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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 459151  
Subject: Re: Poll: At what price would you buy gold? Date: 2/12/2013 12:08 PM
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Since gold (unlike bonds or dividend-paying stocks) does not pay the investor a rate of return, buying it is purely speculative. Investors usually buy gold during times of high risk (along with other risk-off trades such as the USD and Treasury bonds).

The "fair" price for gold can be based on cognitive anchoring.

http://en.wikipedia.org/wiki/Anchoring


Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.
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I bought gold in 1985, 2006 and 2008. Since I always think long-term, I recall clearly that only a little over 10 years ago gold was $250 per ounce.

http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

Thinking short-term, gold had a bubble-shaped run-up to $1924 per ounce in the summer of 2011. (I called this bubble.) This bubble deflated somewhat but did not pop. Gold has been gently declining and has stabilized at $1660 per ounce.

http://stockcharts.com/freecharts/gallery.html?$GOLD

The great run-up of the gold price from 2001-present parallels the the great run-up of the money supply and system credit. The explosion of the trade deficit supported bubbles in housing, Treasury prices and gold because our trading partners invest heavily in "safe" assets such as Treasuries, agency debt and gold.

http://research.stlouisfed.org/fred2/series/TCMDO

http://research.stlouisfed.org/fred2/series/MZM

http://research.stlouisfed.org/fred2/series/BOPBCA

History shows that U.S. investors would rather invest in productive assets like stocks than gold. When the economy is growing strongly, the stock market rises and gold languishes.

The answer to the "fair" price of gold depends upon where the investor places their "anchor."

If the future will return to a strong economy with a lower trade deficit and money supply growth that does not exceed the growth of real GDP by much, the price of gold will fall.

If the future holds economic stagnation or stagflation, fast growing money supply and trade deficits, the stock market will fall and gold will rise. Gold is a defensive investment that is meant to protect asset valuation in times of high risk. A gold bug (like Poz) watches the money supply and trade deficit grow and thinks, perhaps rightly, that the gold price will have to break to the upside.

The Fed is able to create money out of thin air, but individual investors can't. We must divide our limited resources between alternative investments. The balance of the different assets is a measure of the investor's macro judgment of the economy.

Wendy
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