Gold Collapse: The Start of Something Big?

In August 2011, a Gallup poll asked Americans what they thought would be the best long-term investment: 34% said gold, 17% said stocks.

It's too early to declare a winner, but the early results are in. The SPDR Gold ETF is down 17% since the survey was taken. The S&P 500 (SNPINDEX: ^GSPC  ) is up 38%.

Gold has lost nearly one-fifth of its value this year alone, and more than 10% since Friday -- the worst decline since the early 1980s, when the yellow metal began a two-decade slump. Whether the current slide is the end of gold's bull run, or just a short-term drop, no one knows. What is clear is that gold isn't the wealth-preserver many thought it was. Some gold stocks, like NovaGold and Kinross Gold (NYSE: KGC  ) , have lost more than half their value in the last year.

It wasn't supposed to work this way. The bullish argument behind gold made so much sense. As the Federal Reserve ballooned its balance sheet, inflation was sure to take off. And as the government ran trillion-dollar deficits, confidence in the dollar was sure to go up in smoke.

But neither happened.

The Consumer Price Index has increased at an average annual rate of 1.87% since 2008. That's almost half the average level after World War II. Privately measured inflation gauges show roughly the same change. The vast majority of the new cash the Fed printed never really left the Fed at all, as banks kept it parked in excess reserves. And the federal budget deficit has been nearly cut in half as a percent of GDP. "It shocks people when I tell them the deficit as a percent of GDP is already close to being cut in half (this doesn't seem to ever make headlines)," wrote economic blogger Bill McBride last week. It may be shocking the gold market, too. People still talk about "trillion-dollar deficits as far as the eye can see" without realizing that no such forecast exists. Government debt as a percent of GDP is on track to fall over the next decade

Then there are rumors that the Fed will cut its quantitative easing within a few months. "I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer," said San Francisco Fed president John Williams last week. "If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year." This would have been unthinkable just a month ago.

To boot, gold purchases by central banks have long been cited as a bullish catalyst. But now fears are swirling that the central bank of Cyprus will be forced to dump its gold to finance an international bailout. If Cyprus, who else? Portugal? Spain? Italy?

The irony is that the goldbugs may get the story right but the investment wrong. Like any asset, gold is forward-looking and prone to wild overreactions. So prices doesn't always mesh with what's going on in the economy. Inflation in the 1980s averaged nearly 6% -- triple current levels -- and gold lost more than half its nominal value. It is entirely possible that the coming years will bring high inflation, but tumbling gold prices. Just as the Internet blossomed while the Nasdaq plunged from its high in 2000, asset prices can gallop far away from the stories people buy into them for. Indeed, they usually do.

Historically, gold has surprisingly little correlation with inflation. As one Citigroup research report put it: "There is no obvious relationship between the gold price and inflation." Instead, gold correlates fairly well with two events: negative real interest rates and financial panic. But if the economy is healing, as many think it is, real interest rates are likely to rise. And as the Cyprus bailout showed last month, markets appear to be well past the panic stages of the financial crisis. One interpretation is gold's fall is the shift in how investors perceive risk -- away from a world obsessed with panic and collapse toward one focused on long-term growth.

For those in gold for the long haul, that should be unsettling. Over time, gold's real return averages close to zero:

Asset

Average Annual Real Returns, 1838-2012

Stocks

6.49%

Treasury bonds

2.77%

Gold

0.46%

Source: Deutsche Bank Long-Term Asset Return Study

The stock market falling 20% or more is typically nothing for long-term investors to fret about -- historically, it's a once-every-five-years occurrence, with large gains over time. Gold is different. Over the long haul, the best it will do is preserve wealth. In between, it goes through periods, sometimes decades-long, of boom and bust.

No one knows if the gold story has peaked. What we know is that it's riskier than many believed. As Bill Bonner says, "People do not get what they want or what they expect from the markets; they get what they deserve."

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


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  • Report this Comment On April 16, 2013, at 3:43 PM, whereaminow wrote:

    Why would you use real returns for gold prior to 1971? You must have missed me destroying Alex Dumortier on this point over... and over.. and over again.

    He's since moved on to the "regression to the mean" theory. Which doesn't apply either.

    So while the gold bears have been right this year, they have no idea why they were right.

    Gold has done poorly when the US Dollar has done well versus other Western currencies. During the 1990s, gold performed poorly, but the US dollar was doing well against Europe. Continued deterioration in Europe, combined with a slower printer press in America, is bearish for gold.

    Of course, we all know the US government cannot live on a tight budget for long (heh, as if this current slowness in printing would be considered "tight" by any reasonable individual.) So we'll see what happens.

    David in Liberty

  • Report this Comment On April 16, 2013, at 4:30 PM, daveandrae wrote:

    Doug Kass was correct when he said Gold had become a religion. At the end of the day, you either believe in it, or you don't. Thus, as far as I'm concerned, I sincerely hope the price of Gold falls to freaking zero.

    Personally speaking, I knew the Gold bull run was over two years ago when I witnessed a good friend of mine, who, at that time had no idea what he was doing and today is a drunk, take out a home equity line of credit to buy $16,000 worth of Gold on the very same day.....at 1626 an ounce!

    Now I don't know about you, but I have been around the investment block enough times in life to know full well that anytime you decide to mix GREED with leverage, it is bound to end badly every, single, time.

    Thank God.

  • Report this Comment On April 16, 2013, at 5:13 PM, Darwood11 wrote:

    "Like any asset, gold is forward-looking and prone to wild overreactions. "

    So the question is, how many will be burned via the lemmingesque rush to bonds?

  • Report this Comment On April 16, 2013, at 10:01 PM, damilkman wrote:

    I am not invested in gold as I do not have a clue on when it will go up or down and why. However, I do have a long term concern how the Fed will extricate itself from letting banks park excess cash for a profit. At some point the exercise must be unwound and interest rates may approach something more normal. At that point the cost of financing that 16 trillion dollar deficit will hit the budget deficit a little harder. Unless of course the Fed takes steps to ensure that a boom cycle never occurs because the budget could never afford it.

  • Report this Comment On April 17, 2013, at 8:25 AM, jargonific wrote:

    What is the reason that the world learned of the Cyprus gold sale prior to it happening? It seems the world bankers would have been more merciful had they allowed the sale to take place before tanking gold prices.

    Thinking more along those lines this appears to me to be a big grab by the bullion bankers who see gold prices as too flat for their liking. By tanking it, they get to reinflate it.

    Good luck everyone.

  • Report this Comment On April 17, 2013, at 9:02 AM, deckdawg wrote:

    Morgan, I've been gradually accumlating shares of the major oil companies (solid dividend payers) when they seemed cheap (or at least reasonable) as my inflation hedge. Also provides a bit of a hedge against the ever present danger of a nasty war in the middle east. This isn't a perfect hedge, but there isn't a perfect hedge. Worst case, I've got a slow growth set of reliable dividend payers (XOM, for example. Chevron, for another. Looking for additional solid companies that are mostly oil and mostly not in the middle east).

  • Report this Comment On April 17, 2013, at 9:12 AM, szczepan4069 wrote:

    good try!!!...but civilisation is smarter than the banks/governments trying to smack down the perception of gold's value....gold has real value!....and it is gold that has lasted the test of time. It takes lots of energy to extract the mineral, you cannot print it into existence. Again it has real intrinsic value that can be easily ascertained by its cost of extraction. it is not like paper money - that is printed into existence. Don't let the controlled media outlets tell you otherwise. All this shaking out of the tree is to part people from their gold and to sow a seed of doubt and shift the microscope away from the corrupt system that is trying to pull the wool over everyone's eyes. Hold your gold !!!

  • Report this Comment On April 17, 2013, at 12:51 PM, ClimbinFool wrote:

    Morgan,

    Great article, although I have a question about the average annual real returns table. Weren't gold prices held relatively fixed prior to the 1960s since it was tied to the US dollar? How does that affect its real return compared to stocks/tresuries going back to 1838?

  • Report this Comment On April 17, 2013, at 12:56 PM, TMFMorgan wrote:

    <<Weren't gold prices held relatively fixed prior to the 1960s since it was tied to the US dollar>>

    Fixed to the dollar, sure. But there was inflation, so it lost purchasing power. You can see the returns here, page 57:

    http://www.johnbudden.com/wp-content/uploads/2012/09/ltasset...

  • Report this Comment On April 17, 2013, at 3:03 PM, Darwood11 wrote:

    Morgan, In the above Deutsche Bank Report I liked the "median YOY" inflation graphs since 1209. Now that's what I call a "long term" perspective!

    Gold, via GLD, comprises about 0.5% of my investment portfolio. I purchased some so I could track the value of this commodity in my portfolio. With only 0.5% I'm certainly not a gold bug. Some will say "Hey, just use M*" but I like putting my money where my mouth is. It changes the personal dynamic.

    My spouse wanted "Kruggerands for Christmas" about a decade ago, and I resisted and took her to Key West in winter, instead (She had never seen the Florida Keys). She reminds me about that (my avoidance of Kruggerands) from time to time when she checks the price of gold; ah, how quickly one forgets! On the other hand, I kept her in the market in 2008 and thereafter, and urged her to "stay the course" and continue using DCA for her retirement accounts in a well diversified portfolio. So I guess she and I are even.

    As for Cyprus, their gold reserves have been stated to be about $750 million, while ETFs have sold about $9 Billion in gold the first quarter of 2013. I have no clue what's going on, but I ask that we consider this: What happens when the average investor gets burned via their bond funds? Will it result in the "Bond Panic of 201x?"

  • Report this Comment On April 17, 2013, at 3:49 PM, Sketch71 wrote:

    This is why you don't base investment decisions on political ideology.

  • Report this Comment On April 17, 2013, at 4:34 PM, whereaminow wrote:

    ----> Fixed to the dollar, sure. But there was inflation, so it lost purchasing power. You can see the returns here, page 57: <-----

    Wow. Just wow.

    That means the dollar lost purchasing power as well, since they were fixed. So how does that help you?

    Morgan, take a night and study the gold-exchange standard and the preceding classical gold standard. Otherwise you are going to be another Dumortier making the same mistake over and over again.

    David in Liberty

  • Report this Comment On April 17, 2013, at 5:58 PM, buddylady wrote:

    To much Monday morning quarterbacking going on with the " experts " at Motley.

    How's about something new, something that will benefit us instead of stating the obvious.

  • Report this Comment On April 17, 2013, at 6:03 PM, xetn wrote:

    How do you explain the fact that many central bankers have been accumulating gold during the last two plus year? (That is except for the US Fed.) Perhaps they know what the results of their massive money creation will be?

    For what its worth, much of the decline in gold's fiat based price has been the result of large short selling of GLD ; not the actual commodity.

  • Report this Comment On April 17, 2013, at 6:33 PM, DaveG99 wrote:

    For those of us who believe owning gold and by extension gold equities is a legitimate form of preserving and even growing wealth, the issue we must face is the question of rigged and manipulated selling and its effect on price over time.

    Experts seem to agree that is exactly what happened last week. Yet some are still convinced this was more or less a panic that developed like a tornado. I can’t say with 100% certainty either way.

    The central question is the position of bullion banks and the application of fractional banking rules to their business model. JPM had seen a decline in its COMEX gold stock from 3.2 mm oz to about 1.6 mm oz over a few months . Was this in response to lower or higher demand from their customers? Answer this question correctly and the truth will be known.

    The former implies the market no longer wanted or needed gold and the bullion bank correctly anticipated by lightening its inventory. But the latter indicates its response was to use the almost unlimited financial firepower at its disposal to take down the price and obtain its physical gold position from GLD and other ETF’s via margin calls and sell stops to literally refill coffers on the cheap. In the process hurting millions of investors, direcly and indirectly, and affecting other markets as well.

    If it is choice number 2, it is because individuals and institutions wanted their gold out of a bullion bank for this very reason: it can be relent and ‘owned’ by multiple interests. Fractional banking works with fiat because it can be instantly created to avoid a panic. The attraction of gold is that it cannot or at least should not be claimed by multiple parties at once.

    Is it legal? Sounds like fraud, not unlike selling the Brooklyn Bridge over and over. Yet we hear not a peep from regulators.

    Should this be the case, what does the long term hold? Is there ever an end to this, ironically enabled by the WGC and GLD, where selling gold in 10,000 oz lots is mandatory as the price declines?

    Because the mining stocks have been absolutely decimated (good companies down 50-90% over 2 yrs) it leads to economic questions as well. Mines will not be built, jobs will not be created, investors will lose, taxes will not be collected, etc etc. All to save the skin of the bullion banks, or as Dr Craig Roberts says, to provide cover for the US government?

    The blog stated that Americans held a preference for gold over other investments. The issue for them (including myself) is to sort out these questions and focus on the incompatibility of fractional banking and gold and exactly what can be done about it to eliminate it as a risk.

    By the way, in 1927 French francs were pegged to gold at 500/oz. One lifetime later, it takes more than 500,000 of the same francs to buy the same oz – after devaluations and the Euro conversion.

    That’s why owning gold is so important.

  • Report this Comment On April 17, 2013, at 6:34 PM, oberta wrote:

    It is an old idea. Transfer all gold in Central banks into standard golden coins worlwide.

    You solve the currency problems. Competition will be maintained. A car in country X cost 2000 coins and in country Y 2030 coins as an example.You go back into prehistory--- no inflation--no interest. Revenues obtained in employement will be received in golden coins!

  • Report this Comment On April 17, 2013, at 6:50 PM, DEberhardt wrote:

    You do realize your analysis is flawed on the historic return because the price of gold was fixed up until 1971. Since the separation of Federal Reserve Notes from gold, gold has had a very nice return and in those 42 years, we now have almost $17 trillion of debt.

    A 1964 dime can buy you a loaf of bread today based on its silver content. How much can a 1965 dime buy you?

  • Report this Comment On April 17, 2013, at 6:52 PM, TMFMorgan wrote:

    The returns aren't flawed. You can see them here on page 57:

    http://www.johnbudden.com/wp-content/uploads/2012/09/ltasset...

    <<How much can a 1965 dime buy you?>>

    How much time does it take to earn a dime today vs. in 1965?

  • Report this Comment On April 17, 2013, at 7:21 PM, DaveG99 wrote:

    I think even you would agree that measuring the return of an asset that was illegal to own during much of the period in question is one step away from meaningless.

    The comparison with other other currencies in the first section of the report you quote is more relevant and revealing. Advise you and other readers take a look. Even you may learn something.

  • Report this Comment On April 17, 2013, at 7:32 PM, DaveG99 wrote:

    And the question arises: are the practices of today's FED and Japanese central bank more akin to Europe in the 1950s -1990s that accounted for the relentless devaluation of their currencies against gold?

    And as you can see, gold priced in those currencies as documented in the report, rose consistently at just about the same rate as the past ten years as priced in $US.

    Coincidence or not?

  • Report this Comment On April 17, 2013, at 7:57 PM, AuditDir wrote:

    None of you have talked about holding physical metals vs. the paper version such as GLD.

    For my money, I can't see a portfolio as being balanced without some allocation into the hard money. More allocation for times when Congress and the President spend like drunken sailors, and even more when imports exceed exports, spending exceeds revenues by $1T annually, slowdowns are occurring in the world's 2nd largest economy, the G8 are all creating loads of currency out of thin air, and numerous countries are at each others' throats. Oh well... call me old fashioned!

  • Report this Comment On April 17, 2013, at 8:06 PM, gkirkmf wrote:

    Morgan,

    Since you have introduced inflation in the discussion, I recommend that you use John Williams' Shadow Government Statistics Inflation Chart to compare historical inflation, as the government has steadily tweaked the CPI until it is no longer reflective of the real story. It can be viewed here:

    http://www.shadowstats.com/alternate_data

    True inflation has been running closer to 4.5% than 1.87%... based on the 1990 definition of the CPI. This explains how everyone gets poorer on 2.5% raises.... I will keep my gold hedge thank you.

  • Report this Comment On April 17, 2013, at 8:07 PM, UpFromDownunder wrote:

    Personally I think it's pointless to look at the returns over a 174 time period. My investment horizon is not that long. It's probably in the range of 30-40 years. Looking at the data in that Deutsche Bank report, it's not too hard to find entire decades where gold has clearly outperformed equities and anything else on the block. The trick as I see it is not to know what asset class performs best over an absurd timeframe, but what asset class(es) will perform over my investment horizon.

    Do I think gold is going to be it for the next decade or two, probably not, but given history, I would be willing to bet that gold will be the highest returning asset class for at least one decade over my investment horizon.

    BTW, I'm curious where the DB numbers are coming from. The report says that treasuries (10 and 30 year) have returned 7+% and 8+% 2009-2012. I'm having trouble wrapping my head around that given the current coupons.

  • Report this Comment On April 17, 2013, at 10:50 PM, whereaminow wrote:

    ----> The returns aren't flawed. You can see them here on page 57: <----

    Logical fallacy. Appeal to authority.

    They are flawed. Gold was not an investment prior to 1971. In fact, an American could not even legally own gold except as jewelry or dental work.

    And... IT WAS THE MONETARY SYSTEM.

    Now if you don't understand, reach out to your colleague Alex Dumortier. It took me 3 blogs to beat through his thick skull.

    How many will it take with you?

    David in Liberty

  • Report this Comment On April 17, 2013, at 11:34 PM, ScottAtlanta wrote:

    I like the last part...you get what you deserve. funny.

    A variant of this is what I say to myself about my uptight, superficial, manipulative, paranoid neighbor....the world will educate him, I don't have to. I'm sure he's a gold hoarder...I saw him burying something....could have been his brow beaten wife as i haven't seen her in months...or gold.

    I do think the correlation to "financial panic" is accurate. Do these gold bugs think America will die? and they'll be clutching to their gold bars and guns in the hills? Though the bars sure do look pretty...

  • Report this Comment On April 18, 2013, at 1:13 AM, daveandrae wrote:

    David in Liberty-

    Nothing you say, or prove, will stop the price of gold from trending Down.

    Sad and simple

  • Report this Comment On April 18, 2013, at 2:26 AM, JadedFoolalex wrote:

    "Nothing is more sad than watching a man go down with his ship while he is absolutely certain of the soundness of his boat!"

    - author unknown.

  • Report this Comment On April 18, 2013, at 6:31 AM, daveandrae wrote:

    ^

    Amen

  • Report this Comment On April 18, 2013, at 7:58 AM, jasperpw wrote:

    Perhaps a more relevant comparison for gold versus the S&P would be starting in 2000 to the present...Would love to see the results.Many thanks....

  • Report this Comment On April 18, 2013, at 8:21 AM, gcp3rd wrote:

    Well first I'll say it makes me smile to see so many people weighing in here with educated, if differing, view points. At least this is all food for thought.

    My two cents on gold is to refer to the opening letter of the annual shareholder report for Berkshire Hathaway. In it Buffet gives a clear, straightforward analogy for gold and why it really makes no sense to "invest" in it. If you haven't read it, do so - you will enjoy it if nothing else. But I got schooled. My favorite line from this part of this letter, as I recall it: "You could fondle the cube, but it would not respond."

    And outside of that, what I don't understand is why the gold bugs think that disconnecting from the inflation erosion of dollars can't be done by buying equities. There is no difference in inflation pushing up the dollar cost per ounce of gold versus the dollar cost per share of stock - excluding the differences in the two markets and the performance of the given company. But take PG for example - say $100/share, and gold $100/oz. If inflation reduces the dollar's purchasing power it will take say $105 to buy either of those. Having bought either at the $100 mark you could then sell either at $105 and preserved your purchasing power. The difference is a)humans need (or will highly prefer anyway) toothpaste and deodorant over gold to live, b)gold does not produce anything so your $100 will never be better than a chunk of yellow metal whereas PG has the ability to improve - oh and also pay dividends. I could go on but I'll stop here.

    Curious to hear your comments.

  • Report this Comment On April 18, 2013, at 8:21 AM, gcp3rd wrote:

    ***and I believe it's the 2012 shareholder report, I left that out, but easy to google and find

  • Report this Comment On April 18, 2013, at 9:04 AM, skypilot2005 wrote:

    Morgan wrote:

    "It wasn't supposed to work this way. The bullish argument behind gold made so much sense. As the Federal Reserve ballooned its balance sheet, inflation was sure to take off. And as the government ran trillion-dollar deficits, confidence in the dollar was sure to go up in smoke.

    But neither happened."

    Hmmm. I wonder why?

    http://finance.yahoo.com/blogs/daily-ticker/gold-rout-blame-...

    After the Gold Rout: Blame Central Bank Manipulation, Says GATA’s Powell

    4/17/13

    “I’m pretty confident it was a central bank operation,” Powell says of the huge drop. “Financial journalism does its best to contrive other reasons but there was too much selling for it to be any source other than an inspiration from central banks.”

    Sky

  • Report this Comment On April 18, 2013, at 9:11 AM, Jamesband wrote:

    I’m confused, did the cost of a house and all building supplies needed to build it go down, how about a car, anything? I can find Nothing! Did the value of the paper currency somehow go up in value, even in the wake of 87 Billion new Fed money being created out of thin air and snuck into the economy every month through governmental money laundering? NO! Well then what are you left to think then, or better yet, who is manipulating the value of gold? Disclosure, I have a gold wedding ring, as does my wife.

  • Report this Comment On April 18, 2013, at 9:23 AM, blakeb1122 wrote:

    "Government debt as a percent of GDP is on track to fall over the next decade"

    After some research I found that this statement cannot be supported by the available research that I have been able to find online. The most conservative of the projections that I can find is by the "Center for American Progress" who projects a best case scenario of debt as a % of GDP increasing from 75% current to about 100% of GDP by 2037. I cannot find any research that says it will fall. Also if you look at other benchmarks such as debt per US citizen over time and total debt over time, it is overwhelming in its severity. I think I will hold onto my gold hedge.

  • Report this Comment On April 18, 2013, at 10:33 AM, whereaminow wrote:

    daveandrae,

    ---> Nothing you say, or prove, will stop the price of gold from trending Down. <---

    Do you have a point? Since I don't imagine for myself the powers to control a market, I don't have any intention of trying to stop the price movement of anything in this world, let alone gold. It will do whatever it is meant to do.

    I am just pointing out a common mistake in gold analysis that Morgan is making.

    You obviously have no counter argument, hence your non-sequitor.

    David in Liberty

  • Report this Comment On April 18, 2013, at 10:40 AM, TMFMorgan wrote:

    <<After some research I found that this statement cannot be supported by the available research that I have been able to find online. >>

    I linked to the CBO forecast in the statement. You can see the numbers there. 77.7% of GDP this fiscal year to 77% a decade later.

  • Report this Comment On April 18, 2013, at 11:23 AM, terryongarland wrote:

    The true cost of mining an oz of gold in 2012 was $1289.If that is valid, and I believe it is, because many cost estimates conveniently did not count many items in the cost of production.Going forward it means production will be cut, and no new mines started until we get price appreciation.Bottom line, that is bullish for gold,and as a trade,buy some gold.

  • Report this Comment On April 18, 2013, at 12:11 PM, markseisar wrote:

    BUY GOLD

  • Report this Comment On April 18, 2013, at 12:35 PM, mikecart1 wrote:

    If you asked me in 2009 what is better Gold or Stocks - I said stocks

    In 2010 - I said stocks

    In 2011 - I said stocks

    In 2012 - I said stocks

    Today - I say stocks

    Gold is overrated with little support to why it is necessary other than its 'price chart'.

  • Report this Comment On April 18, 2013, at 4:19 PM, daveandrae wrote:

    directed at daveand rae

    "Do you have a point? Since I don't imagine for myself the powers to control a market, I don't have any intention of trying to stop the price movement of anything in this world, let alone gold. It will do whatever it is meant to do.

    I am just pointing out a common mistake in gold analysis that Morgan is making.

    You obviously have no counter argument, hence your non-sequitor."

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

    Oh Cut the freaking crap!

    You're not "smarter" than Morgan. You're just another sanctimonious fool with a computer.

    Over the last 31 years, The price of gold has risen from roughly 800 dollars an ounce to 1400. A gain of only 75% compared to the almost FIFTEEN FOLD increase in the Dow Jones industrial average... and this gain ignores dividends

    Thus, the ONLY people stupid enough to invest in this freaking cult of a metal are people who mistrust their currency.

    I'm done

  • Report this Comment On April 18, 2013, at 5:22 PM, whereaminow wrote:

    daveandrae,

    I've commented on dozens of Morgan's articles, and though I question his Keynesianism and mainstream statist analysis, I don't believe I have ever pretended to be "smarter".

    I simply pointed out a flaw in his analysis. It is flawed. It is incorrect. And it should be corrected.

    I don't know why you feel that deserves your insulting comment, but I suspect it has to do with you being unable to argue on the point I've raised.

    David in Liberty

  • Report this Comment On April 18, 2013, at 11:06 PM, ScottAtlanta wrote:

    You are NOT in Liberty David, your mind is shackled to silly and paranoid ideas.

  • Report this Comment On April 19, 2013, at 12:34 AM, whereaminow wrote:

    And what are those?

    David in Liberty

  • Report this Comment On April 19, 2013, at 11:46 AM, ukta wrote:

    Badly flawed and biased analysis by true fools with vested interests in equities. Inflation is far higher than doctored govt stats show. And nowhere do you cite the enormous manipulation of gold in PR from Goldman Sachs, a major profiteer and manipulator of gold valuations. Indeed all financial advisories, up or down, mainly benefits small cliques at the top at expense of later sucker subscribers, essentially classical pump and dump, now done in small increments at low transaction volume.

  • Report this Comment On April 19, 2013, at 11:50 AM, fsc137 wrote:

    The value of gold is high compared to its value as an industrial material.

    Not so with silver.

  • Report this Comment On April 19, 2013, at 12:09 PM, SkepikI wrote:

    OK Morgan, an excellent exposition of probable gold bubble. I expected you to make the point Gold bubble pops, Bonds next.

    To those of you who believe that the cost of mined gold is $1200 oz or $1300 or some other fixed figure, you had best get some Gold miner annual reports like and study up. Mined gold cost is all over the map, from $300 oz up and a few lower (placers at 2 sandwiches 3 oz of sweat and 10 hrs/flake). This is part of the reason some gold producer stocks are down a lot more than gold is. The other is bad management and execution... I once worked with a gold producer CFO who on hearing me wax optimistic about their rate of return, remarked, well our ror is less than some utilities. When I expressed shock that they could stay in business with all of the risks on such a low return, he replied: "well gold at $400/oz instead of $300 covers a multitude of sins". This was quite a few years ago. This indicated to me a lack of business diligence and reliance on optimism that was pretty stunning. Producers have to manage a LOT more than selling shiny lumps into a rising market. Some do it well, some not.

  • Report this Comment On April 19, 2013, at 12:24 PM, busyboy53 wrote:

    This article is about the biggest pile of BS I've ever read.What you are saying is if I have a few billion dollars stashed away and collecting interest,that money doesn't count.

    Let alone the fact that there was about 1100 tons of gold dumped on the market in two days.Must have been some crazy little goldbugs selling their handful of coins.What a coincidence.

  • Report this Comment On April 19, 2013, at 1:11 PM, rhealth wrote:

    As Bill Bonner says, "People do not get what they want or what they expect from the markets; they get what they deserve."

    Exactly! If you don't know why gold (and silver) moves up and down stay out of it. It moves in cycles and is not a "preserver of wealth" Ask David Einhorn!

  • Report this Comment On April 19, 2013, at 1:20 PM, HEINCREASES wrote:

    If gold had an average annual return of 0.46% that means that the amount of gold that I could buy in 1838 for $1000 would only cost me $2230 today.

    That is patently absurd. You don't need to be a math whiz. The internet has easy compound interest calculators.

    175 years @ 0.46% interest =2.23 times original amount.

    So we must be talking about inflation adjusted returns. The article fails to make that clear.

    If the 0.46% rate of return is true for inflation adjusted returns, then gold lives up to its billing as a store of value or hedge against inflation.

  • Report this Comment On April 19, 2013, at 1:24 PM, TMFMorgan wrote:

    <<That is patently absurd ... So we must be talking about inflation adjusted returns. The article fails to make that clear.>>

    The table clearly says *real* returns.

  • Report this Comment On April 19, 2013, at 1:26 PM, ChrisBern wrote:

    Ah yes, another false choice article--gold vs. stocks. Same as another false choice I often see bandied about--stocks vs. bonds.

    When is a Fool going to have the prescience to write the real article, which is that gold, stocks, and bonds are all overvalued and are therefore likely to have subpar returns (if not outright losses) over the next 10-15 years?

    The only thing I'm seeing that's worth investing in right now is real estate in certain parts of the country/world. More or less everything else is overvalued--sort of the opposite of 1980 if you will.

  • Report this Comment On April 19, 2013, at 1:27 PM, Mitzymoon wrote:

    Some of my smartest friends bought into the right-wing meme about "debt as far as the eye can see."

    In some ways I thought this was more a reaction to Obama than rational thought. Even when I would remind them that "it's not the debt, it's the debt service as a percentage of annual revenue"--and that America's was and still is at a very low and sustainable ratio--they seemed unable to grasp that this simple fact disproved their doom-and-gloom predictions. Needless to say, they bought their weight in gold and reveled in "profits" when more right wingers joined the doomsday cult. How do you convince your friends that their cult leaders are deluded? You can't.

  • Report this Comment On April 19, 2013, at 1:28 PM, x000ald000x wrote:

    An oz of gold bot a well-tailored man's suit 200 years ago, and 100 years ago, and even ten years ago. Today it buys two suits, so it still has some room to go down, fundamentally.

    Gold does not track CPI short term, but it does provide an epochal store of value. Unfortunately, we may all be dead before the next epoch occurs.

    "If you want to own an epochal store of value it will cost you."

    5% or 10% of a portfolio assigned to epochal store of value Insurance is plenty. The rest has to be invested in growth and dividends, carefully adjusted to account for extremes in relative valuations and sentiment.

  • Report this Comment On April 19, 2013, at 1:29 PM, will1946 wrote:

    I don´t know what all the fuss is about, with a measley 20% decline in gold prices. It is still way too high. Three or four years ago it was under $300 if memory serves. I wouldn´t touch it with a ten-foot pole.

  • Report this Comment On April 19, 2013, at 1:43 PM, x000ald000x wrote:

    As to the cost of mining gold, it depends how you calculate it. Recent article on seeking alpha makes the case for very high costs compared to what the industry reports. Think 1000…

    The only good news for gold bugs is that the physical metal cannot stay below actual production costs forever, since supply will fall off as mines shut down.

    The price of gold is determined by the small amount that is actually traded. The vast bulk of above ground gold is rarely ever traded.

  • Report this Comment On April 19, 2013, at 1:46 PM, plongjr wrote:

    Has anyone ever heard of an INFLATION TAX on your income and overall wealth?

    If you have not, then you ought to figure it out quick. If you have been in the stock market for the last 15 years, you have not only not made any money, but you have lost the purchasing power of your money, during the time you have been owning stocks.

    Would anyone like to guess how much the INFLATION TAX has cost your purchasing power in the last 15 years. JUST GUESS. I HAVE THE ANSWER.

  • Report this Comment On April 19, 2013, at 1:50 PM, TMFMorgan wrote:

    <<If you have been in the stock market for the last 15 years, you have not only not made any money, but you have lost the purchasing power of your money, during the time you have been owning stock>>

    With inflation and dividends the S&P 500 is up 43% over the last 15 years. Again, that is after inflation.

  • Report this Comment On April 19, 2013, at 2:04 PM, plongjr wrote:

    You do not understand what I was telling you above. There is a hidden INFLATION TAX on your money by holding US dollars. It averages 15-20 % per year. To check this out, look at what items cost today in dollars compared to what they cost in dollars 15 years ago. You think the fact that the market gained 43% over the last 15 years , THAT YOU HAVE NOT LOST 250% of your purchasing power in dollar's ????

    Wake up TO THE KNOWLEDGE OF THE INFLATION TAX, BEFORE YOU LOOSE ALL OF YOU PURCHASING POWER. BUY GOLD, FARM LAND - HARD ASSETS, THEY DO NOT HAVE THE HIDDEN INFLATION TAX WHICH HOLDING US CURRECY AND INVESTMENTS DO.

    THANK YOU VERY MUCH.

  • Report this Comment On April 19, 2013, at 2:08 PM, TMFMorgan wrote:

    <<THAT YOU HAVE NOT LOST 250% of your purchasing power in dollar's ????>>

    The most you can ever lose is 100%.

    <<Wake up TO THE KNOWLEDGE>>

    I'll pass.

  • Report this Comment On April 19, 2013, at 2:10 PM, NoDonkey wrote:

    This entire gold bug thing soured me completely on Fox News, Rush Limbaugh, Glenn Beck, etc. all who were pushing this on suckers. I'm still a conservative but I don't listen to any of them anymore. Their constant drumbeat of pessimism and shilling for these gold sellers is going to hurt a lot of good people.

  • Report this Comment On April 19, 2013, at 2:36 PM, whereaminow wrote:

    My calculation shows gold having a nominal return of 9.41% since 1971 ($35 to $1,400 over 41+ years).

    With a inflation rate of say 3% per year (or whatever you want to believe), that's a real return of 6.22%

    That's right in line with stocks. Even after this severe pullback.

    I wish Morgan would concede his mistake and correct the article, but he won't.

    David in Liberty

  • Report this Comment On April 19, 2013, at 2:48 PM, xbows wrote:

    The only way to make money in gold is to buy when it's price is depressed and sell when it's inflated by market panic. It is not a tenable buy-and-hold investment vehicle. Buy stocks. Buy stocks. Buy stocks.

  • Report this Comment On April 19, 2013, at 2:52 PM, cycletrader wrote:

    First of all, the question posed to people in 2011 was what is the best LONG TERM investment. But readers must realize the 1-2 years is NOT long term! Just because gold is correcting sharply NOW doesn't mean it will STAY that way!

    Second these anecdotal stories about folks selling their house to buy gold indicates they are NOT INVESTORS, but more like stupid lunatics.

    The best true long term investment is the stock of dividend paying large corporations. Especially those which show continuous dividend growth. The catch here is long term means not 1 or 2 years and not 5 or 7 years. Try 20 or 30 years! Look at how long Buffett has been developing Berkshire Hathaway (BRKA, BRKB).

    Most people who call themselves "investors" have no clue what they are really doing. Case in point: the "market is currently going down or correcting. How do you feel about that"? If you answered that you are getting nervous, you should NOT be doing your own investing! EVERY investment moves up and down. An astute investor knows that! They know that investments run in cycles. If you learn that you will be able to buy low and sell high, and THAT is the KEY to making money. Lot's of it. But that ability is something that most investors never come close to. And here is another surprise: most so-called investment advisors don't do well with it either!

    To invest for yourself, you must learn how to pick stocks with very good fundamentals. This takes a lot of work. It is not "easy". And, fundamentals alone are not a guarantee. Then you still have to recognize that everything runs in cycles. Case in point: Apple (AAPL) Last year, the world was in love with AAPL - both the company and the stock - and now it seems that nobody wants to own it. It is going through one of these cycles. If you own it, how to do feel now? The truth is most people are hard wired to FAIL at managing their own money!

    You must be able to "read" stock cycles to make really consistent returns. To learn how to read stock cycles, you are going to have to master technical analysis. Charts in other words.

    Look closely at Gold. It actually topped in the summer of 2011. YOU SHOULD HAVE NOT OWNED GOLD AFTER IT TOPPED. It has been a downtrend since then! I have been out of gold for almost 2 years. And out of Apple since November of last year. And my charts have given NO INDICATION that either was worth buying in the past 3 months. So what AAPL or GLD does, does not phase me a bit.

    For those who say the "market is manipulated", I say I agree. But if you can' stand the heat then get out of the kitchen! Self investing is definitely do-able but very few are dedicated enough or willing to learn how to do it. For everyone else, consider index ETF's, mutual funds, investment advisors or look at the "Permanent Portfolio" solutions (Google that one).

  • Report this Comment On April 19, 2013, at 2:57 PM, wantingtoretire wrote:

    I am continually amazed at shallow articles and blinkered comments on article like this.

    Looking backwards is of no use to you at all in constructing a future prediction for gold.

    Gold is not an American market phenomenon, unlike the American stick exchanges. Gold price is influenced by the America Comex and LBMA. It is also heavily influenced by most of the countries in the world and trades almost continuously.

    People have means to value shares in US dollar terms. They do not have the same means to value gold. However, both share the property that people will purchase shares or gold with US dollars if they believe either is of value to them.

    That is all you need to know.

    The concept of gold giving you a return is like looking through the telescope from the wrong end. That is not the purpose of buying gold.

    You do look for a return if you trade gold. But that is an entirely different universe.

  • Report this Comment On April 19, 2013, at 4:03 PM, RedEsquid wrote:

    A buddy of mine bought gold back in '80 or so, figured it as inflation hedge and all that. Paid $600 and he was really pleased when it went to $850 soon after.

    He kept swearing how great an investment gold was as it dropped a little, until it was back below $600. And he swore it would be back above $600 and he would have a profit, so he held on. Eventually gold became kind of a sensitive subject, and I stopped asking.

    In 2006, after 26 years, it finally went above $600 again. Now he thinks its a great investment again.

    But after the last few days, he sold it all.

  • Report this Comment On April 19, 2013, at 4:06 PM, Luke721 wrote:

    He uses gold returns back to 1838, which even a lightly schooled economist knows is flawed, for the same reason he chose August of 2011 for his comparison of S&P returns to gold returns. Because it supports his thesis, never mind if it is a fair presentation.

    Funny how MF consistently supports long term views of investments, except when they don't.

    When it comes to gold, I am neither a bug nor bear. But holding 6-8% of your assets in gold is not a bad idea.

  • Report this Comment On April 19, 2013, at 4:08 PM, TMFMorgan wrote:

    <<for the same reason he chose August of 2011 for his comparison of S&P returns to gold returns>>

    I used it because that's when the Gallup poll was taken.

    Thanks,

    Morgan

  • Report this Comment On April 19, 2013, at 4:12 PM, TMFMorgan wrote:

    <<Funny how MF consistently supports long term views of investments, except when they don't.>>

    1838-2012 is pretty long term.

  • Report this Comment On April 19, 2013, at 5:22 PM, whereaminow wrote:

    ^ Except that using 1838-1971 is incorrect. You can ignore the point all you want. You're just damaging your own credibility.

    Gold wasn't an investment from 1838-1971. it was the monetary system.

    As I pointed out above, since 1971 - when it became a separate entity from the money system - gold real returns are very close to stocks.

    David in Liberty

  • Report this Comment On April 19, 2013, at 5:46 PM, COS911 wrote:

    <<After some research I found that this statement cannot be supported by the available research that I have been able to find online. >>

    "I linked to the CBO forecast in the statement. You can see the numbers there. 77.7% of GDP this fiscal year to 77% a decade later. "

    No one, not even the CBO, believes the CBO forcast. Thats why the phrase "under current law" runs throughout their forcast. That means that the forecast you are reading is pure BS and the CBO is trying to let you know it. Current law has all kinds of "cuts" that the CBO knows won't happen becuase they've been in the law for years or decades, but Congress always eliminates the cuts just before they take place. It is a game Congress plays (both parties) to make the future deficit look better. But the CBO knows this won't take place, they're embarrassed by this and use that code phrase over and over to let you know it isn't a true forcast of what is likely to happen.

  • Report this Comment On April 19, 2013, at 7:36 PM, MichaelHamilton wrote:

    with 1bn indians buying gold for the wedding season and also low confidence in banks (particularly in Europe) then people will buy gold rather than keep money in the bank where they could be randomly subject to a haircut (ouch!)

    I don't think the gold story is over yet.

  • Report this Comment On April 19, 2013, at 9:16 PM, Ceisri wrote:

    I buy gold on dips, but I keep it. It is not for sale! Went to buy some more on Thursday. No gold was available. Most all was sold. People had to be turned away. Lucky me, I had an account, and I bought gold at the fixed price so I could collect later. I know that my investment will go up or down, but I also know that no broker is going to take it away.

    Look at what happened to Nero when he stole the silver from the coinage and then burned Rome as a divergence from the act. He blamed the Christians for the arson. Who are the owners of Rome now ?

  • Report this Comment On April 20, 2013, at 1:21 AM, slojo wrote:

    Consumer purchasing of gold in 2012:

    India and China: more than 1600 tonnes

    United States : 160 tonnes

    from World Gold Council Gold Demand Trends full year 2012

    So who controls the demand side of supply and demand?

    Enough about right wing kooks starting a gold bubble that was bound to pop. Let's see this for what it is: A long term play on China and India consumer demand.

  • Report this Comment On April 20, 2013, at 3:57 AM, UserError wrote:

    With all the talk of "cost of mining", everyone seems to be overlooking a few related points.

    1: Mining cost per oz will ALWAYS go up when prices go up, and fall when prices fall. Why? It has nothing to do with cooking the books! It's that miners are willing to use more expensive and risky techniques to extract gold on the way up to price peaks, because the payout makes mathematical sense. As gold falls, their techniques, staff, equipment etc follow. We can't mix correlation with causation, here.

    2. Durability of goods. My main vehicle is real estate. I purchased 2 houses in the last 2 years, each one a newer home (4 years and 19 years), in good and great shape, for about 35-45% of true construction/replacement cost. And I should know, I've built around 10 similar houses in this area, during the boom. Housing has stayed at that level for *years*--5 years AND COUNTING. You know why? Housing isn't consumed at any appreciable rate. I think I read that with gold it's in the single digit %s. Regardless of mining cost, it could take a long time to burn off an excess gold inventory, even with a bunch of Indians getting married.

    Oh, and when the housing market busted here in Arizona? Those "optimistic" builders went out of business by the dozens. I was one of them. Lost everything and started back at zero at the close of 2007. So will some gold mining operations.

  • Report this Comment On April 20, 2013, at 8:10 AM, WarunBoofit wrote:

    Gold is one worldwide market and I agree with my mate Warren its nice to fondle but it does not respond . Unlike the gold market the stock market is not one worldwide market , I invest in companies and not markets and thats worked better for me . The returns on good companies have beaten gold by many multiples but pick the wrong ones and you lose whereas at least gold does not go bankrupt . I have even invested in gold producers and lost a lot , nevertheless it was educational and I have learned not to do it again . If you have a long term problem picking good companies try and find a good fund manager but the average manager produces average returns and yet still demands payment for their efforts.

  • Report this Comment On April 20, 2013, at 8:25 AM, AnotherNavyFool wrote:

    I do not claim to be an expert at this, or have the time to delve so deeply into the subject as I could.

    When i look at gold and its "value" I tend to think of it as any other commodity that people want/need. It is only worth what someone will pay for it. The phrase"gold will always have value" means nothing to a man in desert with a full bag of gold and an empty canteen.

    W eare far from going back to a barter system (which is fortunate for most of us - we produce little of any barter value) nor are we going back to a gold based economy. The actual amount of physical gold on the planet is actually quite small and not enough to create currency for 6 billion people to use efficiently. We are and will likely forever be in teh digital accounting age for wealth.

    Back to gold as a commodity - it will be worth what people will pay for it. And as someone finally pointed out at teh end of this comment list, most of the people buying gold are in India. They purchase more than twice the amount that China does and they are easily over 100 tons a year ahead of the US. They have not been buying as much this year, so the price (demand) has gone down. I also believe some people are taking some profits off the table. I never had money enough to get into gold, but I sure did look at teh price heading over $1300/oz. and thinking "If I had gold, I would be cashing out!" Isn't that the whole point of a commodity, something to profit from by buying it low and selling it high? I think there may be a number of people out there thinking the same, esp. if they baought into the economic fears many spouted over the last seven years and bought gold as it surged higher and higher. They don't want to be caught holding when it drops.

    Gold - and soda, video games, etc. - will only have the value people think it does. To me it has little more than any other commodity/stock/asset/ I can sell. And dont'g ive me that "This is metal I can hold it in my hand" argument. How many people actually own physical gold? And can you sell it at the market price or do you have to go through someone who takes a cut?

    My grandfather for decades used to buy silver and gold bars (ditinctly remember the broken toe story from the bag ripping and a gold bar falling on his foot!) because he was old school and didn't trust banks, likely due to his 8th grade education. (He was a very successful restaurantur, however - people skills, Southern charm and a killer red-eye gravy recipe can go far). We still have those bars in a safe somewhere, never did sell them. All I ever heard was "we need to save tehm for teh future - they are an investment and safe." OK, got that, but when gold hit $1,500/oz and I said, hey let's cash those in, pay some bills, and buy some other investments, the rest of the family reacted like I had kicked the cat. They were too tied emotionally to it to sell it. So what good is it then?

    Meanwhile, i have watched my dividend stock investments grow over 26% in the last couple of years. (I do own a gold producing stock - Newmont - and it is my worst performing stock in my portfolio, down alomst 30% from what I bought it at. Luckily, I am not too deep into that one).

    Don't get me wrong - I will buy gold in the future, but when this cycle goes down and I can buy it cheap and sell it when paranoia and fear drive up the price again in the future. Then I will spend on those things that are important to me - and have more value than gold ever will - the beautiful house my wife deserves for our retirement (not for another 17 years at least!), my childrens' education, our health, books, and my Miami Dolphins. Gold is just another tool to get where I want to go.

    AnotherNavyFool in Kabul

  • Report this Comment On April 20, 2013, at 1:55 PM, TheJadeMonkey wrote:

    I haven't seen emotions -- or allegations of market manipulation by short-selling shadow consortia -- this high since CROX. Good stuff.

    I have an ignorant question about inflation and excess reserves at the Fed. I understand the argument that we haven't seen inflation yet because most of the stimulus money never met the consumer or investor economies. What happened or will happen with the excess reserves? Should we not instead expect extra inflation from 1) interest on the reserves, 2) extra expenditures or risk-taking from banks whose balance sheets are subsidized with extra reserves, and 3) the eventual entry of the stimulus money into the economy when reserves return to normal? It seems to me from my current viewpoint that the money sitting at the Fed is even more troubling that the same amount of money entering the economy now because it grows as it is sits. Anyone have any insight?

  • Report this Comment On April 20, 2013, at 3:14 PM, TMFAleph1 wrote:

    It's becoming increasingly clear that the bull market in gold has ended. The evidence is not just in the price action, it's in the increasingly tortured sophistry that goldbugs are advancing to support their religious crusade.

  • Report this Comment On April 20, 2013, at 3:47 PM, kyleleeh wrote:

    I see what Davidinliberty is saying about not using pre 1971 returns to measure gold's return as an investment. The price of gold was not the real market value but rather a fixed government value.

    But if that's the case then why use this artificial fixed value as the starting point when calculating post gold standard returns? I know it would very difficult and highly subjective to determine when gold reached "fair market value" but if David is using an artificially created fixed price as his starting point for calculating the average return for gold then his calculations are just as skewed as he claims Morgan's to be.

  • Report this Comment On April 20, 2013, at 4:06 PM, whereaminow wrote:

    TMFAleph1,

    Do you have a response to my destruction of your reversion to the mean theory? Or is sophistry (ahem, "religious crusade" lol) all you can muster?

    You have presented a crusade against gold for years, and with each attempt I have calmly showed you how your theory is flawed. You have even admitted your mistakes to me, and yet you continue to claim we are the "religious" ones.

    Introduce yourself to a mirror when you get a chance.

    kyleleeh,

    You are correct, but any other choice would be equally subjective. I think you could make a case for a slightly higher price, say $50 as a starting point, since the government was actively suppressing the gold market in order to keep Bretton Woods intact. That is quite another sordid history.

    Even then, the real returns would track close to stocks.

    Notice how the Motley Fool anti-gold staff will not address this point.

    But we're the religious ones.. Yeah....

    David in Liberty

  • Report this Comment On April 20, 2013, at 4:15 PM, whereaminow wrote:

    kyleleeh,

    To add more research to that, the gold price on the London market hit $44/ounce a couple of times before it was decoupled in America, so if you prefer, you could recalculate with that as your starting point. Anywhere between $35-$44 would be fair. And whatever is chosen, the result will be closer to the 6+% real return of stocks than the nonsensical >1% Morgan Housel claims.

    http://mises.org/daily/3402/The-Losing-Battle-to-Fix-Gold-at...

    David in Liberty

  • Report this Comment On April 20, 2013, at 4:39 PM, kyleleeh wrote:

    I know it's subjective to pick any starting point but when the government fixes the price of any asset then calculating the return on that asset becomes more and more irrelevant. Gold's fixed convertibility to dollars prevented any market in the world from seeing it's real value, so even the London rate is not a relevant starting point if you want to try to determine what the market will return on gold.

    What would be a good starting point?...I have no idea. One could argue that gold prices reached market equilibrium in the 80s at around $200-$300 an oz...but who knows.

    My point is that every Gold bug I know uses the artificial fixed price of gold as a starting point when claiming that gold has a long term return equal to stocks, and I think that's just stupid. It's like using Venezuela's subsidized gas prices as a starting point to determine the return of oil.

  • Report this Comment On April 20, 2013, at 8:09 PM, whereaminow wrote:

    kyleleeh,

    Thank you for at least putting together a reasonable argument, something that the Motley Fool staff cannot do.

    The reason I disagree with your reasoning that $35 in 1971 is an unfair starting point is this:

    Find me an economist in 1971 that thought $35 was too low of a price for gold. The Keynesians and the Monaterists were certain that gold would plummet after the peg was removed. Milton Friedman famously said it would go to $10 the next day.

    So while you think us "goldbugs" are using an unfair starting point, from the historical perspective, that is pretty funny.

    David in Liberty

  • Report this Comment On April 20, 2013, at 8:46 PM, kyleleeh wrote:

    <<The reason I disagree with your reasoning that $35 in 1971 is an unfair starting point is this:

    Find me an economist in 1971 that thought $35 was too low of a price for gold. The Keynesians and the Monaterists were certain that gold would plummet after the peg was removed. Milton Friedman famously said it would go to $10 the next day.>>

    Logical fallacy. Appeal to authority

  • Report this Comment On April 20, 2013, at 9:02 PM, whereaminow wrote:

    II think it's only an appeal to authority if I hold their presumption was true. I don't.

    http://en.wikipedia.org/wiki/Argument_from_authority

    I am pointing out the interesting predicament we have. If I say $35/oz was a fair starting point, you say no that's crazy, it should be much higher! If I were in 1971 and thought it was a fair starting point, every economist on the planet would say no that's crazy, it should be much lower.

    All that is well and good, and I have long since agreed that there is no perfect starting point. My intention here was to show that Morgan Housel's starting point was horribly flawed.

    However, you wish to measure the real returns of gold, feel free. I know I am much closer to the truth than this article.

    David in Liberty

  • Report this Comment On April 20, 2013, at 9:13 PM, TMFMorgan wrote:

    kyleleeh,

    I'll concede that there's no truly fair starting point for measuring gold over time. Thanks for the smart observations.

    -Morgan

  • Report this Comment On April 20, 2013, at 9:15 PM, whereaminow wrote:

    Thanks Morgan.

    Now lean on your pal Alex to concede his reversion to the mean theory doesn't work either.

    Let me know how it goes.

    David in Liberty

  • Report this Comment On April 20, 2013, at 9:20 PM, kyleleeh wrote:

    @David

    To be fair I didn't think either of you were using good calculations. This is an email I sent to the author:

    "I think my real point is that trying to determine what the average market return for an asset is, using non market fixed prices in the calculations just doesn't seem to make sense to me.

    Like I said with the example of using subsidised gas prices in countries like Venezuela or Saudi Arabia, if I start out with those artificial prices and compare them to today's market prices the return on oil seems great, which is what David and all the gold bugs do when they quote golds return since 1971. If I start at the free market value of gas in Saudi Arabia or Venezuela starting from before oil was subsidised, and then factor in several decades of the subsidised fixed price in between then and today to calculate the return on oil since then it looks terrible...which is kinda what you're doing including the fixed Bretton Woods price to say gold has such a low return. In either case the data is to skewed by non market prices to have much relevance as far as what kind of market return you can expect going forward.

    Personally I think that in the last 100 years the price of gold has been subject to so much non-market price fixing that I don't think anyone can make a call as to average market returns over the long run. I think we would need free traded gold for another 50 years at least before we could come up with any kind of trend."

  • Report this Comment On April 20, 2013, at 9:24 PM, whereaminow wrote:

    kyleleeh,

    I agree with your assessment. To a point.

    There market always clears. Once the peg was lifted, had $35 been ridiculously off base (keep in mind that the peg was not as simple a price-fixing scheme as gas in Venezuela, it was based of a ratio of dollars to gold), the market would have corrected it.

    It does not take 100 years for a market to clear. So if we understand simple economic theory, we see that $35, while not perfect, is not far from the free market price. The market told us it was too low because of the US money printing for Vietnam and the Great Society, for sure. That's why the BW agreement failed.

    But again, it doesn't take 100 years for a market to clear.

    It's sad that it took 4 days and 100 comments before Morgan finally capitulated. But better late than never.

    David in Liberty

  • Report this Comment On April 20, 2013, at 9:34 PM, whereaminow wrote:

    I should add that the term "perfect" starting point, I agree with that. But same goes for anything you are measuring in economics. That is why econometrics is such a tragic failure.

    David in Liberty

  • Report this Comment On April 20, 2013, at 9:37 PM, mtimothy wrote:

    Well there is so much nonsense to all of it.

    Who would think the fed could produce 80B a month of public debt currency to purchase mortgages and treasuries, how that can even be conceptually possible, none of it has any meaning, it's currency.

    I have studied some principals of currency. The metals are money not currency. They are the only money that you can posess, that is not someone else's debt.

    When a car loan for example is paid to the bank.

    A sum of currency was transfered, although that individual perceives that their own debt went down, that currency still exists and is the same debt. I imagine fed has mechanisms to destroy currency but I don't if it every occured and debt was never once extinquished in this system.

    Gold should work for a rainy day. We do see companies are a form of tangible equity in the way gold is. Is it just behavioral that stocks are in cycle while gold is not at this time, like nasdaq was behavioral in 2000-01. Maybe nothing more than

    that to it.

    I think we'll need gold and silver and others as an allocation. I only believe in coins in possession, I believe the paper versions traded, are fractional reserve.

    I do some cyclical analysis, I have a time frame to

    buy gold toward the end of June. I do hold silver coins but almost no gold coins. If I had currency available I would make some incremental purcha

    se now but I have my budget commited for now.

    We don't know what the gold crash was about,

    cyprus selling, heck some countries that had it were invaded, maybe they just don't want it for that reason.

    Maybe it is a generalized counterparty call, margin call.

  • Report this Comment On April 20, 2013, at 9:41 PM, kyleleeh wrote:

    I didn't say it would take 100 years for the market to clear, I said it would take a long time for a market "trend" to become clear. The average return on stocks and bonds is based on decades of trends not a few years.

    yes, markets always clear...often at irrational prices. Only over the course of decades does the irrationality get sorted out into a clear trend.

  • Report this Comment On April 20, 2013, at 9:59 PM, whereaminow wrote:

    It's clear that we have further economic disagreements. The term irrationality as you used it is a subjective value. From the perspective of economics, all economic action is rational if a person acts using means to achieve ends. So from an economic perspective, no matter what the price is, the market clearing process is rational. It is only irrational from a subjective "I don't agree with it" point of view.

    This is why I don't get worked up about a gold pullback. The market, assuming there is no coercion - not always the case - is acting rationally. If I don't agree with it, and think it's irrational, then I am making a subjective claim and will add more to my gold stock.

    David in Liberty

  • Report this Comment On April 21, 2013, at 12:52 PM, TMFAleph1 wrote:

    Goldbugs' circular logic remains impeccable.

  • Report this Comment On April 21, 2013, at 4:23 PM, aleax wrote:

    I did enjoy the essay at http://www.johnbudden.com/wp-content/uploads/2012/09/ltasset... , but one bit in it bugs me: it describes our current deficit as "Largest peace time deficit".

    I wish the author would go spend a month with our troops still in Afghanistan (the longest war in US history!) and then come back and rethink what "peace time" MEANS!

    For that matter, there is no actual PEACE in Korea either (where my wife's lamented dad served long ago) - just an armistice, which has actually been denounced by North Korea recently.

    Looking at it properly, I don't think the US has actually been at peace for any substantial length of time since late 1941 -- the "cold war" and the "war on terror" may or may not technically be "wars", but what with armistices and "police actions", it's been one thing after the other... and a huge build-up of military might and expense.

    Had the US been able to limit military spending to far less than 1% of GDP per year, as it did e.g in the 1920's, for the last 80 years or so, I doubt it would be carrying any substantial debt now, despite all other "big gov't" issues. Which is why it's not only incorrect, but very misleading, to call our current debt and deficit "peace-time" ones!-)

  • Report this Comment On April 22, 2013, at 6:10 AM, TheHeroTheDavid wrote:

    What a thread!

    From reading this board I didn't know left-wingers were such capitalists oppressing the working classes, whilst chastising "gold-bug" "right" wingers for not exploiting the masses.

    Karl Marx would be scratching his head.

    I notice no one mentioned that the US GOVT confiscated all that privately held worthless stuff called gold in the 30s!

    Point 1/ Re starting points for gold - anytime before 1971 would be idiotic as has been stated. However, why is the same not mentioned about stock markets?

    As the main indexes are comprised of global players or have global trade, the absence of the current access to markets such as Russia, China & India should surely be rebased according to current penetration/trade. It might also be as idiotic, but one would expect a greater return.

    2/ Since the 80s in particular, there has been a massive increase in debt. One would again expect equity & bond returns to be far superior to gold.

    3/ The stock market has been bailed out & subsidized since 2008, & possibly trillions of liabilities have been transferred form the private sector to the public sector.That again inflates stock & bond returns.

    4/ The whole USA financial system falls apart & will need restructuring if dollars stop being the world reserve currency. The BRIC countries are already doing some non-dollar trading, & the IMF has recommended a new world reserve currency.

    And if that happens, the dollar will devalue, & if that happens gold will go up in dollar terms ( though not in some other currencies).

    5/ Buffet bought a lot of gold in 2008 & extolled its virtues ( of course mainly in a hedge vs oil).

    I don't think any investor holds the majority of their portfolio in gold. But it is an insurance against a currency that can become worthless overnight,& all the underlying indicators that forced gold through the roof remain, but market sentiment is whatever it is on any given day.

    Staggeringly, some idiots talk about ability for the USA to "service" debt interest, oblivious to the fact that they aren't paying a cent of it back & are therefore benefiting now at the expense of future generations.

    I bet not one of them runs their own household like that. How would they have any money to invest?

  • Report this Comment On April 22, 2013, at 7:42 AM, TMFAleph1 wrote:

    <<Buffet bought a lot of gold in 2008 & extolled its virtues.>>

    Source?

  • Report this Comment On April 22, 2013, at 4:52 PM, SN3165 wrote:

    Thanks David in Liberty for providing some common sense here.

    Gold IS money, people like Morgan Housel will never understand this.

  • Report this Comment On April 23, 2013, at 3:19 PM, TheJadeMonkey wrote:

    <<Thanks David in Liberty for providing some common sense here. Gold IS money...>>

    I don't pretend to understand this stuff, which is why I read discussions like this one. But oversimplifying a point just to brush off somone's argument is a waste of all our time. "Common sense" rarely applies to abstract systems like money, and the bullish argument for gold on this thread seems to rest on the assertion that "Gold is NOT money"

  • Report this Comment On April 24, 2013, at 5:02 PM, mtspace wrote:

    I am almost 100% certain that anyone who can stay invested for the better part of two centuries will find stocks to be superior to treasuries or gold. Not sure my time frame is quite that long. Still, I am inclined to keep most of my portfolio in equities for the long haul.

    On the other hand, if gold's extraction cost exceeds $1000 per ounce, it seems difficult to imagine that the price of the metal would slip below that level for many years. If inflation heats up, commodities are likely to increase in cost, gold included.

  • Report this Comment On April 25, 2013, at 12:03 PM, ikkyu2 wrote:

    "David in Liberty" may be a haranguing gold bug, but he's right about this: you don't look at inflation-adjusted returns on gold denominated in US dollars prior to 1971, because the price of the US dollar was pegged to gold during those years.

    If you try to inflation adjust gold to the dollar prior to 1971, what you get back is meaningless; you are adjusting both the numerator and the denominator of a ratio by the same multiplicative factor and pretending to be surprised when the overall adjustment produces no change.

  • Report this Comment On April 25, 2013, at 10:04 PM, TheHeroTheDavid wrote:

    Now this thread is dead, I'm going to tell it like it is!

    People think they are market savvy, but basically know nothing; the whole stocks/bonds/commodities system is a house of cards held up only by the faith of those who have no power to manipulate it.

    World economy $70 trillion, World assets $200 trillion, yet derivative liabilities alone are £700 trillion & rising every day - escalating more than since the crunch.

    It's all paper.

    Then we have gold, or more specifically, GLD. You do not own it. Even if you hold it in a bullion bank - YOU DO NOT OWN IT! Just like derivatives, the whole thing is leveraged like crazy, in some cases 100 times. So that means that that bar you think you own, 99 other people do too!

    It's all paper.

    ABN AMRO technically defaulted when they refused to give people gold, & instead offered cash instead. They don't have it, see.

    It is nothing to do with the price of extracting gold - no one knows what the real value of gold is, other than it's being rapidly manipulated - look up Andrew McGuire http://en.wikipedia.org/wiki/Andrew_Maguire_(whistleblower) on all of this.

    We're like beaten dogs being suckered by a few scraps of food into walking into a knockout punch, or Bertrand Russell's Inductivist Turkey not believing Christmas coudl ever come.

    It is really hard to buy physical gold. That says more than anything about the price, & there are queues in Asia & Russia, & both Russia & China are trying to develop a real ASSET BACKED currency.

    Owning gold & silver isn't about being a bug, & chasing speculators normally get what they deserve.

    This is about physically owning coins etc as an insurance against the collapse of the pyramid.

    Think about it. $Trillions being created, yet no real currency devaluation in most goods. This never lasts, but who can call it? I bet people in Greece & Cyprus wish they'd just bought physical gold, & the future only looks bright to PollyAnna's who've never looked at the history of finance & see that these collapses happen again & again & again.

    Maguire says that when the actual huge jump in price happens, it'll be directly after they've paid out in paper - paper that will be worth far less than that all important hedge people thought that they had.

    The major banks control the bullion banks! Where do you think all these derivatives come from?

    Vastly inflated debt, huge quantative easing,ultra low interest rates, physical shortages of gold, & countries where currencies have devalued before seeing flocks of people trying to get a time honoured means of exchange. Where do you think that this will end?

    Are you aware that Fort Knox has never been independently audited? Are you aware that Germany wants it's gold back from the US after the Fed refused to submit an audit of its holdings?! Are you aware that they still haven't given it back, & the dollar is not looking like a safe haven at all & the only reasons the major investing countries aren't making more of a fuss is because they don't want to start a run & get totally stiffed?

    This is just the tip of the iceberg, but imagining hitting hit seems more scary to people than actually trying to avoid it!

  • Report this Comment On April 26, 2013, at 2:28 PM, Chippy55 wrote:

    Folks, how much do all those shysters on TV charge, $75 per ounce of gold? And where do store it, at home or rent a safe deposit box? If you want to own gold coins, go on eBay, and if you HAVE to buy it from the guy on Fox news who has 2 commercials per hour, do your own due diligence on him first. You'll be surprised what you'll find out.

  • Report this Comment On April 27, 2013, at 10:34 PM, jwfoster wrote:

    Here we are a week later and its $130 off the recent lows. The general lack of information in these articles is criminal. Gold only has relevance since 1971 when paper and gold became no loner convertible. Since that time the Dow has gone from 1000 to 16000 and gold from $36 to $1560.

    Any article that doesn't use a 41 year time frame for gold is useless and represents a complete lack of understanding of the global monetary system.

    Name one fiat currency that lived to see its 100th birthday at any more than a pittance of its initial value as all paper currencies fail. 41 years into this experiment our debt to GDP sits at unsustainable levels while our currency has lost 95% of its value relati e to gold. How long before

    As for gold versus stocks put 10 paper stock certificates in a vault in an ounce of gold for 30 years and then pull out the Tandy Blackberry internstional paper sears Kmart JD Penney powers woolowrths or whatever and witness the value versus gold. I'll take the gold versus all the paper claims.

  • Report this Comment On April 28, 2013, at 9:14 AM, Zakeroo wrote:

    Bought gld at 133 still holding at 141 not a bad return in 3 weeks . Everything is timing

  • Report this Comment On April 29, 2013, at 1:58 AM, TMFAleph1 wrote:

    <<As for gold versus stocks put 10 paper stock certificates in a vault in an ounce of gold for 30 years and then pull out the Tandy Blackberry internstional paper sears Kmart JD Penney powers woolowrths or whatever and witness the value versus gold. I'll take the gold versus all the paper claims.>>

    That comparison is inappropriate. The appropriate comparison is gold versus a broad market index such as the S&P 500.

  • Report this Comment On April 30, 2013, at 1:23 AM, OnTheContrary wrote:

    Gold doesn't correlate with inflation? In 1913 when the Federal Reserve was founded, the gold price was $18 an ounce. Since then the dollar has lost 98.5% of its value in purchasing power, or to put it another way it is worth only 1/66th of what it was worth in 1913. Gold, on the other hand, is worth about 81 times what it was worth in 1913 - or in other words it is almost perfectly correlated - inversely - with the purchasing power of the dollar, and with the US money supply having tripled over the last five years, the only thing preventing runaway inflation is that: (1) most people continue to believe that the heavily doctored CPI is a true measure of inflation (thus "inflationary expectations remain well-anchored" to descend to Fedspeak; and (2) the velocity of money has declined while the money supply has ballooned. All that fresh monopoly money is just sitting unused in banks, or actually it is lodged with the Fed that pays banks a little interest on the money it fed to them in the first place. If the US economy ever improves to the point of a truly sustainable recovery, both interest rates and price inflation are going to rise rapidly, and then accelerate, and you will be glad it before that time you've traded some of your soon-to-be-worthless counterfeit money for the only real monies in the world - gold or silver.

    Gold is not an investment, although like anything else it can be appropriated by market manipulators as a trading vehicle. What it is, is the only money that can preserve your wealth, and it comes to the fore sooner or later whenever some fiat issuer gets irresponsible and greedy, as now just about everywhere.

  • Report this Comment On April 30, 2013, at 7:03 PM, Darwood11 wrote:

    Wow, I thought I'd come back to see what's transpired.

    My conclusion? If you want to push people's buttons then talk about gold or Apple. Netflix is also a good one!

  • Report this Comment On May 06, 2013, at 4:50 AM, RedScourge wrote:

    The reason that gold lost huge value during the 80s is that the Fed decided to do as close to the exact opposite of what it's been doing now, and the government did not decide to significantly ratchet up spending and throw burdensome regulations onto an already hurting economy.

    Gold's been going up for 10 years now; it's more than earned a correction, however the underlying reason for it going up has not really ended, merely stalled. With that being said I'm in stocks at the moment, they've still got a good year on em before I'd want to think about going all in on gold or something like that. I've hedged my bets by buying gold stocks after the decline, as based on their present valuation it's like buying gold for $1200 per ounce.

  • Report this Comment On May 08, 2013, at 4:51 PM, scooper2013 wrote:

    It seems like Pershing is on a fast-track to become Nevada's newest low-cost gold producer. The company has an experienced management and consulting team as well as gold properties that are in advanced stages of exploration with significant infrastructure already in place. Importantly, the majority of the company's shares are owned by insiders and institutional investors, which is a good indicator that shareholders interests of realizing value will be well-served. With gold becoming an important hedge against inflation, currency depreciation, and political unrest, Pershing Gold offers an opportunity to invest in Neveda's gold deposits at a relatively early stage. While the risks with companies exploring and developing gold projects are high, the rewards stemming from investing in pre-production gold companies are also high. The Relief Canyon Mine already has a history of gold production, which should reduce the risks inherent in Perhisng's common stock.

  • Report this Comment On May 08, 2013, at 10:38 PM, wasmick wrote:

    Darwwod is right, this is almost as much heat as an Apple article gets; and Apple acolytes are just as rabidly devoted as gold's.

    whereaminow is right, gold's returns should be taken from a point after its market value had been established but that sure is a lot of hot air to conclude that gold has had decent returns albeit not quite as good as stocks. And his approach is such a nice mixture of arrogant and condescending (which is surprising since his point is so basic) it's easy to be turned off by the obnoxiousness.

    To those crying about market manipulation, grow up. Every market is manipulated.

    And yes gold is money just like pretty much everything else in the world, like salt, work, monkey crap, cigarettes, paper money and oil. If you can exchange it for goods, services or the currently in vogue currency...it's money.

    I believe holding some PMs as a currency hedge makes sense, that's why I have a 10% allocation. But if you are holding nothing but gold you're a foolish speculator and if you're buying gold because you think a currency collapse is imminent than I submit you are buying the wrong metal. Buy lead.

  • Report this Comment On May 09, 2013, at 8:50 AM, MotleyGeo wrote:

    Hi Wismick – I am going to split a investing terminology hair with you. All currency is money, but not all money is currency. By definition, only coins and paper bills printed by a government and circulated in a economy for trade is “currency”. Salt, cigarettes, food, gold, etc. that you may use to trade one thing for another may be a form of money, but they technically are not currency.

    These two terms are often interchanged but they are similar yet different things. The value of a currency can go to zero. Money on the other hand will generally always hold some value for trade.

    I like your idea of buying lead. It falls in line with my personal belief on charity. "Give a man a meal and you fed him for one day. Give a man a lead weight, bobber, string and a hook and you've fed him for life." (Sorry, I freely adapted the common phrase to fit this conversation!)

  • Report this Comment On May 24, 2013, at 7:49 PM, Questionable2 wrote:

    Gold is like everything else subject to supply and demand. Gold is priced in Dollars. Europeans saw the price of gold go up even when the price of gold didn't change here in the US as the dollar appreciated against other currencies.. Foreigners like Soros have unloaded a lot gold as a strong dollars means they get more of their local currency

    for the gold they had previously bought. As this process took place gold supplies increased and the price of gold dropped. The reason for this is that for everyone selling physical gold there has to be someone buying it. To get others to buy the excess gold you have to lower the price to induce the buyers to clear theexcess gold off the market.

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