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TMFAleph1 (95.98)

More Evidence Gold is a Bubble

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July 27, 2011 – Comments (95) | RELATED TICKERS: GLD , SLV , AUY

I was going to write this up for The Motley Fool, but I decided to widen my circle of detractors:

Bubbles: Turning gold into dross | The Economist

Alex Dumortier

 

95 Comments – Post Your Own

#1) On July 27, 2011 at 1:19 PM, TMFKopp (98.93) wrote:

Nice work Alex!

Matt 

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#2) On July 27, 2011 at 1:34 PM, Munchies101 (99.25) wrote:

Thanks Alex, great article as usual. You are by far my favorite contributor on the MF.

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#3) On July 27, 2011 at 1:40 PM, TMFAleph1 (95.98) wrote:

Thanks, Munchies; I appreciate your kind words.

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#4) On July 27, 2011 at 1:44 PM, TheDumbMoney (42.99) wrote:

Excellent.  Thank you.

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#5) On July 27, 2011 at 1:47 PM, SteelReserve (46.96) wrote:

Great article. Always nice to see some hard numbers to counter the "gold will continue to rise" argument.  Thanks!

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#6) On July 27, 2011 at 1:56 PM, Evlampius (24.04) wrote:

assuming the bubble bursts - what would be a good fair price to buy gold at?  some people say buy because the world is imploding some people say sell because when they increase the debt ceiling everything will be calm in the world.

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#7) On July 27, 2011 at 2:04 PM, whereaminow (42.76) wrote:

David in Qatar

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#8) On July 27, 2011 at 2:05 PM, TMFAleph1 (95.98) wrote:

assuming the bubble bursts - what would be a good fair price to buy gold at?

Here are two reference points: In June 2011 dollars, the long-term average inflation-adjusted price of gold is $483, using annual data going back to 1833, and $683 using monthly data going back to 1971.

Alex Dumortier

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#9) On July 27, 2011 at 2:10 PM, whereaminow (42.76) wrote:

Alex,

Would you take a moment to calculate the historical average M1 and M2 (or any other money aggregates) for the countries you listed in the article, post Bretton Woods?  Then post here how far above the historical average those amounts are.  That would be interesting.

David in Qatar

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#10) On July 27, 2011 at 2:14 PM, TMFAleph1 (95.98) wrote:

Interesting graph, at first glance; however, one should be very wary about accepting the conclusion that suggests itself, no matter how intuitive it appears. The sample period of the graph is much too short, to begin with.

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#11) On July 27, 2011 at 2:25 PM, TMFAleph1 (95.98) wrote:

Would you take a moment to calculate the historical average M1 and M2 (or any other money aggregates) for the countries you listed in the article, post Bretton Woods?

I don't see how that's relevant. M1 and M2 are money aggregates, there is no reason for them to have a stable mean even in an economy with zero inflation.

My analysis relies on -- and the long-term data supports -- the notion that gold is a store of value (again, over the VERY long term only). Unfortunately, that doesn't stop today's prices from being far above that value.

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#12) On July 27, 2011 at 2:26 PM, Evlampius (24.04) wrote:

Thank you Bull and Bear, but do you honestly think gold will go down to $683 anytime in your lifetime?

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#13) On July 27, 2011 at 2:33 PM, whereaminow (42.76) wrote:

Alex,

I don't see how that's relevant. M1 and M2 are money aggregates, there is no reason for them to have a stable mean even in an economy with zero inflation.

The supply of money affects the value of money.  I strongly suspect that if you calculated the supply of those paper currencies and created an historical average, post Bretton Woods, that would see the current supply is as high over average as the current gold price.  

"It should be clear then, that the demand for paper money, in contrast to gold, is potentially highly volatile. Gold and silver are always in demand, regardless of clime, century, or government in power. But public confidence in, and hence demand for, paper money depends on the ultimate confidence—or lack thereof—of the public in the viability of the issuing government."   Murray N Rothbard, Mystery of Banking, pp. 65-66.

The gold price is not high and it is not volatile. The market's demand for paper money is the volatile component (which it should be, since the value of paper can move dramatically as it has no underlying clear title to property.) 

David in Qatar 

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#14) On July 27, 2011 at 2:34 PM, TMFAleph1 (95.98) wrote:

Thank you Bull and Bear, but do you honestly think gold will go down to $683 anytime in your lifetime?

Who knows. What I am near certain of, however, is that we'll witness a very significant decline from today's levels.

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#15) On July 27, 2011 at 2:41 PM, whereaminow (42.76) wrote:

Who knows.

I know. Ron Paul knows. The Austrian School of Economics knows.  You will never see gold at $683 in your lifetime unless the Fed decides to contract the money supply by about ~50% or the government cuts its spending by ~50%. In other words, there's not a snowball's chance in Hell.

David in Qatar

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#16) On July 27, 2011 at 2:42 PM, TMFAleph1 (95.98) wrote:

The gold price is not high and it is not volatile. The market's demand for paper money is the volatile component (which it should be, since the value of paper can move dramatically as it has no underlying clear title to property.)

I'm sorry, but even assuming the mechanism you describe is correct, the price of gold is something that is observable and not a construction in the mind of an economist. Run the numbers and you'll find that gold prices are volatile by comparison with many other asset classes. That result has nothing to do with the dismal science -- it is mathematical.

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#17) On July 27, 2011 at 2:42 PM, JaysRage (90.49) wrote:

Gold is a store of value.   That you have correct.   Instead of trying to compare to the moving targets of the value gold in monetary terms, you would be better served to compare to the value of goods and services that gold can buy in any monetary amount of your choosing.   The amount of clothes or food or gas that you can buy with an ounce of gold is remarkably consistent over time.   If you could get off the money comparison and only use money as a means to get from gold to something of substance, you would begin to see what everyone else is seeing.  

If you can prove me wrong with this analysis, I'll begin to look at your argument.   If you can tell me that gold buys twice as much food as it should or twice as many men's suits or twice as many gallons of gas as it should, so be it. 

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#18) On July 27, 2011 at 2:43 PM, TMFAleph1 (95.98) wrote:

You will never see gold at $683 in your lifetime unless the Fed decides to contract the money supply by about ~50% or the government cuts its spending by ~50%. In other words, there's not a snowball's chance in Hell.

In that case, you must be willing to give me good odds on that bet. I would be interested in that wager.

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#19) On July 27, 2011 at 2:56 PM, whereaminow (42.76) wrote:

In that case, you must be willing to give me good odds on that bet. I would be interested in that wager.

I'll give you even odds.  And to keep it fun, if I'm wrong I'll read any Keynesian macro text of your choosing and write a lengthy positive review here and on Amazon.  If you're wrong, hmmm, I've already got a treatise in mind :)  Deal??

David in Qatar

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#20) On July 27, 2011 at 3:00 PM, TMFAleph1 (95.98) wrote:

I'll give you even odds.

Even odds!?! Are you sure you understand the meaning of the expression 'a snowball's chance in hell'?

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#21) On July 27, 2011 at 3:02 PM, workfor (< 20) wrote:

Evlampius,

That's a very good question, because americans have barely even started buying gold in this so called "bubble". In 1980, 26% of american's invested money was in gold and silver when gold hit it's high of $850/oz., and americans were virtually the only participants in that market. Welcome to the new global economy where paradigms change. Today eight tenths of 1% of american's investable money is in precious metals, while gold stands at $1600/oz. Talk about a stealth market!

But don't worry, if gold truly is in a bubble and the bubble were to burst today, it would hurt americans a mere fraction (1/25th) as bad as the last gold bubble.

 

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#22) On July 27, 2011 at 3:05 PM, TMFAleph1 (95.98) wrote:

In 1980, 26% of american's invested money was in gold and silver when gold hit it's high of $850/oz., and americans were virtually the only participants in that market.

Where did you get that statistic, The Goldbug's Almanach? That number is entirely fictional.

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#23) On July 27, 2011 at 3:09 PM, TMFAleph1 (95.98) wrote:

I don't understand why posts that include a link to a public education nonprofit foundation are being censored!

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#24) On July 27, 2011 at 3:26 PM, TheDumbMoney (42.99) wrote:

Loving this thread.  David, that's a great chart.  Though I think you should be willing to offer him at least 10/1 odds given that there's not a snowball's chance in hell of him prevailing.

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#25) On July 27, 2011 at 3:29 PM, Evlampius (24.04) wrote:

Bull and Bear,
Rationally I can understand where you are coming from, historically its all there, but what scares me is that when subprime market was booming everyone was backward looking as well, everyone was saying that home prices are going to appreciate indefinitely. Why? because that what it was in the last whatever years you're running your model at.

So ok lets say bubble bursts,  gold is devalued by 50% so say around $800/oz  does that mean that your dollar will be able to buy twice as much food and gas? Isnt it all about inflation, its quite possible Gold stays here for a while and adjusting for inflation its no longer in bubble?

I might sound confusing but what I am really trying to say is this, having some kind of retirement savings i dont want it all to evaporate if dollar become the new hyperinflated currency.

I guess another possible way to protect yourself is to borrow alot of money and buy houses/land. Cheap to borrow / cheap to buy..

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#26) On July 27, 2011 at 3:30 PM, whereaminow (42.76) wrote:

so i have to read ten keynesian texts????  Yikes, I would have to think about this one. ;)

David in Qatar

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#27) On July 27, 2011 at 3:39 PM, TMFAleph1 (95.98) wrote:

Though I think you should be willing to offer him at least 10/1 odds given that there's not a snowball's chance in hell of him prevailing.

That sounds more to my taste, but even 10:1 is inadequate for an event that has a snowball's chance in hell of occurring. At less than 20:1, the phenomenon can't be rejected as statistically insignificant.

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#28) On July 27, 2011 at 3:43 PM, workfor (< 20) wrote:

TMFbullnbear,

http://bobchapman.blogspot.com/2011/07/bob-chapman-this-gold-silver-rally-will.html

Around the 14:20 mark, but I'm sure I've heard higher numbers in the past. More digging needs to be done.

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#29) On July 27, 2011 at 3:44 PM, TMFAleph1 (95.98) wrote:

Rationally I can understand where you are coming from, historically its all there, but what scares me is that when subprime market was booming everyone was backward looking as well, everyone was saying that home prices are going to appreciate indefinitely. Why? because that what it was in the last whatever years you're running your model at.

There is a critical difference between the two. Saying that home prices are going to appreciate indefinitely is betting against reversion to the mean (well, it is in the context of growth rates we experienced.) My argument is a bet on reversion to the mean.

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#30) On July 27, 2011 at 3:51 PM, TMFAleph1 (95.98) wrote:

@workfor

I heard this argument before. I've even put forward some variation of it myself in the past. It may help explain why gold has advanced/ will advance over the short- to medium-term, but it is not enough to convince me that gold is overpriced.

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#31) On July 27, 2011 at 4:24 PM, workfor (< 20) wrote:

I heard this argument before. I've even put forward some variation of it myself in the past. It may help explain why gold has advanced/ will advance over the short- to medium-term, but it is not enough to convince me that gold is overpriced.

Overpriced?

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#32) On July 27, 2011 at 4:28 PM, TMFAleph1 (95.98) wrote:

@workfor

My apologies, I meant it is not enough to convince me that gold isn't overpriced.

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#33) On July 27, 2011 at 5:19 PM, workfor (< 20) wrote:

@TMFBullnBear

My apologies to you as there is a difference in percent of available investment capital going into gold/silver vs percent of people investing in gold/silver. My initial numbers may be accurate however, but it's hard to re-source all info. That being said, I think it's safe to say that americans are severely under invested compared to the 1980 bull market.

But don't worry, if gold goes from $1,600/oz to above $10,000/oz and then  back down to $1,500/oz you will technically be correct. "Gold is in a bubble". Good luck.

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#34) On July 27, 2011 at 6:06 PM, GameTheSystem (99.00) wrote:

" 'In 1980, 26% of american's invested money was in gold and silver when gold hit it's high of $850/oz., and americans were virtually the only participants in that market.'

Where did you get that statistic, The Goldbug's Almanach? That number is entirely fictional."

Actually, it's fairly close (although only as a "percentage of global assets").

 

Source is this article in the Motley Fool. (For some reason, I can't directly post the chart in the article.) While it is unlikely that gold will return to 26% of global assets, it is not meritless to say that gold will attract more investment capital than it has.

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#35) On July 27, 2011 at 7:21 PM, Munchies101 (99.25) wrote:

I think this stat is getting a little misinterpreted. Gold comprised 26% of global investments in equities, bonds, ETF's (managed assets), not gold itself or global assets. Big difference. But yes, only .08% of global equities are in gold equities while in the 80's it was 26%.

Honestly I don't find this very relevant. The investing world was substantially different in the past then it is today. And just because there is a different market share now doesn't mean it will revert back to a previous market share.

It’s like saying that because MySpace used to have an 80% market share 10yrs ago, and that it has a 5% share now, it should revert back closer to 80%. It’s a bad comparison but the best I can do at the moment :)

 

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#36) On July 27, 2011 at 7:28 PM, TMFAleph1 (95.98) wrote:

"...if gold goes from $1,600/oz to above $10,000/oz and then  back down to $1,500/oz you will technically be correct. "Gold is in a bubble."

If gold goes to $10,000 within the next 10 years, the question of whether or not gold is in a bubble won't be open to interpretation.

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#37) On July 27, 2011 at 7:41 PM, TMFAleph1 (95.98) wrote:

ERRATUM

Though I think you should be willing to offer him at least 10/1 odds given that there's not a snowball's chance in hell of him prevailing.

That sounds more to my taste, but even 10:1 is inadequate for an event that has a snowball's chance in hell of occurring. At less than 19:1, the phenomenon can't be rejected as statistically insignificant.

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#38) On July 27, 2011 at 10:06 PM, Frankydontfailme (27.20) wrote:

"If gold goes to $10,000 within the next 10 years, the question of whether or not gold is in a bubble won't be open to interpretation" 

Possibly. Unless you specify that we are not in a hyperinflationary scenario in the next ten years (unlikely event, but possible).

 Nonethless, if gold hits 10,000 dollars an ounce in the next ten years, even if it does collapse to 500 after, will you admit that you were wrong? If not, then we agree on gold.

 

The only difference between our opinion would be that I believe that gold is an excellent buy right now ( well, after a pullback). Alex, on the other hand, doesn't (only because he fails to fully understand the gold market.) 

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#39) On July 27, 2011 at 10:29 PM, dragonLZ (99.69) wrote:

More Evidence Gold is a Bubble 

I don't know what was the previous evidence Gold is a bubble, but if there is a lot of evidence (which I guess 'more' implies), then it probably ain't a bubble...

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#40) On July 27, 2011 at 10:37 PM, TMFAleph1 (95.98) wrote:

I don't know what was the previous evidence Gold is a bubble, but if there is a lot of evidence (which I guess 'more' implies), then it probably ain't a bubble...

Is that a koan or a syllogism?

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#41) On July 27, 2011 at 10:40 PM, TMFAleph1 (95.98) wrote:

Possibly. Unless you specify that we are not in a hyperinflationary scenario in the next ten years (unlikely event, but possible).

You're quite right; I was going to mention that exception, but I left it out for the sake of brevity and effect.

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#42) On July 27, 2011 at 10:49 PM, TMFAleph1 (95.98) wrote:

 Nonethless, if gold hits 10,000 dollars an ounce in the next ten years, even if it does collapse to 500 after, will you admit that you were wrong?

That certainly wouldn't do the trick. If gold were to go to $10,000 within ten years -- even assuming the increase in price is legitimate due to hyperinflation -- does not imply that it isn't overpriced, today, at $1,600. And if the price collpased to $500, that would be virtually iron-clad proof that gold had been in a bubble (barring a bout of  hyper-deflation.)

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#43) On July 27, 2011 at 11:06 PM, rfaramir (29.57) wrote:

AD: "What I am near certain of, however, is that we'll witness a very significant decline from today's levels."

DiQ: "not a snowball's chance in hell"

Even odds is not too bad when you're both this confident. Since you're nearly certain, why don't you, Alex, give David 2:1 odds?

"Near certain" pretty much means near 100%, whereas no one has any good idea of the temperature of Hell. In fact, Dante pictured the ninth circle as having Satan locked in frozen ice. I'd give pretty good odds of a snowball surviving several hours without melting in the Ninth Circle of his Inferno. Since Dante's picture is out of step with conventional theorizing on Hell, why don't we just say "we don't know" the temperature of Hell? (wikipedia: "In contrast to the popular image of Hell as fiery, the traitors are frozen in a lake of ice known as Cocytus, with each group encased in ice to progressively greater depths.")

So we have "near certain" versus "who knows? but most would say small chance". Not worth even odds, Alex?

 

If any version of the bet will take place, it would be nice to make clear the price target and time and how to measure the target. Alex has already skewed things by trying to use inflation-adjusted prices. Make it specifically CPI-adjusted as calculated today, so we readjust if the government changes their mind again?

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#44) On July 27, 2011 at 11:54 PM, ElCid16 (98.07) wrote:

Alex, is your gold article next month going to be bearish or bullish?

http://caps.fool.com/Blogs/the-momentum-behind-gold-keeps/596489

http://caps.fool.com/Blogs/gold-could-drop-below-500/468353

http://caps.fool.com/Blogs/another-reason-to-be-bullish/463068

http://www.fool.com/investing/general/2011/04/29/gold-is-now-3-times-overpriced.aspx

http://caps.fool.com/Blogs/gold-listen-to-the-money/452638

http://www.fool.com/investing/general/2010/06/30/gold-dont-get-out-before-the-bankers-get-in.aspx

 

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#45) On July 28, 2011 at 12:55 AM, dwot (97.03) wrote:

Nicely written.

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#46) On July 28, 2011 at 10:16 AM, XMFSinchiruna (27.97) wrote:

Alex,

Even though I would continue to vociferously challenge the direct assumption that any price over an historic mean must yield an overpriced condition in the absence of adequate consideration of the real-world context (in other words, the world can not be seen or understood through data alone), I respect that you truly believe in the conclusions you are drawing from the data. You're heart's in the right place, and you do your homework.

Bubble is just a word, and everyone seems to have a disparate definition for it. You may assign the term when a price surpasses a given standard deviation above a mean, but I would not be inclined to follow that route. George Soros shares your view that gold is a bubble, although that won't stop him from participating in it. I reserve the term for any market that lifts well past an identifiable fundamental justification on the heels of broad-based and usually leveraged speculative buying. Since gold exposure has yet to even approach a broad-based nature, in my opinion the word bubble does not apply as yet.

Gold remains a safe haven at these prices, because it will go substantially higher before the trend runs its course.

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#47) On July 28, 2011 at 10:23 AM, TMFAleph1 (95.98) wrote:

David,

Adjusted for the growth in M2, the average price of gold between 1971 through April 2011 is $1,123.

Alex Dumortier

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#48) On July 28, 2011 at 10:52 AM, TMFAleph1 (95.98) wrote:

George Soros shares your view that gold is a bubble, although that won't stop him from participating in it.

As a speculator, there is nothing wrong with that; in fact, it's expected. I myself don't think the bubble has run its course.

Since gold exposure has yet to even approach a broad-based nature, in my opinion the word bubble does not apply as yet.

In my opinion, gold will always remain a niche asset class (and this is probably where we differ.) In that context, I think 'broad-based' for gold looks very different than it does for stocks, for example. I do, however, agree that gold's 'participation rate' can increase from here.

Gold remains a safe haven at these prices, because it will go substantially higher before the trend runs its course.

'Trend' is a market technician's term and I don't associate trend-following with safe haven investing (I realize you that you may not be using it with that precise meaning.) I also think gold will go higher before the bubble runs its course, but that isn't enough to qualify it as a safe haven. For that, you would need to be reassured that those higher prices are comfortably sustainable. 

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#49) On July 28, 2011 at 12:35 PM, leohaas (35.73) wrote:

Nice article. Ignoring most of the comments so far, here are my 2 cents.

1) The article takes a (fake) scientific approach: it uses Jeremy Grantham's definition of a bubble (2 standard deviations above the long-term trend). Sorry, but when it comes to pricing assets such as stocks, bonds, and commodities, this definition is not at all scientific. That is because standard deviations assume a normal distribution. And as we all should know since the Great Recession, pricing of assets clearly does NOT follow a normal distribution around a long-term average. For those who did not yet know this: it was the underlying assumption for why the ratings agencies rated all but the bottom tiers of the CDOs containing MBSs holding nothing but sub-prime mortgages as "AAA".

2) The article conveniently ignores a fast-increasing source of demand. Indians, for example, are obsessed with gold. Their jewelry is 24k. With India developing quickly (and there being 1.2B or so Indians), the middle-class in India is more and more able to afford gold. And by the way, similar trends though maybe not quite as strong, are noticeable in much of the developing world. It is this new demand that will drive up gold prices in the future, even if demand from the "All-Fiat-Currencies-Will-Fail" folks will eventually subside.

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#50) On July 28, 2011 at 12:41 PM, leohaas (35.73) wrote:

PS: Argument #2 in Comment #49 also holds for oil. Demand from developing nations will drive up the price long term.

Disclosure: long USO at the time of writing.

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#51) On July 28, 2011 at 1:19 PM, TMFAleph1 (95.98) wrote:

@leohaas

Re. your first point: I know that the distribution of asset returns prices is leptokurtic; I read Fooled by Randomness before it had even been published. However, that doesn't make any difference within the range we're talking about.

For example, I calculated that the average price of gold for the month of January 1980 ($613 in nominal terms) is 5.7 standard deviations above the average of annual values between 1833 and the first half of 2011. For a normal distribution, 5.7 standard deviations represents the top  0.0000005% of values.

Do I believe that the January 1980 average monthly lies 5.7 SDs from the mean of the true distribution? Certainly not! In trying to establish the actual probability of that event, the normal distribution is absolutely useless. In fact, Taleb would warn us that using it is dangerous (even criminal, perhaps!)

In 2008, the CFO of Goldman Sachs tried to explain losses on Goldman's quantitative hedge funds with this statement:

“We were seeing things that were 25-standard deviation moves, several days in a row.”

Obviously, he didn't realize that reality trumps asset pricing models (or he may have thought that the people he was addressing didn't understand it.)

However, when one is discussing gold prices that are 2-3 standard deviations from the mean, the normal distribution is amply adequate as an approximation for that purpose.

Alex Dumortier

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#52) On July 28, 2011 at 1:28 PM, whereaminow (42.76) wrote:

David,

Adjusted for the growth in M2, the average price of gold between 1971 through April 2011 is $1,123.

Alex Dumortier

Thanks for doing that. Interesting result.

David in Qatar

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#53) On July 28, 2011 at 1:31 PM, TMFAleph1 (95.98) wrote:

On the topic of Viniar's unfortunate comment, the following paper is interesting and entertaining, It evens contains a citation of our very own Seth Jayson (TMFBent.)

How Unlucky is 25-Sigma?

The money quote:

"As Oscar Wild [sic] might have put it: to experience a single 25-sigma event might be regarded as a misfortune, but to experience more than one does look like carelessness."

Alex Dumortier

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#54) On July 28, 2011 at 2:10 PM, Frankydontfailme (27.20) wrote:

By the way Alex, congratulations on the paper. I still think you're overly discounting the likelyhood of future money printing (think Eurozone/Japan and ignore our mess for now). That being said you have provided the best criticism of gold I have ever read (and I read a lot).

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#55) On July 28, 2011 at 2:14 PM, TMFAleph1 (95.98) wrote:

@Evlampius

Isnt it all about inflation, its quite possible Gold stays here for a while and adjusting for inflation its no longer in bubble?

 Yes, that scenario is possible, although barring hyperinflation, it would take a very, very long time for the inflation-adjusted price to adjust to a reasonable level.

However, under that scenario, those who hold gold today would still experience substantial losses on a real basis (i.e. their gold position would suffer a tremendous loss in purchasing power), even though the nominal price of gold holds firm.

Alex Dumortier

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#56) On July 28, 2011 at 2:15 PM, whereaminow (42.76) wrote:

Adjusted for the growth in M2, the average price of gold between 1971 through April 2011 is $1,123.

With a closing price at the end of April at $1531, that would be 36% higher than M2 adjusted.  That's not bubble territory at all.  It certainly is pricey, though.  

http://federalreserve.gov/releases/h6/Current/

However, it's only pricey if increased demand for gold is based on money supply growth expectations (true inflation) that do not materialize.  YOY SA M2 is up 6%, with the 3 month avg. April-June moving faster (8.2%). 

It would also be pricey if the expectations of a debt ceiling raise were incorrect.  It must be pointed out that the demand for dollars decreases as the debt burden increases (see chart in commeent #7 for correlation - but not causation).  Hence, the price of gold increases as will other subsitutes for holding cash.

Most people assume that because gold holders would like to see a balanced budget/smaller government, they must also think that a balanced budget would be good for gold.  That is incorrect.  No matter what your reasons for demanding gold, it is generally agreed that lack of faith in government's ability to pay its bills is the primary force behind dollar weakness and gold strength.  Raise #81 in-a-row of the deficit will only increase dollar weakness in the long run (though you could see a short run bump in dollar strength when during the "we did it" obligatory high five session after the resolution passes.)

Most gold owners would rather see the government and the banks restrained, even if that means taking a hit on gold prices in nominal terms.  I certainly can't speak for all of them, but that is the general impression I find on boards and articles across the gold web.

So if our expectations are wrong (money supply growth and debt growth), gold could see a significant decline, perhaps back to $1,000/oz (there is of course, still a ton of growth and debt already in the system.) 

Sadly, I don't think we will be wrong.

David in Qatar

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#57) On July 28, 2011 at 2:32 PM, TMFAleph1 (95.98) wrote:

@Frankydontfailme

I still think you're overly discounting the likelyhood of future money printing (think Eurozone/Japan and ignore our mess for now).

No, I used to think this was a valid objection until I gave it some thought. I have concluded that it has no bearing on my argument.

Assume governments do run the printing presses night and day. One of two things can happen:

- That process is transmitted to the consumer price level, resulting in higher inflation, perhaps even hyperinflation. In this case, paying bubble prices doesn't prevent you from suffering losses in purchasing power, as I alluded in the previous post.

- Money printing isn't reflected in the consumer price level, i.e., there is no incremental impact on inflation. If that is the case, there is little reason to believe gold would continue appreciating and you are still stuck holding overpriced asset. The inflation-adjusted price must decline one way or the other, either with a decline in nominal prices or through inflation. Either way, the real price declines and you suffer a (substantial) loss of purchasing power.

Alex Dumortier

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#58) On July 28, 2011 at 2:43 PM, TMFAleph1 (95.98) wrote:

However, it's only pricey if increased demand for gold is based on money supply growth expectations (true inflation) that do not materialize.

I don't think this is accurate for the reasons I describe in the previous two posts. Expectations do not affect the fair price for gold today. In fact, at any given time, whether today or in the future, only realized inflation affects the fair price of gold, not inflation expectations (even if you want to define it in terms of the money supply). Paying above the fair price for gold will not spare you from losses in purchasing power on your position, regardless of what you expect to happen.

Alex Dumortier

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#59) On July 28, 2011 at 2:44 PM, TMFAleph1 (95.98) wrote:

@Frankydontfailme

Thanks for your kind words. By 'paper' do you mean article?

Alex Dumortier 

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#60) On July 28, 2011 at 2:51 PM, Frankydontfailme (27.20) wrote:

Hehe yep. I'm a scientist, we call  prestigious 'articles'  'papers'

I am confident that you are wrong on your inflation expectations. Money flow expectations are a much better predictor. This requires a knowledge of Austrian economics... David will fill you in I'm sure 

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#61) On July 28, 2011 at 2:55 PM, TMFAleph1 (95.98) wrote:

I am confident that you are wrong on your inflation expectations. Money flow expectations are a much better predictor.

As I wrote in my previous post, the plumage -- errrr... inflation expectations -- don't enter into it.

Alex Dumortier

 

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#62) On July 28, 2011 at 2:57 PM, TMFAleph1 (95.98) wrote:

As I wrote in my previous post, the plumage -- errrr... inflation expectations -- don't enter into it.

To be clear, this applies to "money flow expectations" also.

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#63) On July 28, 2011 at 3:03 PM, TheDumbMoney (42.99) wrote:

"It must be pointed out that the demand for dollars decreases as the debt burden increases (see chart in commeent #7 for correlation - but not causation).  Hence, the price of gold increases as will other subsitutes for holding cash."

David, do you know what I would like for you to do?  I'm serious here, not being snide.  To the chart in #7, add real (not nominal) interest rates.  I suspect you will see a LOT of (inverse) corrolation to the price of gold there as well, though it's only a suspicion.

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#64) On July 28, 2011 at 3:08 PM, whereaminow (42.76) wrote:

dumberthanafool,

David, do you know what I would like for you to do?  I'm serious here, not being snide.  To the chart in #7, add real (not nominal) interest rates.  I suspect you will see a LOT of (inverse) corrolation to the price of gold there as well, though it's only a suspicion.

I pulled that chart from Robert Wenzel at Economic Policy Journal.  I can write him an email asking if he has a moment to include that data. (He follows real rates very closely). 

David in Qatar

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#65) On July 28, 2011 at 3:17 PM, TMFAleph1 (95.98) wrote:

@whereaminow,

David, do you know what I would like for you to do?  I'm serious here, not being snide.  To the chart in #7, add real (not nominal) interest rates.  I suspect you will see a LOT of (inverse) corrolation to the price of gold there as well, though it's only a suspicion.

This has been done and it apprears there is a strong inverse relationship. This is a comment to my article from a reader on The Economist website:

"Instead of a simple comparison to historical averages, why not attempt to model the price of gold? Here is one attempt:

http://www.crossingwallstreet.com/archives/2010/10/a-model-to-explain-the-price-of-gold.html

"gold acts like a highly-leveraged short position in U.S. Treasury bills""

The blog post that is referenced makes for some interesting reading.

 Alex Dumortier

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#66) On July 28, 2011 at 3:23 PM, TheDumbMoney (42.99) wrote:

Alex, thanks for posting that, that is very unsurprising, and I think instructive.

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#67) On July 28, 2011 at 3:51 PM, Frankydontfailme (27.20) wrote:

Yes I read the blog and also found it interesting. I suspect though, that it is correlative not causitive BECAUSE it is putting the cart before the horse. What I mean is that real interest rates are low BECAUSE of certain circumstances (ie stagflationary depressions). During these environments central banks force interest rates low, attempting to force lending and thus for the economy to grow out of the mess.

Real interest rates cannot be raised in this political environment as long as debts are high, and growth is low.

This is why the price of gold inversely correlates (anyhow this is how I thought about it when I first read it) 

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#68) On July 28, 2011 at 5:05 PM, TheDumbMoney (42.99) wrote:

Frankydontfailme, nobody is saying it is causative, yet.  But for the sake of our money, it is best to view the matter as objectively as possible. 

As for real interest rates, they can be raised pretty much whenever the Fed decides to raise them, subject to various limiting factors. 

Finally, whether it is cuasative or correlative in the end may not matter.  Those who have "hated" gold over the last year have maybe been fighting the Fed, in an ironic way, myself included.  It may well be that that chart Alex linked to is what Paulson was looking at in 2009 as he prepared to laugh his way to the bank again during QE and before QEII, and he may eagerly be anticipating QEIII as well.   (Of course, he would have been even better off in 2009 buying lots of crap, overleveraged companies, but his funds under management were too high to buy into the really crappy small ones that jumped SO far.)

Anyway, David's original chart includes debt held by the Fed.  That is how the Fed implements its policy of lowering real interest rates, since the nominal rate is already near the zero-bound.  That observation is what prompted me to ask the question I asked David.  So, causative or correlative or caused by "debt", if QEIII hits, you will likely see a major further leg up in gold.  And if QEII gets wound down (which is not happening yet), you will likely see gold head down.  And you will see gold rise somewhat, though not hugely, if real anticipation of a QEIII sets in.  I say likely as to all of this, not certainly.  Nothing is certain in life, not even taxes.

But what I fear is that those who persist in talking about "new paradigms" for gold or focusing on 'debt levels,' long after the Fed starts making a significant eventual move to change real interest rates may well find their trade...unprofitable.  Assuming that actually happens.

This will not happen any time soon, based upon stated Fed policy.  And an argument can be made that our deflationary crisis is bad enough it will not happen not just for an "extended period of time" but for a VERY long time, or that, relatedly, QEIII is inevitable.  Stepping further out on the "reasonability curve," one can make a less reasonable argument that even QEIII will not solve things.  I used to think such an argument was utterly nuts.  It is still implausible, but becoming moreso every day Boehner or Cantor or even Obama step up to a microphone. 

In a sense then, the argument for or against gold ultimately boils down to a political argument about whether our country can ultimately get going again in a sustainable fashion, which is why the argument gets so emotional.  Buffet says yes, which is why he doesn't own it.  The folks at Zero Hedge and Real Money Silver and in the Tea Party say no, which is why do own it.  And a Soros or a Paulson probably could care less either way, and own it now because they think the Zero Hedge people are cute and they want to ride gold as long as possible before they dump it on people like Glenn Beck who are ideologically wedded to it enough that they will take the fall.

We shall see though.

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#69) On July 28, 2011 at 6:00 PM, whereaminow (42.76) wrote:

dumberthanafool,

Outside of the Left/Right nonsense - which I refuse to be a part of, unless I get to make fun of both sides (and I do), because they are both monumental ritards - I am not very far from you on my forecast of gold prices.  The model shared via Alex in comment #65 is very interesting.  I know that someone "Pulling A Volcker" is disastrous for gold prices.  Sinchy knows that too. As does everyone who follows his work. 

Does Glenn Beck know?  WTF do I care?  He was 10 years late to the gold rally anyway.  Four years ago he was calling people like me whacko gold bugs.  I hope he chokes on it and takes that rat c*nt Rachel Maddow with him.

David in Qatar

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#70) On July 28, 2011 at 6:27 PM, muddlinthrough (< 20) wrote:

@leohaas.

+1 for pointing out the 'this time will be different' normalization. 

 From that same Economist article self-quoting the view from 1980:In equity markets, there is much truth to the saying never sell on a strike. In the gold market, which has become in some ways the reverse image of equities, a suitable variant might be never buy on the end of the world. You cannot, after all, take it with you.

Also from the article, the 'Inflation adjusted' peak of $2470.  With the current debt-limit gridlock of vested interest V. vested interest, the unpredictabilty index for the markets is increasing.  And THAT peak is no where near what we see in USD numbers.  Of course, one has to use official inflation numbers to get to that $2470. 

 Using the same (non) argument, APPL stock is in a similar bubble.  I don't believe gold will lose much value in the near-term, as it's the USD 'worth'/purchasing power that's deflating, not the increase in asset value that's the true event. 

The perceived event is the cost of purchasing gold is increasing in bubble-like fashion.  I agree its tangential slope is going nonlinear, but don't agree that it's doing so at an unsustainable rate, yet.  Once the present 'crisis' is resolved, I expect to see a new floor to a range result and the gold markets are just trying to race upward to establish what that floor will be.

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#71) On July 28, 2011 at 7:37 PM, TheDumbMoney (42.99) wrote:

" I know that someone "Pulling A Volcker" is disastrous for gold prices.  Sinchy knows that too. As does everyone who follows his work."

I disagree with, at minimum, one of those statements, the last one, with with I disagree strongly.  In fact, I don't think Franky here who I was responding to knows that, though Franky will immediately come back here say that's wrong, whether it is or not.  And then there are the skads of other people who maybe don't follow Mr. Barker, but who think the amount of metal in a nickel has any relevance to our world, or who think gold could go to $5,000 "just because."  Etc.  This website is crawling with them, as is much of the interwebbles.  Mr. Barker himself is very smart and articulate, but I think he is a bit more of a true believer than he lets on, too, I think.  I don't think I have seen him make anything remotely like this real interest rate point, which is the only model I have yet seen that makes any sense at all to me (aside from focusing, as Alex did, on the high price relative to history).  Mr. Barker's models that I have seen or remember anyway are all risk-based, or China-demand-based, and central bank holdings of gold-based, or bajillion-dollars-derivatives-meltdown based, or, in short, a spaghetti-thrown-on-the-wall mix of things that I'm not sure individually mean a great deal, because they are stories, not all good ones, and not powerful like the corrollation-on-a-chart we have seen here.  But I, as you might suspect, am not a regular reader of his.

"I am not very far from you on my forecast of gold prices."

Yeah, ultimately though, I take Buffett's side here on the trade, as an investor.  There are many real companies in which I would rather have my money; some of them are my CAPS picks.  As a trader, which I'm not really, but think about, I think buying gold if you really think there will be a QEIII is an eminently reasonable trade, so yes.  If I were to bet, I would bet we will see a modest QEIII, and that I will see gold BOTH at $2500 and at $500 again in the next five years, with $2,500 obviously coming first, and with Glenn Beck holding gold at both levels.  I'm not confident enough to place money on it though, either as a bet, or by buying gold.  That is because I also think there is a real possibility that the economy does turn around on its own and no QEIII is needed and -- forget about a Volcker, QEII is unwound, nominal rates are raised to 2% or so, and gold promptly drops to, say, at most $1,000/oz.  We were heading that way in January/February 2011, before the Japanese earthquake and the confidence-sapping debt ceiling debate hit us.  We may yet get there, I'd put the odds around 50/50 that we do.  Even then you won't see a major drop in gold for at least another nine months or so, I think.  But we shall see.

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#72) On July 28, 2011 at 8:16 PM, whereaminow (42.76) wrote:

Fine with everything, outside of this: 

with Glenn Beck holding gold at both levels.

Don't stoop to Krugman's level. Gold was $252 in 1999 and $834 when Beck's how started on Fox.  Citing him his show from 2009-2011 (which had declining viewership over the last year) as responsible for a bull market from 1999-2011 is just excuse making on Krugman's part.

David in Qatar

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#73) On July 28, 2011 at 8:50 PM, TheDumbMoney (42.99) wrote:

Oh you mistake me.  I'm not intending to cite Glen Beck as responsible for the bull market in gold, not in any way.  I am citing him as emblematic of the stupidist people on the Right who hold gold.  He is a result.  He is the loudest patsy.  Inherent in the fact that he is a patsy is the fact that he is late to the game, and will stay the longest.  He is also more generally the American Right's current ultimate exmplar of glistening stupidity in all of its fullest-flowering glory.  As you know, I think the Left has many of them as well, though quite frankly I don't think the Left has anyone on Mr. Beck's level, at least who has attained his level of cultural penetration (despite his falling ratings and the final end of his truly tragic excuse for a show).

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#74) On July 28, 2011 at 9:31 PM, whereaminow (42.76) wrote:

 As you know, I think the Left has many of them as well, though quite frankly I don't think the Left has anyone on Mr. Beck's level, at least who has attained his level of cultural penetration

I used to think the Left had many genually principled and enlightened minds as well, until about 2009.  In fact, I can remember longing for the day when GWB would be gone, because there was just no way the Left could be worse.  Oh well.

I highly doubt that GB is getting anyone in the neo-conservative circles to buy gold.  And personally, I don't care.  What I do know is that the hard money camp despises him as a hopelessly lost and back-stabbing shill for ratings.  And that reputation is deserved.  Having Ron Paul on your show once a month will not change that.

You know what would be fun?  It would be like a bizarro draft, except that we pick the people we would most like to disappear from public life.  Beck, CMathews, Maddow, Savage, Hartmann, Limbaugh, and Hannity would have to be sure fire 1st rounders.  Career politicians like Boehner, Reid, Pelosi, McConnell would be up there.

And then you know what?  We'd actually have decent discourse in this country for once.

David in Qatar

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#75) On July 28, 2011 at 10:01 PM, TMFAleph1 (95.98) wrote:

And then you know what?  We'd actually have decent discourse in this country for once.

I think you're getting a bit ahead of yourself there.

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#76) On July 29, 2011 at 9:30 AM, Frankydontfailme (27.20) wrote:

dumberthanafool, you make some valid points.

The economy improving and interest rates raised to 2%.... yeah I guess I just don't see it happenning but I could be wrong.

As for a Volcker... that I can't see (again maybe I'm missing something). If rates went to 17% wouldn't we be officially unable to pay the interest on our debt... and default immediately? Or could the fed chairmen selectively raise interest rates ( I suppose so).

If we selectively default on foreign debt the dollar doesn't necessarily disintigrate immediately but it would lose international value.... and if any of these events led to an irrational (or rational) selling off of the dollar...

Anyway, if I'm any of these thoughts are faulty please explain to me why. I know I seem like an idealogue but am open for RATIONAL debate.  

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#77) On July 29, 2011 at 1:13 PM, TMFAleph1 (95.98) wrote:

If rates went to 17% wouldn't we be officially unable to pay the interest on our debt... and default immediately? Or could the fed chairmen selectively raise interest rates ( I suppose so).

The Fed can only set short-term interest rates. Long-term interest rates are set in the marketplace (the Fed has some indirect levers to influence these rates -- that's what QE is about.)

But, yes, 10- and 30-year Treasury yields peaked above 15% in the first half of the 1980s.

Bloody embedding! This link will take you to the graph, at least.

On another note,  why would we be unable to pay the interest on our debt? One participant in this thread started a whole thread on this -- I'm sorry I can't remember who. He wrote that a country that issues its own currency need never default on its debt and he is quite correct

Alex Dumortier

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#78) On July 29, 2011 at 1:31 PM, Frankydontfailme (27.20) wrote:

We could (in theory) continue to print money to pay for the high interest. As a result the dollar would drop in value no? Why wouldn't this buoy gold?

In 1980 our debt to GDP was what? 40% (don't feel like looking it up). 

 

As an aside, I fully plan to sell the majority of my gold (but not all) by 5,000 dollars an ounce and buy diversified bonds and dividend paying stocks. So don't lose sleep over me dumberthanafool :)

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#79) On July 29, 2011 at 1:55 PM, TheDumbMoney (42.99) wrote:

I fully intend to do my best to ignore macroeconomic events in my actual investing (though I like to talk about them), and hold three kinds of stocks/instruments almost forever:

1)  Late-stage-Buffett Portfolio Component:  High quality simple/moaty dividend payers with reasonable growth left in them and/or greater international prospects than is recognized, combination of high dividend and high dividend growth.  (WMT, PG, JNJ, XOM, KO, ABT, MSFT, T, MO, PM)

2)  Phillip Fisher Portfolio Component:  Strong but somewhat established growth stocks that I believe are consistently undervalued regardless of their P/E (assuming there is a reasonable PEG), because they have great managements, great research, great products, great sales, and will consistently grow faster than analyst expectations for years to come.  (AAPL, GOOG, ISRG, others I haven't purchased yet, because I'm hoping we'll get a really really big market drop, or hate myself for not buying long ago:  WFM, COST, AMZN, NFLX, etc.)

3)  Recognition I Don't Know What I'm Doing Portfolio Component:   Low-cost ETFs in favored industries (healthcare) or countries (emerging markets for the long term) and general market indexes, continue to buy in over time.

Trading in gold is a form of currency speculation, at best.  I wish you luck with it.  While you're at it, why don't you set up an FX account and trade Yen/Euros, too?  Or an account to trade corn futures?  That's basically what you're doing already with gold.  Having now seen crossingwallstreet chart, I suggest paying very close attention to real interest rates, which means to Fed policy.  Again, I fully expect it to continue another leg up in the next year, particular as the economic knuckle-draggers push for immediate government austerity, and consequently push us back into recession.  I have always thought of the gold trade more as a generalized fear trade and/or a response to real or perceived inflation risks, but I think those are merely results, which explain short term gyrations, but that the real interest rate model may explain the basic trend, and all the rest of the moo-mooing about central banks and emerging markets jewelry buyers is somewhat irrelevant.

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#80) On July 29, 2011 at 2:33 PM, workfor (< 20) wrote:

More evidence why gold is not in a bubble.

http://www.financialsense.com/financial-sense-newshour/guest-expert/2011/07/27/02/eric-sprott/silver-take-down-and-why-silver-is-set-to-explode

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#81) On July 29, 2011 at 3:20 PM, Frankydontfailme (27.20) wrote:

Dumberthanafool: yeah. I like the way you're thinking. I think your investmest portfolio will crush the market. 

It is basically fx trading considering gold is money. I see no problem with fx trading. I like macroinvestmens and you don't cool cool.

 For whatever reason, I believe I can outperform that portfolio with gold, silver and mining stocks.

After big gains..... I plan to transfer to the staid and true approach (until I see another macro trend I like).

I'm young and still learning (and wouldn't cry if I lost half of my meager net worth), I suppose we will see how it plays out. 

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#82) On July 29, 2011 at 5:09 PM, TheDumbMoney (42.99) wrote:

"I think your investmest portfolio will crush the market."

That makes one of us.  :-) 

I think it will match the market (or come close to it) if markets go up, and I think it will crush the market if markets go down.  But over a long enough period of time I think it should outperform.  We shall see though.  Best of fortune.

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#83) On July 29, 2011 at 7:14 PM, rfaramir (29.57) wrote:

"a country that issues its own currency need never default on its debt"

No. If you pay your debt with newly printed money, you have defaulted already.

Idiots still choosing to use your worthless bills as money have only themselves to blame for their loss of purchasing power. Your future creditors will not accept your debt at the same interest rate as before (or are fools if they do).

This is why gold and silver are good choices for money. (As well as being the only Constitutional monies.) They are not someone else's liabilities whom you must trust and by whom you can be bamboozled.

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#84) On July 30, 2011 at 1:09 PM, TMFAleph1 (95.98) wrote:

With a closing price at the end of April at $1531, that would be 36% higher than M2 adjusted.  That's not bubble territory at all.  It certainly is pricey, though.  

Keep in mind, though, that the M2-adjusted average gold price has hardly budged since April. Meanwhile gold is up another 6% during that period.

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#85) On July 30, 2011 at 3:03 PM, Frankydontfailme (27.20) wrote:

Wouldn't you say that  reasonable expectations of money printing have increased since then ?

That being said, I get your point. Gold may be overpriced. To say its currently in a bubble.... I don't mean to accuse you of being solely an attention grabber, but (whether you admit it or not), you know that it is not in a bubble.

Furthermore, most of sinchys stock picks are valuated with gold prices ranging from 1100-1300 (a fair price for gold no?) 

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#86) On July 30, 2011 at 5:11 PM, Frankydontfailme (27.20) wrote:

And to be clear, I didn't  mean or my last post to be a personal attack, I just don't get why you don't differentiate overpriced and bubble.

Will you explain why one would adjust for M2 as opposed to M3 or MZM (or is it because the Fed no longer releases M3?) 

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#87) On July 30, 2011 at 8:02 PM, TMFAleph1 (95.98) wrote:

I don't mean to accuse you of being solely an attention grabber, but (whether you admit it or not), you know that it is not in a bubble.

You may not have meant this as a personal attack, but that is exactly what it is. Why would you presume to know my own thoughts better than me? I don't know any such thing and I find that statement highly insulting. I think exaggeration is permissible in article titles in order to attract attention; however, I have written that I think it is a bubble many times in the text of my articles and I have produced evidence to support the claim (whether or not you agree with the evidence is beside the point). I don't like being told that I lack the integrity to write what I believe and, instead, write things that I don't believe in order -- presumably -- to mislead my readers. That is a very serious charge that I reject entirely. If, in a moment of madness, I attacked someone's character without knowing them and without any evidence, I'd say they are in their right to demand an apology.

I just don't get why you don't differentiate overpriced and bubble.

Despite your insult, I will answer the question. I believe that gold is currently overpriced, and I think that the degree of overpricing is sufficient that one can legitimately call it a bubble. I have produced arguments to support that claim. If you can't believe that I believe this, then I'm not sure how else I would convince you -- not that I need to convince you.

Is this bubble at the same stage as U.S. technology shares in January 2000 or Japanese stocks in December 1989? No, it still has room to run in before it reaches that stage -- specifically with regard to the magnitude of deviation from fair prices (not in terms of the number of investors involved, that observation is self-evident), and I think it will continue to inflate, but that doesn't mean it isn't in a bubble today.

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#88) On July 30, 2011 at 8:05 PM, TMFAleph1 (95.98) wrote:

Will you explain why one would adjust for M2 as opposed to M3 or MZM (or is it because the Fed no longer releases M3?)

I don't have a strong opinion on which money aggregate is most relevant here, but, yes, data completeness is obviously a factor.

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#89) On July 30, 2011 at 8:07 PM, TMFAleph1 (95.98) wrote:

Furthermore, most of sinchys stock picks are valuated with gold prices ranging from 1100-1300 (a fair price for gold no?)

What does this have to do with the price of tea in China? I don't have any opinion on Chris's stock picks.

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#90) On July 30, 2011 at 8:11 PM, TMFAleph1 (95.98) wrote:

Wouldn't you say that  reasonable expectations of money printing have increased since then ?

See comment #58. Expectations don't enter into it.

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#91) On July 30, 2011 at 9:06 PM, Frankydontfailme (27.20) wrote:

Fair enough. I apologize for the personal attack. That was a thoughtless misstep on my part.

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#92) On July 30, 2011 at 9:28 PM, TMFAleph1 (95.98) wrote:

Water under the bridge ;-)

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#93) On July 31, 2011 at 1:26 AM, ChrisGraley (30.25) wrote:

For anyone convinced by Alex into selling your gold. I am buying.

I'd really like him to start assaulting silver though. 

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#94) On August 03, 2011 at 9:44 AM, JaysRage (90.49) wrote:

We can stop assuming that "stable" currencies such as the Swiss frank aren't also debasing their currencies.   They are degrading as well, just at a slower rate.   The only stable store of value is gold.   Appreciation of it is a measure of the true inflation vs the currencies.   It's not a bubble.

http://caps.fool.com/Blogs/swiss-national-bank-announces/622423

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#95) On August 03, 2011 at 7:57 PM, TMFAleph1 (95.98) wrote:

"We can stop assuming that "stable" currencies such as the Swiss frank aren't also debasing their currencies.   They are degrading as well, just at a slower rate."

It doesn't matter whether or not Switzerland or any other country is debasing its currency and at what rate; as I alluded to above, you only pay a premium for realized inflation; you're not supposed to pay for inflation/ debasement expectations.

Alex Dumortier 

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