To answer everybody who responded to that provocative post, I'll give my take on the fundamentals of gold.
THE BULL CASE
1) The price of gold still does not reflect the true cost of prospecting and mining for gold. We know this is true because the price has been increasing rapidly for years and yet mine production is flat. The reason for this is that ever since the world went off the gold standard, central banks have been dumping gold. If they ever turn off the tap or run out of gold to sell, prices will go much higher.
2) Gold is a traditional safe haven investment that people turn to when there is turmoil of any kind, and in particular when they lose faith in fiat money. Obviously we are likely to see more turmoil and loss of faith in fiat currency in the next year or two.
3???) Inflation? Actually I don't think so. Sure the government is lending lots of money, but this is only to try to replace some of the even larger amount of money that's being destroyed. The US dollar is going down not so much because there are too many dollars, but simply because people don't want to invest in the US, and also because the US does not dominate the world economy as much as it once did.
THE BEAR CASE
1) The price of gold is driven mostly by investment demand. Stop and think about what that really means, "investment demand". It means people buy it, not to use it for something, but simply because they believe they can sell it to someone else at a higher price later. This is the definition of speculation. And if this drives the price to quadruple (which it already has) or even increase tenfold (which it might), then this is the definition of a speculative bubble. Every speculative bubble starts for legitimate, real-world reasons, and then ends up feeding on itself. The housing bubble started because people were looking for a store of value during the last bear market. Now they're turning to gold and other commodities during this bear market. Anyway, enjoy it while it lasts, and I'm not being sarcastic, I do mean enjoy it, because there's obviously a lot of money to be made, just like in real estate a few years ago.
2) Gold is different from other speculative vehicles in that it comes into fashion during bad times. And yet bad times tend to deflate any type of speculation, because at some point there is simply a lack of new money available to drive the price higher. Surely anyone following the price of gold and especially gold mining stocks in recent years has noticed that they usually move up and down with the broader stock market, not opposite to it. There are some exceptions, but that's the usual pattern. If there is a stock market crash, does anyone think gold mining stocks will go up? No way. Look at any market crash in history and check what happened to gold mining stocks.
Fun-da-Mental |
