in the future than what he's paying for it right now, you can't sell your gold. Your platinum-accumulating neighbour doesn't need someone who believes platinum price will go up tomorrow to sell it today (although it might help). As long as a car company needs it in the catalysers every car it sells requires, he can fetch a price.

    You dividend-stock holding neighbour is in an even better place: even if the stock market is closed until the end of time, he can live off the dividends. On the other, when you'll need the money from you stash of krugerand, you better hope someone with deep pockets will believe in the unending ascendant price of gold.

    Now, if you can time the market better than every other goldbug, more power to you. You'll make a bundle selling at the top. You'll make as much shorting at the top and covering at the low. But it'll still be as close as it gets to a zero-sum game. Maybe even less than 0, considering storing and insurance costs.

    Now, either you live in qatar and should go to bed, or you live in america and should get to work to pay that balooning debt.

    Unless qatar is a tax-free heaven where davids don't need to work cause they're getting paid by the tmf post they make.

    *Profanity filter replacement for you know what.

  • Report this Comment On July 29, 2011, at 2:23 PM, ByrneShill wrote:

    And btw, David, the last part of my first message (the one about platinum) wasn't the good part. It was the "on a side note" part. Unless specified, the good part is usually the first paragraphs of a text.

  • Report this Comment On July 29, 2011, at 4:59 PM, sonofliberty wrote:

    I hope you weren't paid for this non-analysis. So no-one should ever invest in commodoties, because you can't analyses them w stock valuation tools? Idiotic. I'm happy to be called arrogant by someone as ignorant as you. Arrogance is not understanding one of the best investments of the last decade, and probably one of the best investments of the next decade, and trying to talk other people out of investing in it, because your limited mind doesn't understand it.

    How'd your portfolio perform over the last 5 yrs

  • Report this Comment On July 29, 2011, at 7:30 PM, pistolstamen wrote:

    So, you're saying that people who invest in Gold are emotional and stupid.

    who is arrogant?

  • Report this Comment On July 29, 2011, at 8:39 PM, xman11530 wrote:

    <<<A few years ago it was real estate. Before that it was tech stocks. >>>

    While I never owned a tech stock, I am invested in gold precisely because of LTCM and the ensuing tech stock boom. I more than doubled down because of the residential real estate boom.

    Neither of those booms would have occurred without stupid, easy money supplied by the FED.

    Presently, the Equity and Debt markets are like junkies needing a bigger fix to get high. QE3? QE...? More paper money has to be created to keep the buzz going.

    There will be a time to sell PM's, but it is when DC, Brussels and Tokyo regain their sanity and stop trying to ripoff debt holders, savers and pensioners ('rentiers' in Keynesian-speak). I am afraid that is a long way down the road...

  • Report this Comment On July 29, 2011, at 8:56 PM, xman11530 wrote:

    TMFBent- <<<buy depressed real estate with artificially cheap money>>>

    Unless the real estate income covers the note, that is the absolutely worst advice ever. Only suckers look at the monthly payment instead of the principle. Real estate is never truly depressed when rates are being held at artificially low levels. The prices might be lower than a year ago, but they are not truly 'depressed'.

    How do I know? When interest rates rise, the real estate value will fall further in value and the buyer will be locked in at a higher than market price.

    Think real estate in LV or Miami is cheap now? Throw a 12% 30 year rate into the mix and look for a bid. By the way, that was my rate in 1988 when I bought my first house.

    Low interest periods are when suckers buy. (Maybe you are a sucker, I don't know.)

    The best time to buy real estate is when rates are screaming and sellers truly cannot find a bid...Then, you own at distressed prices. Moving forward, you can either refinance at lower rates as they fall (saving interest expense) or sell to suckers who only look at the monthly payment.

  • Report this Comment On July 29, 2011, at 9:01 PM, xman11530 wrote:

    byrneshill <<<popefeces>>>

    Ok, I agree that rarity doesn't necessarily equate to value.

    How about something that can be produced at no cost, is incredibly plentiful and is controlled by maniacs who have have a vested interest in seeing its value decay?

    Would that something be more or less valuable than popefeces?

  • Report this Comment On July 29, 2011, at 9:23 PM, 1LAORAVEN wrote:

    40 yrs ago I bought roughly 3 troy lbs of gold, mostly in art form, and mostly 18 and 24kt. I paid US$36 per troy oz. I sold some in the early '80's when gold was headed to US$800 the first time. The rest has resided in a safe deposit box most of that time. Today I can sell that same gold for $1600 (give or take the current price and commissions). Have I made money? Subtract the cost of the safe deposit boxes and other costs related to holding the gold and YES Today I would make money relative to any of the fiat currencies. I can pay debts, take a long trip or do whatever I want with the money I exchange the gold for; I have more than enough gold to live well.

    So when the author talks about whether you are taking the long term view, or short term, with gold it's the long term and be glad you have lbs and not oz. of it.

  • Report this Comment On July 29, 2011, at 10:09 PM, plowhandle wrote:

    Fools , I have nothing to add to the interesting debate regarding the merits of investing in gold, but I am very confused about a topic related to gold. Please help me understand.

    If the world has a total supply of about 162,000 tonnes of gold that is currently worth 1500$/ounce, that is about 8 trillion $worth. Those of you that advocate a return to the gold standard please explain to me how that would work with only 8 triilion $ of gold to work with?

    Isn't a banking system pegged to gold (or diamonds for that matter) ripe for "bank runs" during any panic? Wouldn't there be money supply problems?

    Without DeBeers propping up the price of diamonds, they would bring a few dollars a lb to be used in industrial applications. Without the history of gold, would gold be worth much now that the gold-standard is history.

    Comments appreciated, name-calling tolerated.

  • Report this Comment On July 29, 2011, at 11:19 PM, xman11530 wrote:

    <<<Those of you that advocate a return to the gold standard please explain to me how that would work with only 8 triilion $ of gold to work with? >>>>

    That is the entire point. Money is a unit of measure and should be relatively fixed in value. Bureaucrats should not be able to rint a few trillion on a whim.

    Everytime you go to the gas station, you do not negotiate the volume contained in one gallon. Neither do you negotiate what 1 lb of sugar weighs. Measurements in transactions are pretty well defined, EXCEPT for the value of the currency. This causes confusion for long term transactions.

    If you are interested in the topic, read A History of Interest Rates by Homer. You will see that through history, interest rates fluctuated very little until the gold standard was abolished.

    Why? because when a banker loaned 5 oz of gold out he knew that he would receive 5oz + 5% interest in return.

    It is only the advent of fiat currency that has caused rates to go from 20% to 0% in less than 30 years. Pretty much unprecedented.

  • Report this Comment On July 30, 2011, at 12:05 PM, XMFCinco wrote:

    Nice commentary Alex! After reading all the comments, I still agree with you on this one.

  • Report this Comment On July 30, 2011, at 4:29 PM, larrup wrote:

    Gold is a measure of value that can't be counterfieted like our government is currently doing. I.E. printing dollars like crazy, that are not backed up by anything other than the good faith and credit of the US government which if you haven't looked lately is under review. Most wall street types dislike gold because it points out to people how little your dollars from a decade ago are worth now. The stock market produced little in the way of gains after the techbubble burst till about ten years went by.

    An investment in gold has outperformed the market over the last year. when happy times return gold will decrease in value and I will sell then.

  • Report this Comment On July 30, 2011, at 7:55 PM, esotericevets wrote:

    We are immersed in value paradigms that shape shift into bubbles. An individual can find his house, computer, spouse, family, country, and god to be against him in short order. Scrooge McDuck probably derived a little too much satisfaction from his gold, but to be able to have a satisfying relationship with metals is as valid as enjoying an Ipad or a Mcmansion. There is no telling what price gold will be in the future but if you have the soul of a miner , you just might get some pleasure out of following the progress of mines that you own, and if the world insists on its wasteful ways, odds are your metal portfolio will outperform other assets. One can personally be a miner of sorts on a budget by treasure hunting, cave digging, panning and rock collecting. In the process, you might just develop the skills and contacts to assist you in assessing the world on an elemental level. Any head butting argument between opposing camps reminds me of a battle between a large wasp and a tarantula that a friend of mine and I witnessed. They were totally involved in their match, and took no note of us a few feet away sitting on the curb. We were so transfixed observing the battle that it was an instant and unexpected rolling armageddon when a car ran over the two critters.

  • Report this Comment On July 31, 2011, at 12:34 PM, dragonLZ wrote:

    Maybe the title of this point should be: The arrogance of writing about Gold (without understanding how the world works). (+TMFBent should be a co-author).

    Some truths:

    - Fear and Greed move the stock market, just as they do the gold market (fear moves them in opposite directions).

    - Both markets crash from time to time and retail investors can (and did) lose fortunes in both. Mentioning last gold market crush without mentioning numerous stock market crashes is irresponsible (re: TMFBent).

    - Both markets create bubbles (and both are undervalued) from time to time.

    - Sometimes is better to invest in stocks vs. gold, and sometimes is better to invest in gold vs. stocks (and sometimes is best to invest in both).

    - Gold has no fundamental value? Well, let me give you an example. If I offered you a Picasso's painting (with a certificate that is real) for $500, would you buy it? There is no way to value it (art is in the eye of the beholder), yet I bet you would buy it. Based on the historical prices, I'm sure you would think $500 is a great "value", right? By the way, Gold has 5,000 - 6,000 of historical prices behind it (showing that in the long run always goes up).

    And some myths:

    -------------------------------------------

    "Benjamin Graham, Warren Buffett's mentor, said that the market is a voting machine in the short term, but a weighing machine in the long term. What he means is that, in the short term, stock prices are influenced by emotions and popularity, but in the long term, the market will price stocks based on their fundamental value".

    ----------------------------------------------------------

    That might be true (yes, I'm that arrogant), but how much time do stocks spend at their fundametal values? About 33%, right. They are 33% of the time undervalued and 33% of the time overvalued (unfortunately, short term, we can never tell which one of the three it is).

    ----------------------------------------------------

    "Fear -- of inflation, depreciating currency, political unrest, economic stagnation, or recession -- is a primary driver of retail-level investment in gold."

    ---------------------------------------------------------------

    This is true, too, but will this ever change? Never. There will always be something to fear, and there will always be a reason people will (panicky or greedy) be buying gold.

    p.s.

    As a part of full disclosure:

    I also challenged TMFSinchiruna on his opinion it was a bad idea to buy stocks in 2009. Just because gold is doing well doesn't mean stocks are doing poorly.

    Good luck to all.

  • Report this Comment On July 31, 2011, at 12:37 PM, dragonLZ wrote:

    >Title of this post< not >Title of this point.

    Also >crash< not >crush<.

  • Report this Comment On July 31, 2011, at 3:05 PM, umh wrote:

    I have observed one fallacy here and elsewhere about walking around with a pocket full of gold; with references to a heavy weight. Based on the current value of gold I would not have as much weight in my pockets as I have now in base metal change.

    I see gold as a medium of exchange outside of a government's direct ability to devalue like they do with their currencies through "financial repression" on a regular basis. Of course they can always steal the gold from you.

  • Report this Comment On July 31, 2011, at 4:56 PM, veritasvincit wrote:

    This comment submitted only to promote the conversation, not to challenge anyone's point of view.

    Why is it that nearly all the posts which so strongly advocate owning gold, even purchasing it at historic highs, invariably state its value in terms of fiat currency? If government-issued money is not backed by gold, then how is it relevant?

    Money, in the strictest sense, isn't an investment, it is a vehicle of exchange. Gold doesn't appear to be either. Sure, you can exchange gold for something, but you can do the same with most any household item.

    Consider this context....suppose I meet you tomorrow, outside of your local McDonald's restaurant, and I offer to trade my Krugerrand for the Happy Meal you just bought, you'd likely accept the deal. You'd also think I was crazy, but you'd accept.

    Now, let's say we're shipwrecked, and I wash ashore of the proverbial desert island to find you about to dig into the same Happy Meal, I'll offer you the same Krugerrand. Now do you think you'll make that same deal? No way. In fact again, you'd think I was crazy. Yet, it's the identical deal. Only difference is the context in which it was offered.

  • Report this Comment On July 31, 2011, at 6:52 PM, lollard wrote:

    Like many people here, I have a problem. I have a certain quantity of paper money and am accumulating more on a biweekly basis. I am uncertain of the future value of this scrip, but I suspect it will not buy as many tulip bulbs in 2050 as it would today. However, it also appears probable that there will be more people in the world in 2050 than today, and that they will need food, shelter, and other goods.

    To me, the best ideal strategy appears to be to exchange my paper money for a machine that transforms raw material, energy, and labor into things that people want and need. The relationship among the costs of raw material, energy, labor, and widgets (whether measured in paper money, tulip bulbs, or religious leaders' excrement) are likely to fluctuate. However, as long as people agree to value finished widgets above the price of raw material + energy + labor, the machine is a winning proposition.

    Now, if you believe End Times Is A-Comin' and people ain't gonna be buying any widgets at all on account of they too busy double-tapping Keynesian zombies trying to get at their tulip-stash, it doesn't make sense to buy a widget-making machine.

    I assign this outcome a low probability.

    Furthermore, my neighbor and I both possess skills which we hope to be able to exchange for paper money under normal circumstances, tulip bulbs should they become a preferred medium of exchange, or, in the event of a Zombiepocalypse, directly for widgets and services. To me, the plasticity of this strategy appears preferable to committing to a tulip bulb stash that may decrease in purchasing power as other people assign a lower probability to Zombiepocalypse.

    Now, it's true that if you sit on that tulip bulb hoard long enough, someone still more pessimistic may offer to take your tulip bulbs in exchange for a great quantity of paper money and widgets. But the terms and timing of this transaction are essentially unpredictable, whereas my particular widget machine offers some advance visibility on its future profitability.

    Alternatively, Zombiepocalypse might arrive. My neighbor might lose interest in exchanging goods and services, vandalize my widget-making machine, and start gnawing on my door. But under those conditions, are you confident of your ability to safely exchange your tulip bulbs for shotgun shells? Do you distrust the gubb'mint to the degree that you want nothing to do with its worthless scrip, yet trust it to maintain property rights under Zombiepocalypsean conditions?

  • Report this Comment On August 01, 2011, at 11:24 AM, michaeldon wrote:

    Some nice statistics but a lack of understanding about how the liquidation of debt and the collapse of the dollar will affect the price of gold.

    Oddly enough I wrote a post yesterday as a complete beginner's guide explaining why this should be so on my blog which has nothing to do with investing. I tried to target the article to people who know nothing about money so it's nice and basic.

    you can see it here: http://www.anotherway.org/2011/07/is-gold-too-expensive-thin...

  • Report this Comment On August 01, 2011, at 1:00 PM, garimpiero wrote:

    A real fool would argue that a fire extinguisher is a poor investment because it just sits on the wall collecting no interest- but when it comes to gold, the financial fire extinguisher par excellence, we hear arrogant arguments such as stated above(which also ignore the return from writing covered calls on mining stocks or even that chimera ETF GLD)

    But the pinnacle of arrogance is bleating about describing a new higher debt ceiling as "maintaining the full faith and credit of the nation" when every new dollar issued involves cheating someone.

  • Report this Comment On August 01, 2011, at 1:15 PM, bretco wrote:

    Anybody still wondering why the Dems and 'Publikins can't get along ?

    The Fool community is as much at odds wit each other as the politicians are.

  • Report this Comment On August 04, 2011, at 8:22 AM, doug007 wrote:

    <i>people ain't gonna be buying any widgets at all on account of they too busy double-tapping Keynesian zombies trying to get at their tulip-stash</i>

    Quote of the day! Well done!

  • Report this Comment On August 08, 2011, at 5:23 AM, hjbrito wrote:

    Just joined and read this article. I am already starting to doubt this service just after one article. I can see Bernanke asnwering "No" to Ron Paul when Mr. Paul asked him if gold was money. BTW, does Helicopter Ben work at Motley Fool?

  • Report this Comment On August 18, 2011, at 9:09 PM, robert90069 wrote:

    GLD has doubled for me since the LAST crash just a few years ago. The arrogance of it all.

  • Report this Comment On December 20, 2012, at 1:39 PM, imaphule2 wrote:

    Hi Alex,

    No offense but looking at your CAPS ranking makes me think I shouldn't be taking my investment advice from you...

    Rank: 58901 out of 74996

    Score: -261.39 (+0.54)

    Accuracy: 44.23%

    Average Pick Score: -4.43

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