April 20, 2011
– Comments (56)
David in Qatar
LOL, we'll post some deeper thoughts on this over the next few days.
As you know $1,499 is no less significant than $1,500. We are all just fascinated by round numbers (well those of us that aren't actuaries and past such primitive mathematical notions.)
When fights break out in the McDonald's hiring line, they call it a recovery.
Seriously, McDonald's. People are fighting over a job flipping burgers. And that's a recovery.
When the first McDonald's in Moscow opened, over 70% of the applicants had master's degrees. They called that a recovery too.
It's not exactly good news...
As TMFSinch and many PM investors have pointed out for a long time.
I would not invest in gold if you gave me the money. If have seen the chart of gold prices in the 1970's. People feared inflation so they bought gold and the price went straight up and then a year later straight down. Gold has no tangible value its value is only supported by emotion.
And we've never heard those arguments before.
Would you like to find the counters to those arguments, or would you like to join the rest of the anti-gold crowd that has been wrong over and over and over and over again?
buffalonate, As long as the government likes to print money your gold is safe.
Happy 420 . First!
Does anyone know the daily cost of the 5 military engagements the US is currently prosecuting?
Gold sets a record on Hitler's birthday? Oy!
Yes. I am guilty of a Godwin. I feel no shame.
LOL, Godwin aside, let's consider it an amusing irony since Hitler was a paper-bug and hypernationalist.
Maybe $2,000 can fall on Woodrow Wilson's birthday.
Redundantly, I shouda bought Gold ant $800 and Silver at $14. I'll never learn.
Well, USD index down 0.85% today so gold is not doing too well by going up 0.4% against USD ...
Silver is the one keep on running ...
The evidence of this is mounting. Silver is Neo.
And yet there is all that talk about "Nazi Gold!" being stashed in some Swiss cave or at the bottom of a lake.
I think it would be appropriate for CUT to sky rocket on Woodrow's birthday.
If silver is Neo I want to be Morpheus. Fishburn is one bad mamma-jamma in that role..
Oh, I'm the Kiss of Death. Down to $1,497....
"Gold has no tangible value its value is only supported by emotion."
Emotion tends to run pretty high when the S&P warns that US T-Bill is not worth the paper it is printed on.
I wonder if Bernanke owns any physical gold?
I dont own gold, but i do own silver miners, and i am loving it.
I dont think the dollar will go away for a very long time (Even though I am not a fan of the dollar at all) but it is important to be REALISTIC and not iDEALISTIC when investing...so I WILL pull out of silver when I feel it is overvalued in dollar terms
I'm still long several PM and semi-PM miners, so let it go up...
Ain't nothing wrong with that.
Another way to do that is to start with an initial position and then halve up as it rises, but only if it rises. In other words, make an initial investment of let's say $5,000 in silver miners. As the position improves considerably (say 25%), add $2,500. If it improves even more (another 25%) and you start to fear a top, add $1,250. If you are lucky enough to have it keep running another 25% add $625 and so on.
This protects you in a number of different ways.
If you make a purhcase and the market goes down (and your timing just sucks), you are only down on the initial investment.
If you run it all the way to the top, when it does crash you can get out with a real healthy profit still intact. Let's say you have made 4 additions to your initial investment, you are up on a cost basis by a large margin. (I'm too lazy to do the math) and that's a nice cushion in the case of a sell-off.
Think back to GPL. Following this strategy, had you bought it around $1, you would be so insulated from a silver top that you wouldn't even have to worry about it. You would be adding smaller and smaller amounts. If silver does a large reversal, you are can move out with a large profit still intact.
I understand this strategy runs against all conventional wisdom, but when you think it through, it is the safest strategy when you are dealing with a rising asset.
Silver luv you long time!
Gold bugs have been wrong over and over and over again at various times, which is quite normal since they are never anything but bullish on gold. The last time they were wrong, it lasted two decades!
You have guts, Alex. No knowledge of anything besides witch doctor economic models. But guts for sure.
No he didn't!
Thank you for illustrating in dramatic fashion just how ludicrous and useless the term "gold bug" is in the first place, and how commonly it is employed in support of wholly irrational straw man arguments against gold.
I am not a gold bug. I am an investor who has made the right call on gold and silver every time it has mattered from 2005 through 2011. If I fail to lock in my gains and reduce long exposure before the secular bull market completes its upward trajectory, then I will volunteer to wear the "gold bug" label in my shame.
Although I didn't participate in the 1980 spike, I can tell you that anyone who was left holding gold after Volcker hiked interest into double digits either knew they were playing with fire, or they knew nothing at all about the market they operated in. If you wish to direct your comment at individual gold investors who may have purchased before 1980 and sold at the trough before 2001, then I think fairness dictates that you specify same. Otherwise, you have merely constructed an unseemly straw man.
The myth that anyone bullish on something must therefore always remain bullish on thst thing, for life, without regard for rational fundamental analysis, is the most tired myth around. It's time to put it to rest.
Just wait....there is a big momment coming in May!
Dave-- Not sure what you are referring to by "witch doctor economic models." I think about economics in pragmatic terms; I'm not one of those theoreticians of libertarian economics who remind me of the old Marxist theoreticians in their propensity to discuss ad infinitum the fine details of a model that almost no relevance to the real world. That's not economics, it's not even "witch doctor economics", it's science fiction.
Chris-- Of course the term "gold bug" does not apply to anyone who has owned gold at one time or another. I try to contribute to a rational discussion of gold; the piece in which I looked at historical real gold prices going back to 1851 is perhaps the best example.
However, I'm forced to recognize that many gold enthusiasts -- at least among the sample of those who manifest themselves in the comments section -- are simply not interested in a rational discussion of gold pricing. They are happier to throw out price targets that they are incapable of justifying. When one tries to get them to justify their reasoning, their answer reduces to "Just because...". I'm happy to hear that there are many rational gold investors; I just wish they were more vocal.
Nonsense. You obviously spend no time talking PM's with the CAPS community. These Fools have had to justify their positions and strategies for the last three years to every skeptic around (and there have been lots of them, although fewer now). They've offered sound reasoning, well thought out investment ideas, and contingencies.
There are far more knowledgeable on PM investements and monetary issues than anything I have seen expressed in your writing.
Now, if you are done insulting my friends and readers, I would be grateful if you took a hike.
I don't follow the discussion of precious metals on CAPS, but I'm convinced there are plenty of people here who are better versed on the minutiae and oddities of the precious metals markets. However, I have yet to see any of them offer a convincing rebuttal of the quantitative argument I made that gold is in bubble territory.
This should be good. How about a link?
$1,500 Gold is Just the Beginning
I can't find much to disagree with in your article. I think it is quite likely that gold will continue its upward trajectory in the short- to medium-term. There are certainly plenty of catalysts that favor continued price appreciation.
What I don't agree with is the notion that current prices are justified from a fundamental perspective. I lay out my argument against that notion here:
Warning! Gold Could Drop Below $500
I'm surprised to find that you didn't comment on the article at the time of its publication, but I welcome your comments now.
It’s really hard, and I mean really hard to be in the anti gold camp. You have to admit anyone who says negative things about the stuff on this site generally gets ripped to shreds. Mind you people spouting ‘gold bug’ aren’t much better, but I think we all are oversimplifying our positions when anti gold guys saying ‘gold bug’ and the pro gold guys saying ‘you just don’t get it.’
I might not know as much about gold as Sinch, but in essence all people in the anti gold camp are really just trying to tell you one thing: you are in one of the most speculative investments known. Props if you made money, but it was through speculation.
Sure, gold is a store of value, but as I learned in my finance classes that I had so many years ago, this is only true over the extremely long term. We are talking lifetimes. Over one person’s lifetime it may bubble and bust, or it may flat line, or do all sorts of loopy things, but predicting where it’s going to go IN YOUR LIFETIME is speculation. Sure, if I lived for 1,000 years I’d be a gold investor myself, but I’m going to assume that won’t happen.
Gold guys, you may be right that it hasn’t equalized over the past few lifetimes, but you are playing with fire here. You have NO IDEA where this is going to go, and any attempt to say you do is nothing but speculation. And the higher it climbs, the higher the stakes are for a correction.
I will honestly say, it’s not that I think gold is a bad investment, it’s just so speculative and so volatile it scares the living crap out of me, and if someone came up to me and said invest in gold, I would wonder what risks he wasn’t willing to take with his finances. I’m sure ETF’s are the second favorite stock pick among many gold investors.
Want to see the scariest graph in the entire world? Go to Goldprice.org and look at all data. While you’re at it look at all data for silver.
Like I’ve said before, I hope all you gold guys aren’t left holding the bag, you get rich and retire early. You took a chance, and it paid off and anyone trying to take that away from you is an idiot that didn’t have the balls to do it.
I happen to be one of those people who doesn’t have the balls to speculate like this.
Re: Chart: Gold, Real Annual Average Price, 1851-2010
Why are the large fluctuations in real annual average price only occurring in the 1971-2010 era? Is there any specific reason that you can pinpoint, other than sheer coinkydink, to explain why a large fluctuation in gold price did not occur at any time from 1851-1971?
There are a few reasons, but I would like to hear you explain them.
You are right to say that gold will not rise forever. And thank goodness for that. What is important are the catalysts for rising prices, and the how those affect people's subjective value scales for gold and silver.
One of those catalysts present today that was not present in 1980 is a vast and extremely expensive overseas empire engaged in several military engagements. Wars are not free. Wars are always inflationary. Long wars are disasters for a country and a currency.
I would love to see America adopt a sound policy of border defense, a reduction in confiscation+redistribution in the welfare/warfare state, interest rates that come close to the reality of the nation's available savings and time preference, and a stable money supply. These things would be disasters for the price of gold. And if they ever happen, I will be happy to dump all but the tiniest portion of my metals (the tiniest portion would remain simply because we are dealing with politicians after all...)
Nor would I ever advocate 100% exposure to metals with no other stocks (if you can afford to be investing in the first place) to anyone. But if you're just getting started and you have no "insurance" against the exponential growth of the warfare/welfare machine (considering its historic role in destroying national currencies), I would advise anyone to start building a safety nest in PMs. Once you feel comfortable, then diversify with stocks. If the country ever decides to choose sanity over perpetual war, and sound fiscal policies over perpetual raising of the debt ceiling to meet the promises of previous generation's "leaders", stable money over inflating/crashing/re-inflating/latherrinserepeat, that would be the time to stop worrying about that stupid yellow metal.
"Sure, gold is a store of value, but as I learned in my finance classes that I had so many years ago, this is only true over the extremely long term. We are talking lifetimes. Over one person’s lifetime it may bubble and bust, or it may flat line, or do all sorts of loopy things, but predicting where it’s going to go IN YOUR LIFETIME is speculation. Sure, if I lived for 1,000 years I’d be a gold investor myself, but I’m going to assume that won’t happen."
This is precisely the point, as I showed in the article I referenced above. Munchies101 has it right: Gold may be a store of value over the EXTREMELY long term, but within a practical timeframe it is a speculation. Furthermore, there is no way in which gold can thought of as an investment; the expected long-term real return of gold is exactly zero and that is as it should be. Anyone expecting anything more is speculating (at times, such speculation may have a positive expected value) or does not understand gold's function.
I hope your going to address D in Q's comments
I'm curious if anyone is going to take up Alex's challenge on making a quantitative case for gold or any of the myriad gold targets...
Alex's article is built upon a fallacy that "reversion to the mean" exerts a more powerful influence on the future direction of the gold price than the macroeconomic factors responsible for the bull market. Anyone who wants to take an analysis that ignores the accumulating nature of the debt crisis or the intractable peril of the U.S. dollar's purchasing power, and dress it up as a quantitative assessment can be my guest, but they are bound to discover that the analysis will not be predictive of forward pricing trends for gold. Viable quantitative analysis, furthermore, must consider all available relevant data, and that article ignores key data such as the all-in costs of mining gold.
The article suffers additional fallacies as well, including the failure to account for historical variations in the legal framework of gold as a monetary instrument, comparing periods where the dollar was fixed to gold to periods where it was free-floating on an equal basis, and relying upon badly flawed official inflation data as a means of tracking value dynamics.
So congratulations, Alex. You probably succeeded in scaring the pants off of some newbie gold investors at $1,350 gold by suggesting that $500 gold is somehow a realistic possibility within the next several years (it is not a reasonable expectation), and then proceeded to confuse the heck out of them by indicating you think it could still go substantially higher, or that you're bullish on gold miners but not on gold, etc. I have found your analysis on the whole to be all over the place, and lacking in conviction in one direction or the other.
Gold will correct at some point. It could happen anytime, and it could even be quite deep. But $1,200 is a floor beneath gold so strong you could pile all the paper money in the world on it. As gold continues to $2,000, I hope you are pleased with the number of investors you are able to deter from seeking exposure along the way, but I prefer to gauge the value of my analysis according to the real-life investment gains that my readers are able to accrue. If I were an uncertain Fool out there in the woods, and had only your analysis of gold to go by, I would have no clue how to proceed.
Validated macroeconomic analysis led me to identify gold and silver as the safest, choicest sectors for my investment capital back in 2005. You may think I have no better than a gambler's chance of understanding how high it can go or how long it can last, but over the years my understanding of the macroeconomic landscape has only grown stronger. I have my finger on the pulse of gold, and I'll be the first to let you know if $500 ever becomes a reasonable possibility again.
Please keep your convictions. I like having various opinions to weigh. The fool needs you and you write some very convincing articles on a variety of topics.
But, I got to admit to you that I am very scared for my children's future. I see nothing but piles and piles of debt all over the wordl with growth at less than 2% and more and more collecting than paying in. I see a Federal Reserve and other central banks as the backstop to worldwide debt. I know you probably think I see black helicopters, but someone is purchasing all this debt and I don't think it is just the Chinese.
It's OK Alex,
People like you laughed at me when I said the country wasn't being responsible with the dollar and gold would go over $1500.
Now people like you are blaming it on a bubble and saying it will go back down to $500.
Did we suddenly get more responsible and voted for Ron Paul for President when I wasn't looking?
Apparently making money for over a decade on PM's isn't enough of a track record for the people that missed the boat and like to point fingers.
Alex is your claim that inflation really isn't real if this is a bubble?
STOP IT - ALL OF YOU!
#5 I would not invest in gold if you gave me the money.
You better not. Gold is not an investment.
Yes, you can pay TOO much for gold or silver, but you do not buy them for hopes of gaining more dollars in the future, as you do stocks. You buy gold and silver to protect your wealth.
Lets say Ben Bernanke has an epiphony today and pulls a Volcker on the market. Gold tumbles to $700/oz. Will I be upset that gold lost 55% of its value? Absolutely not. I will be happy that the money I put in gold is going to buy as much at $700 as it did at $1,500.
As an owner of gold, I am NOT happy to see it hit $1,500 and I'll be even LESS HAPPY at $2,500. That doesn't mean I'm not buying more, but its one purchase I prefer to cost less in the future.
Ok this is ridiculous. I honestly can’t take the wise ass comments from the gold guys anymore so I’m going to make my own.
What analysis can you do for a rock? Pretty much all your analysis is going to have gold in the denominator and some random thing in the numerator. Grow up, that’s not analysis. “According to the amount of pickles in existence on the planet, gold should be worth $4trillion dollars a bar.”
Start spouting something other than technicals and fundamentals. Oh wait you can’t, gold doesn’t have value.
Also I’m so sick of you confusing results with sound thought processes. Just because it went the direction you want it to go doesn’t mean your underlying thesis was correct.
Sinch, I’m so sick of you being the piper that is leading these people to eventual collapse. I feel like many of us have laid forth valid opinions and they get dismissed or worse ganged up on by your cult.
I’m sick of macroeconomic arguments, absolutely sick of them. It’s like your trying to predict the future in your crystal ball of doom. You can’t predict the future. What happens if the fed increases interest rates and all these idiots lose money Sinch? Are you just gonna say “whoops my bad guys, you should have deleveraged your speculative position.”
Once again, I’m going to post something I posted on Binves blog once:
Gold guy: Buy gold, it’s going up, waaaayyy up!
Other guy: Why do you say that?
Gold guy: Because of the fundamentals and technical’s surrounding gold.
Other guy: What about the possibility gold is overvalued? It’s been going on a rip lately.
Gold guy: Forget value. The economy is crashing, the recovery is a fraud and your dollars are becoming worthless. In a few years your money will just be green pieces of paper in your wallet.
Other guy: But we’ve had countless recessions before, a few that were worse, and we’ve made it out just fine. What makes you think this one is different?
Gold guy: The fundamentals.
Other guy: That makes no sense. You just claim that gold has an infinite value because you don’t believe in the fiat system.
Gold guy: You make no sense. Your greenbacks have nothing backing them besides a fraudulent economy that gives you an illusion to their value.
Other guy: I hate you
Gold guy: I hate you more.
Chris and Alex,
I understand what it is like to be passionate about a opinion. I also think a agreement to disagree may be needed at this time or TMF July Fourth Picnic will be oddly tense. Honestly, who wants to eat BBQ while the two of you are giving each other the stink eye?
The only gold I own rests on my left hand as a wedding band. Personally I have no use for the stuff. However, what does interest me is the opinion of those driven to buy it. As people flock to gold as a "safe haven" the price of the mining companies I own goes up. For me that is good. I think of myself as being a happy Amish man that bought into Sinclair Oil early in the last century: no need for the stuff but happy it is all the rage. I know the Amish don't typically hold stocks but I'm trying to illustrate a point with a dash if light hearted humor.
P.S. - If moths were able to purchase porch lights like we do gold the price of a light bulb would be outrageous. Think about it.
You used to praise my analysis of gold, but, sadly, that only lasted as long as I agreed with you. My analysis isn't all over the place; it's just that I changed my initial position on gold after looking at it more closely.
Reversion to the mean is a very powerful force that is observable with regard to every major asset. Sure, other factors may be more influential in driving gold prices in the current bull market, but that is like saying that clicks and eyeballs were more influential than cashflows in driving the price of internet stocks during the bull market of the late 1990s. It was true for a time, but it did not negate the fact that those stocks were overpriced (by the way, there is nothing contradictory about the notion that gold will continue to rise in the short- to medium-term, despite being overpriced.)
It looks like an odd choice to believe that mean reversion no longer applies to gold when: (1) Empirically, it is observable over the period for which we have data and (2) theoretically, it is consistent with the notion of gold as a (very) long term store of value. In that context, the burden of proof falls squarely on those who want to thow out mean reversion to explain why that makes sense -- simply asserting it won't do the trick.
Forecasting eventual reversion to the mean is not the mistake you make. You are correct that gold will likely revert eventually to a mean, but I think you overlook the likelihood that it will revert to a mean that in nominal terms lies well above your $500 figure. If we had Volcker installed as Fed chairman and tasked with raising interest rates abruptly into positive real territory, and a Congress willing to balance the budget this decade with severe austerity despite the obvious economic ramifications, and financial reform that actually tackled the obscene levels of risk in leveraged derivatives, then perhaps I might concede the relevance of your quantitative analysis. Until you can make your analysis relevant to empirical observation of our present macroeconomic condition, then I'll take my present-day empirical analysis over your historical empirical analysis any day of the week.
I accept no burden of proof whatsoever, particularly since you did not address the fallacies I indentified in your analysis. Moreover, your comment #2 injects an additional fallacy, since theoretically, it is possible (indeed, it is likely) for gold to increase in nominal price while still eventually ceasing to accrue value in properly adjusted (non-CPI) currency terms.
With that said, and in the spirit of cato's comments above, I look forward to continuing what has been an enjoyable professional and personal dynamic between us. I don't agree with your perspective on gold, but I do defend your right to express it and I respect your intentions behind as being in the best interest of investors according to your outlook.
If the Fool ever does throw a company BBQ for us writers, let's enjoy a frothy beverage and enjoy a friendly debate. :)
How come Alex can't address my comment #36?
Revision to the mean? That's funny especially when he doesn't know why gold reverted to the mean for previous generations.
An army of CFA's running around the country and none of them understand the first thing about money.
David in Qatar
I don't think I've ever seen this before on TMF!...
TMF writer's disagreeing "strongly" with one another.
Usually, it's the other way around. Their patting each other on the on the virtual back.
I'll address your comment in good time, but, as you can imagine, taking the time to reply to someone who is already convinced that he is right and isn't going to give the response serious consideration isn't my first priority.
Fine. i'll start a new thread. You can either chose to respond there or allow my comments to stand uncontested.
Although you have approached me with nothing but disrespect, I will nonetheless take a moment to address your baseless criticism.
I am not familiar with your username. If you and I have discussed gold in the past, you'll have to refresh my memory with links. I have had scores and scores of friendly and highly constructive debates with gold skeptics over the years, so I will not be cast as some autobot hell-bent on ridiculing disparate perspectives. As for your reference to a cult, I think you have perhaps mislabeled the court of public opinion.
If you are sick of macroeconomic arguments, is that because you prefer to remain agnostic toward the future than attempt to forecast trends? You my find that to be a comforting investment strategy, but I most certainly would not. I consider effective trend forecasting the primary staple of a successful investment strategy (though I recognize there are alternate roads to success).Moreover, does not your above statement accusing mwe of being a "pied piper" leading people to eventual collapse inherently invoke your own attempted prediction of the future? Hmmm, that appears slightly contradictory.
I initiated my gold and silver exposure in 2005 because I correctly forecasted a multiyear secular bull market in the metals, a corresponding secular decline in the USDX, and a resulting systemic financial crisis. Those forecasts caused me to feel unsafe seeking broad equity exposure at the time. I correctly forecasted a continuation of the pm bull market when most of the world presumed it had reversed course in 2008, and I managed to avoid selling into weakness as a product of that forecast. Thereafter, I forecasted a permanent bottom in Silver Wheaton shares at $2.51, a looming pause in gold's recovery in February 2009,a major breakout in September 2009, and then another pullback in December 2009 with gold near $1,200 (all the while taking care to reiterate that those near-term calls were highly speculative, and that actions taken on the basis thereof must be constrained accordingly). I certainly would never lay claim to prescience, but my disciplined approach to comprehensive macroeconomic analysis has permitted me to navigate these markets very effectively over time, and accrue substantial investment gains along the way.
What happens if the Fed raises interest rates by a degree that would be capable of impacting gold? The domestic economy would roll over and play dead until the next round of quantitative easing became politically feasible. If Fools are leveraging their precious metals positions, then they'll find no sympathy here. I have always advocated zero leverage with respect to precious metals. Meanwhile, while you're wasting your time attacking me for making so many correct calls with regard to precious metal stocks and making my readers real money, while the financial media universe is packed with folks getting away with failed call after failed call after failed call after failed call and seldom being called to task on that record. My silverminer portfolio has an 88% success rate of picks that have successfully outperformed the S&P 500. Your criticism is therefore utterly unwarranted, woefully misplaced, and thoroughly rebuked.
Wow Sinch...I really woud love to buy you a few brews one day
I am fairly certain of two things:
First, Munchies101 had that conversation with himself in his head and not with anyone here. It's ok to talk to yourself, but when it turns to argument, seek help. I think it's obvious by TMFSinch's and my replies that no such nonsensical back-and-forth occurs here.
Second, Alex Dumortier posted charts he doesn't understand, hence the inclusion of 120 years where the price of gold was fixed, which he inferred as evidence of a mean. He asked for quantitative evidence that gold is in a bubble? That superficial analysis of gold prices earned him 205 recs!
Playful banter aside, I have answered your quantitative argument definitely. Your choice to let it stand or respond.
Sinch, first like to say sorry, my was a little hot headed when I made my last comment. I think I’m done arguing about gold with everyone, but I guess I’ll sum up my position in a paragraph or two and call it a day.
It seems that for gold to progress much further is a risky endeavor, and it would seem like a better idea (in my opinion) to lock in your gains and starting capital then to pursue this upswing much further.
Gold is very volatile, and the higher it climbs the greater the chances of a large correction are. You two are obviously very informed about PM’s, a lot more then me anyway. But at the same time I don’t need to be as I will never be long/short PM’s so I don’t need this knowledge.
But it seems the more informed crowd is cheerleading the non informed crowd to stay in something they do not fully understand. This usually doesn’t matter as buy and hold mentality fixes most knowledge shortcomings, but not when PMs are involved. Most of us don’t know half of what you know, and when in a speculation of this magnitude that, is the investors saving grace.
That’s what I was trying to say. Whereimnow and Sinch, I believe you two fully understand what type of investment you own. Most people in gold do not, and that is going to be the difference when this story eventually unwinds.
Once again, I’m done with this argument.