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Will Gold Hit $800 or $1,500 Next? Who Cares?

Gold bugs don't know what to do these days. Is gold going back up to $1,500, or will it fall back to $800 or even lower? The story seems to change by the day.

Head gold bug John Paulson must also be scratching his head after watching his gold fund -- which consists mostly of his own money -- fall 65% so far this year. The gold thesis is falling apart, and traditional stocks are now outperforming the long-term performance of gold, even after the precious metal's run-up.  

Who needs gold, anyway?
Few average investors were loading up on gold at $300 per ounce during a brief window when you could have outperformed the stock market over a 10-year period. It wasn't until the financial crisis that gold became a hot commodity, and those who bought gold then haven't done well. 

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts.

Both the S&P 500 (SNPINDEX: ^GSPC  ) and the Dow Jones Industrial Average (DJINDICES: ^DJI  ) are outperforming the spot price of gold and the highly popular SPDR Gold Shares (NYSEMKT: GLD  ) , in which Paulson has a huge stake.

The gold trade unravels
There are two big reasons gold has fallen this year. First, the inflation that was predicted because of the Federal Reserve's money-printing and the U.S. government's massive deficits has failed to materialize. If it had, gold would have been a hedge against inflation, or so the story goes. The second problem is that interest rates are rising and the economy is improving, so investors are rotating out of gold and bonds and into stocks. 

Basically, gold is a tool investors use to hedge against doom and gloom. In 2008 and 2009 -- when the economy was terrible, the deficit was growing, and inflation looked like a sure thing -- gold was the investment of choice. Today, all three issues look like they're improving, and inflation may actually be too low. The gold thesis is unraveling before our eyes.

Stocks win in the long term
Long-term investors should focus on investments that generate earnings and cash over a long period of time. Gold is a great trade if you can time it right, but it has never outperformed stocks in the long run, and that won't change in the future.

A great place to look for investments that will outperform gold in the long term is high-paying dividend stocks. The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.

Read/Post Comments (18) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2013, at 9:43 AM, JoshPittyTheFool wrote:

    I did GLD max history verses S&P on yahoo which would be slight less than a 10 year period and gold is up 100% versus the S&P. Even on your graph, which is not a 10 year period, but a 5 year period, gold matches S&P 6 months ago. It is sad state, but a chunk of metal that doesn't produce anything beats the market.

  • Report this Comment On July 13, 2013, at 9:59 AM, wolfman225 wrote:

    I'm glad gold is "down". Isn't one of the basic investing thesis "buy when others are selling scared"? This gives me an opportunity to perhaps buy in at a greater value.

    Besides, the most likely reason for the non-appearance (so far) of inflation, as well as the juiced performance of the broader market has been precisely because the Fed has continued to monetize/digitize our debt, to the tune of $85B per month. You saw how the market reacted with the mere rumor that Bernanke was considering closing off the Fed pipeline "sometime in the future".

    The "free money" that has been propping up the market will inevitably end. When it does, the markets will fall, the economy will slow, and interest rates will revert to their mean, you will see inflation the likes of which we haven't seen since the "malaise" of the Carter era. At that point, it could very well be that even $1500 gold turns out to be a bargain.

  • Report this Comment On July 13, 2013, at 10:42 AM, plange01 wrote:

    gold prices run in very long cycles and its over a year into its down cycle that will continue for the next eight to ten years before bottoming and flat lining for year will be 25 to 30 YEARS! before gold sees new highs.very few people involved in gold will even be alive!!...

  • Report this Comment On July 13, 2013, at 11:41 AM, knives620 wrote:

    this would be very true, if the dollar was not losing value every day and the US getting more and more in debut and so it just prints more money. soon im sure the world currency wont be the dollar. hell even our largest corp. McDonald is offering stocks in Chinese currency, take a hint from that!

  • Report this Comment On July 13, 2013, at 11:51 AM, Dq1Ai2013 wrote:

    Its all rigged.

    No mystery.

  • Report this Comment On July 13, 2013, at 12:23 PM, fool6771 wrote:

    I looked at prices of the DOW and Gold beginning 1968 in when gold prices were first allowed to float. (Making this is the only fair time period to look at).Gold went from just under 40 to 1284 as of today 7/13/2013. The Dow went from 906 to 15464. Doing the math, Gold increased over 32 times, the DOW, just over 16 times. Gold doubled the Dow in the only time period that is fair to compare, The writer says Gold has never outperformed the DOW. I see it differently.

  • Report this Comment On July 13, 2013, at 12:53 PM, duuude1 wrote:

    Here's a historical chart of gold prices. You can find historical charts anywhere on the web, and they seem to agree so I posted a random one here:

    Now go ahead and look at a yahoo finance or google finance historical chart of the dow or S&P or nasdaq - does anyone really want to put money into gold (paper or physical) rather than in stocks after looking at these charts?


    Hey it's your money - just don't blame anyone when you are eating Purina's in your foolish old age.

  • Report this Comment On July 13, 2013, at 3:12 PM, EricTheRon13 wrote:

    Well, you assaulted the gold bug religion and so you were bound to get negative feedback. Anyway, gold always performs well when bonds have negative real returns (after inflation). In fact, this is a bigger factor than inflation itself as a cause. Even in the late 1970s when bonds had high rates, these rates were still less than inflation. And these rising rates meant that bondholders were losing money too. So gold took off. Again recently, the Fed created negative real returns for bonds which inflated gold. If bond rates go higher from here, it may hurt bondholders initially but the prospect of bonds having positive real returns is a killer for gold prices.

  • Report this Comment On July 13, 2013, at 3:29 PM, rhealth wrote:

    "Gold is a great trade if you can time it right" it is. Silver is better. As I always say when I bother to comment on gold vs stocks articles is "know what you're doing". Successful metals traders can make 40% or more per year, much more after compounding. If you don't know metals, buy yourself an index fund and look forward to purina gourmet, courtesy of your 6% annual returns.

  • Report this Comment On July 13, 2013, at 3:37 PM, justinmaxwell86 wrote:

    This author should read up before posting junk. Honestly, it's worse than Cramer's stock picking theories.

    1- the "all-in-cost" of mining gold is just above $1,000. Why? Because digging deeper required more labor, more oil to get the stuff up, more processing, basically more of everything as they re-open old mines to further develop.

    2- read Gibson's Paradox (something everybody seems to want to ignore, with no valid reason not to).

    3- inflation adjusted gold has outperformed the stock market.

    4- you better make sure your time frames are relative to each other as joshpittythefool and fool6771 states. "Its like a goldbug saying look at the stock market in 07-08', and look at the gold chart from 1900 to 2011." completely stupid.

    5- last but not least, where is the fed pushing people into? Homes and equities. out of 3 asset classes (real estate income properties, stocks, and commodities) stocks are near all time highs, real estate has "recovered" -in price-, and then you have commodities, specifically gold, which is low compared to its high. So campers, who are you going to trust and invest in with? Gold "bugs" who are investing in an asset that is nowhere near its high? OOOORRRR your slimy lying realtor and overpriced homes, orrrrrrrr your stock brokers/and this author promising you everything is fine in the stock market????????? Ill stick with the hated commodities, why buy high just so i can sell low?

  • Report this Comment On July 13, 2013, at 3:43 PM, ejhickey wrote:

    duuude1 :

    looked at the chart and i must be missing something because it shows the price of gold @ 200-400 per ounce in the 1920s and 30's. up to 1933 the price of gold was fixed at about $20.50 per ounce. then FDR aebitraily raised it to $35 per ounce, a roughly 75% increase as measured in us dollars. my point is: you may be right but what showed us doesn't come close to the facts and is confusing.

  • Report this Comment On July 13, 2013, at 3:47 PM, duuude1 wrote:

    "Successful metals traders can make 40% or more per year..."

    And what percent of people are "Successful metals traders"? Remember that the majority of mutual fund managers - professionals who do NOTHING else - are killed by the S&P500 that makes on average 6% annually.

    I'm a busy father of two and half way through this year my entire assets which are 100% stocks are already up over 30%. TMF's basic strategy of buying-and-holding good stocks is without doubt the best way for normal families to retire wealthy.

    If someone wants to be one of the "Successful metals traders" - go for it and just realize that unless you have the smarts and experience of a Soros you'll get killed like 99% of professional money managers by the S&P.

  • Report this Comment On July 13, 2013, at 3:51 PM, duuude1 wrote:

    To ejhickey: please see the note under the chart:

    "Compares historical real (inflation-adjusted) gold and silver prices back to 1915."

    You can also find similar non-inflation-adjusted charts which will show the $20/oz in 1920's dollars...

  • Report this Comment On July 13, 2013, at 3:53 PM, whereaminow wrote:

    Gold has performed nearly the same as the S&P 500 earnings since de-coupling in 1971, even with the recent pull back.

    So this statement:

    "Gold is a great trade if you can time it right, but it has never outperformed stocks in the long run, and that won't change in the future."

    Is highly misleading. My calculations show gold returning around 5% yoy since its price has been allowed to move freely.

    All investments come down to timing. And all investments have pros and cons. The stock market had a terrible inflation adjusted 20 year run at one point.

    Anyway, your knowledge of the subject is very limited, so I will leave it at that.

    David in Liberty

  • Report this Comment On July 13, 2013, at 4:13 PM, ejhickey wrote:

    duuude1 :

    thanks. sorry i missed that. going back to charts now.

  • Report this Comment On July 13, 2013, at 5:35 PM, larrygn wrote:

    Who really cares!

    After all it will rise and fall, as the panic struck act, but in the long run, it will head for $ 900.00 a price that it can maintaine due to production costs.

  • Report this Comment On July 13, 2013, at 6:20 PM, duuude1 wrote:

    Whoa, David in Liberty, duuude - a little bit of pot calling the kettle black there... your simplistic calculation with a classic picking of advantageous dates and statements like "All investments come down to timing" don't put you in very flattering light.

    As far as your calculations, you happen to pick an end date (now) that is mid-way up a huge price bubble.

    Homes calculated with an end date of Oct 2007 would make you look like a genius... we all know that was not the case right? Same with gold calcs with today's date and price.

  • Report this Comment On July 13, 2013, at 9:18 PM, ExposeIdiots wrote:

    The writer is either a crook or a complete idiot. Probably the latter.

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