Possible Price for Gold?

[Anonymous]

I said 'gold mining stocks' when I should have said 'precious metals mutuals funds.'  We have all of our money in these:

Vanguard Precious Metals and Mining (VGPMX) — mostly larger cap (median $6B) gold and other mining companies.

U.S. Global Investors Precious Metals (UNWPX) — mostly smaller cap (median $2B) gold and other mining companies.

The PowerPoint presentations at PrudentBear — "Is the Dollar at Risk?," "Why Gold?," and "The Case for a Secular Bear Market" — were the ones that made the sale for me.  See what your husband thinks.

http://www.prudentbear.com/homepage.asp

[Anonymous]

Mostly, ps, you should tell your husband that he’ll be killing your future website business, ’cause no one will take you seriously as a ‘doom and gloomer’ if you only have ‘a few grand in gold’! Lever up, lady!

Roubini — who has expressed disdain for gold — will see the light, too, as the dollar continues its fall and the oft-mentioned alternative, the Euro, gets diluted, too: per Doug Noland’s most recent Credit Bubble Bulletin at PrudentBear, Euro zone M3 was growing at 8.5% year-over-year in October.

[anxvariety]

jg, I enjoy reading the stuff you write. What do you do for work? Are you a San Diego resident?

[Anonymous]

Thanks for the compliment, av. I’m just a humble wage-slave (head of finance for a small medical device start-up) living in a rental home in La Jolla.

See you at the next meet-up.

[powayseller]

I like his posts too. Thanks for the links, jg, good stuff. But I need somethign more, something that explains why gold will do well when the credit bubble pops.

[rseiser]

PS,
I think the only chart you can use is a plot of gold, inflation adjusted in today’s dollars, using a reasonable rate of inflation (not some ridiculous 2% CPI number). There you will see that the window for gold is $300-$2400, and there is no reason to believe that gold should trade much outside this window, since it hasn’t for 3000 years. Of course, this window will move up with inflation, so in 10 years it could be $600-$4800. Within the window gold will trade according to fear, investors expectations, loss of faith in currency, etc. So if investors will sell everything else, the money might go into gold, and therefore prices will gravitate towards the upper end. The only way money won’t flow anywhere is if government lets our huge credit bubble collapse without printing money – highly unlikely. Even then, gold can move to the upper end of the window, but the window will move down.

Will gold go to $3000 in between and then crash again to $600? Who knows, why not. But sometimes you have to know what is cheap and what isn’t. Since gold is $650, it is closer to the lower end than to the higher end, and chances are still in your favor. If gold goes to $1500 the reverse is true, and I wouldn’t rush out to buy it. I might sell some and hopefully find better investments then.

It’s like a 5 year old Toyota, that you can get for $2000-$8000. I would buy it for $3000, and I wouldn’t worry that it can go to $2000. If you are afraid of things like that, you will never make money in investing.

So to summarize, these are the basic beliefs that you must have when buying gold:
-That gold will trade in the same range it has been for hundreds of years.
-That inflation is real, and that interest rates are not high enough to offset your loss of purchasing power. (including protection in a crisis)
-That other asset classes are overpriced and that this won’t last forever.
-That you can only buy it when it is realtively cheap or not at all. After the price moves up and everyone rushes into gold, the risk/reward will not be as favorable anymore as it is now.

If you don’t share these basic beliefs, then don’t buy it. Nobody will ever be able to offer you a guarantee since nobody can predict the future.

[masayako]

Well said, rseiser.

[Wiley]

I second what rseiser said.

and add a quote…“Gold still represents the ultimate form of payment in the world… Fiat money in extremes is accepted by nobody. Gold is always accepted.”

Any guesses on who said it. No googling.

[powayseller]

One of our Federal Reserve Chairmen?

[Wiley]

Very good. Greenspan 1999

[poorgradstudent]

“assume that in inflationary times, it will be used 100% for money”

The price of gold will have to get a LOT higher before people stop using it for jewlery/industrial purposes.

[qcomer]

JG, Gold is an asset and just like all assets, supply and demand drive its price. In future, I do see demand for gold picking up in view of the liquidity glut and so one should definitely have a certain portion of portfolio in gold. But your formulation assumes that all available money (M2) goes after gold (100% demand) which is very idealistic.

With a constant amount of gold around, a growing population,a growing prodution line and a globally linked world,a gold standard idea seems idealistic but quite difficlt practically. Honestly, I don’t like gold as a commodity asset compared to more useful commodities like silver/copper/oil/houses. Reason is simply because if it comes to cut throat survival scenarios portended by true gold bugs, a shiny coin cannot really help me as much as oil(energy),food,copper(tools),guns,etc. But I do own gold because I believe in diversification.

[Wiley]

Why does gold as a monetary standard seem idealistic when its been the most affective or maybe better said popular, monetary standard for the last 4000 years? As far as our short history (US) we’ve only not had some sort of gold standard for 35 years and look what the value of the thing we call money (frn’s) has done.

[powayseller]

We first went off the gold standard because there wasn’t enough gold to buy all the stuff that we needed and were making. Our productivity jumped drastically with the industrial age, but the amount of gold in circulation just did not keep up. How is it even feasible that all the money in the world today could be replaced by gold? I guess if it happened, each oz of gold would cost tens of thousands of dollars? Then someone would need to make tiny slivers of gold to buy cheaper items like bread or shoes.

[qcomer]

Wiley,
The discussions about pros/cons of gold standard with gold bugs is a long,endless and tirring debate so I am not going to go there. The reason I called the gold standard ‘idealistic’ is because theoretically the gold standard theories rely on the freedom of action that is distributed between free movement of capital, and effective monetary and fiscal policy. However, one reason that most modern macro-economists do not support a return to gold is the fear that this remaining amount of freedom would be insufficient to combat large downturns or deflation.

This argument can also be termed as “controlled inflation” vs “controlled deflation” as goal of monetary policy. Most economists fear that gold standard creates deflation and people don’t spend money and buy stuff in deflationary scenarios thus causing recessions. Also, gold standard doesn’t necessarily guarantee fiscally responsible govts as we saw in WW1 when govts printed money without care for gold, hoping to return it after winning the war. I believe (like most) that there should be some form of hard currency. What we have on hand now is an inflationary extreme but a gold standard would be another extreme. If you have stats/data to show otherwise (since the industrial revolution) then I would love to hear.

[Author]

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