The case for and against 3000$ Gold (Part 2 of 2)

By: ispeculatornew
Date posted: 09.23.2010 (5:00 am) | Write a Comment  (14 Comments)

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Yesterday, we took a deeper look into how gold investments were being made and also the main reasons why gold could continue its move towards the $3000. However, like any other subject, there are many doubters and some say that gold is vastly overvalued. It is a very difficult asset to predict but there are many reasons or forces that could lead gold way back down. Is it already a bubble? Difficult to say honestly but some arguments are difficult to argue with…

Contrarian: Few financial principles have held true for decades as markets usually adapt but one that has is that if everyone is putting money in one asset, you are usually better off betting against the crowd. Finding examples is the easiest thing in the world. Think of real estate… Remember how crowds were leveraging everything to get into real estate because prices could not decrease? How well did that turn out? And when everyone was negative a year or so ago thinking that the market would collapse? If they got out, they missed the whole rally. You could easily find tens of examples. That is a very worrying thing about gold. It just seems like everyone from your financial adviser to your dentist or your cab driver

Based on belief: Yesterday we discussed how gold had historically been a good hedge against inflation and was seen as a hedge against apocalypse. I can see both but I think it’s easy to forget that the source of gold’s value is similar to that of the US dollar, it is based on belief. In reality, gold’s main “utility” is for jewelry. If chaos falls upon us, I am not 100% convinced that gold would hold its value. Who will be looking to exchange for gold exactly? It could happen but maybe not. And if I’m starting to prepare for the worst possible situation, I would prefer something that has more intrinsic value such as land or food. I’m not saying they are easy to store (can you imagine storing soup or fire wood?) but just saying that gold is maybe not the bulletproof solution.

Governments getting rid of gold: If you look at the past decade or so, governments, the main gold holders, have been selling more gold than buying. There are many reasons behind it of course but I think that if it was so obvious that gold was going to rise to $3000 or higher, these governments would hold on a little longer to find out.

Not a true inflation hedge: Gold has always been seen as a good hedge to inflation and it certainly seems like it will continue to do so. But if hedging inflation is the goal, don’t you think that buying TIPS (inflation protected treasuries) is a far better hedge? I’m not sure why gold is seen as the ultimate inflation hedge when a product like the TIPS is directly linked to inflation numbers?

What will happen when the economy/markets recover? Just take a look at the chart on the left, from Clusterstock. This proves what we already know; that gold has been enjoying a good run every time there is uncertainty about the markets or the general economy. I don’t think anyone expects the US to be thinking about recession for the next 10 years. Recovering is a challenge and will remain so for some time, but what will happen to gold when the market recovers?

So which is it?

There are good arguments on both sides and I guess everyone has an opinion about where gold is headed, I would love to hear yours. Is gold headed to $3000 or even higher as some predict or is it already a bubble ready to burst?

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14 Comments

  1. Comment by Stephen — September 23, 2010 @ 9:57 am

    I think gold price will come down eventually. People buying gold now will get burned just like people who bought houses a few years ago.

  2. Comment by Zavi — September 23, 2010 @ 11:36 am

    that’s a real debate!!

    just one point I’m not sure of this argument: Governments getting rid of gold. I’ve read this:

    “China shocked the world by revealing that they control over 33.89 million ounces of gold for monetary purposes. That’s an increase of 75% in Chinese gold holdings over the past six years.”

    It’s hard to predict, but I think it’s possible that it may reach to 3000$ (with no timeline hahaha).

  3. Comment by IS — September 24, 2010 @ 3:43 am

    @Stephen – It really is difficult to say honestly, could go either way, but it certainly looks like a bubble. But those can go on for a long time..!

    @Zavi – Yes no doubt, China would be a net buyer right now but most big holders have been selling!

  4. Comment by The Welcome Stranger — September 24, 2010 @ 11:47 pm

    Good initial debate on Gold, A few points if I may:
    -The biggest holder of Gold is Government/central banks, if it has little value, ‘a blunt barbaric financial legacy of the past’ why didn’t they just get rid this worthless yellow metal. Its not cheap to store gold, in 1971 when Nixon stopped backing the greenback with gold.
    -India, Bangladesh, China, Russia etc have been buying gold recently, rumor has it Saudia Arabia (SA) is/has relocated its gold from the UK to SA.
    -Contrarian = very few people own gold as a financial investment, compare this to investment in realestate, stocks, bonds.
    -Based on belief = 5000 years as a form of currency, and still going strong. Asian countries currently still see gold as money.
    -inflation hedge = it is claimed in roman times one ounce of gold would get you a good toga, $1300 would get you a good suit, in the last 10 years I would argue gold has been the best inflation hedge.
    -economy/markets recover = if the economy does recover/ or tanks gold will still be there.
    – Apocalypse/ Global war/ currency war/ economic volatility/ Govt/political/central bank insanity etc Gold will still be there while fiat paper maybe far from useful. The Zimbabwian economics model which governments are steering towards is a recipe for no good. In Zimbabwe one egg was 2bil dollars, in the Weimar Republic $$$ became worthless, Hungary 1950’s, Yugoslavia breakup in 1990s, Argentina etc all went through similar fiat experiences.
    Gold is a hybrid- a commodity, as well as an insurance policy against political/economic stupidity, it is also a industrial metal (electronics, medicine, jewelery).
    There is credible evidence that governments have been suppressing the price (US/UK).
    Simple math dilemma what does it mean if all the paper gold cannot be covered by total global gold reserves including government / IMF documented holdings. Answer something does not add up, either governments have secretly sold/lent/leased physical gold to paper gold companies (off balance sheet bookkeeping) and/or there is some serious fraud going on.
    Either way if demand exceeds supply prices will go up. PS the above information also applies to Silver.

  5. Comment by IS — September 25, 2010 @ 9:42 am

    @The Welcome Stranger – Thank you so much for bringing these points, many interesting points. My two initial questions would be:

    1-While there is no doubt that gold has been the best historical hedge, wouldn’t you agree that inflation protected bonds are now a more effective hedge?

    2-and what would you say has impact on gold demand. It’s a lot more clear to me what drives silver demand but gold seems somewhat speculative

  6. Comment by justacomment — September 27, 2010 @ 7:11 am

    I think I will take yellow or gold metal that has always had value over a piece of paper with green ink backed by a government that is 14 trillion dollars in the hole and still digging, thank you very much.

  7. Comment by Goldfinger — September 27, 2010 @ 7:47 am

    I don’t know much else that’s been around 5000 years and still has alure? I think I’ll stick with the yellow stuff? Plus you can’t carry land or firewood?? The only other thing would be ammo?

  8. Comment by Michael — September 27, 2010 @ 7:50 am

    Buying TIPS will not hedge against inflation because it’s using “funny numbers.”

    Remember the government now prefers to talk about inflation NOT COUNTING food and energy. Could someone please tell me what good it does to tell us what it would cost to live without food?

    Therefore TIPS will not be a hedge against inflation, it will only insure less losses due to inflation than other treasuries.

  9. Comment by Phil — September 27, 2010 @ 8:24 am

    Inflation protected bonds??? Where exactly is the “protection” when the same person who’s lending money also decides what the inflation rate is? These are the same guys who have been telling us for the last 2 decades that inflation is running less than 2%, meanwhile the price of everything has doubled or even tripled.

    You want protection? Wear a rubber.

  10. Comment by William Sanders — September 27, 2010 @ 8:24 am

    The point about governments selling gold strikes me as flawed. $3000 gold is a rise of 130% from here. Governments were selling before the 400% increase we’ve already had. You give the government way too much credit for prescience.

    I have been a long time (since 2002) gold (and miners) investor. At this point, my personal view is that I would not rule out $3000, nor would I rule out the possibility of us being near a top. I could be wrong, but I expect we’ll see a blowoff rally before we reach the final top.

  11. Comment by george — September 27, 2010 @ 9:01 am

    As to Michael’s comment…I don’t really trust anything in which the indicator (consumer price index, calculated by govt) is calculated by the same people that are responsible for paying the interest rate which is pegged to that indicator (gee, apparently that is the government also….)

  12. Comment by Stephen — September 27, 2010 @ 10:21 am

    @The Welcome Stranger- What about platinum? Platinum is having very dramatic up and downs the last few years.

  13. […] -Gold (uncertainty hedge?) -Other metals (silver, platinum) -Inflation protected bonds (through ETF’s) […]

  14. […] Better writers that I in the PF blogosphere have commented eloquently on the pluses and minuses of the yellow metal.  Kevin at Invest It Wisely has done a number of informative posts here, here and here, including a guest post from Trace Mayer, a noted commentator on precious metals.  Other interesting articles include the Financial Blogger’s “Real Return Bonds and Gold: How to Hedge Yourself Against Inflation”, Andrew Hallam’s metaphorical cautions on thinking gold an “investment” and Intelligent Speculator’s “The Case for $3,000 Gold – For and Against”. […]

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