I get a lot of great feedback from my readers. I get other email as well. Here is another installment of replies to emails that I usually ignore (see the first one here ). Dear Julia, Thank you for the opportunity to profit from writing a post that directs my readers to your forex broker. Forex trading has all the advantages of trading against extremely highly skilled opponents without the built-in tendency for prices to rise that we see with stocks. If I ever lose my empathy for fellow human beings, I’ll take you up on your offer. Sincerely, Michael -------------------- Dear Blair, Forgive me if I’m a little skeptical of your claimed ability to offer unbiased financial advice to Canadian seniors. What threw me off was the phrase “Gold Price” in your organization’s name and the reference to “proprietary trading algorithms.” When you say that current seniors are the wealthiest generation ever, is it your mission to cure them of this affliction? Sincerely, Michael

Last week I had some fun writing open letter replies to email solicitations . In one reply I said “I have decided not to turn my entire net worth into a lump of metal that fits in a backpack.” This was my way of using humour to poke fun at the absurdly high price of gold. But you may wonder if this statement is literally true. What dollar amount of gold fits in a backpack? A typical backpack used by high school students has a capacity of about 20 liters. Here are a few other facts that will take us to our destination: – 1000 cubic centimeters in a liter – Gold density is 19.3 grams per cubic centimeter – One troy ounce is 31.1 grams – A recent gold price was $1328.60 per troy ounce Combining all this together, we find that a backpack holds $16.5 million worth of gold! Although I don’t like to talk too much about my exact net worth, I’m prepared to reveal that I have less than $16.5 million. So, my net worth in gold does, in fact, fit in a backpack. If you find it cra...

I won ’ t say that I think we’re in a gold bubble because an ounce of gold has lots of room to rise until it trades at historical prices for tulip bulbs or 100 shares of Nortel. Fundamental analysis points to a high value for gold as well. In addition to its ability to sit around in piles near armed guards, an ounce of gold has many uses: – paperweight – ring – shiny thing – very small barbell We have reason to believe that historical fascination in gold will persist. After all, modern inventions like computers and smart phones are in no way more interesting to look at than a shiny piece of gold.

Jonathan Chevreau says that Nick Barisheff is about to publish a book titled $10,000 Gold: Will it happen sooner than you think? (see the middle of the article). The article also included an opinion about gold being overvalued, which creates some balance, but I’d prefer to stay away from these predictions altogether. My first reaction to seeing “$10,000 gold” was to remember the 1999 book DOW 36,000 by authors who would rather remain nameless. Apparently, everyone had to pile into stocks or miss the 3-5 year ride on the DOW from around 11,000 in 1999 to 36,000. It’s now 12 years later and the DOW is still at around 11,000. The only reason a book like DOW 36,000 made it to print with some likelihood of success is that in 1999 stocks had been on a terrific tear, and people wanted to believe that the party would continue. The same is true for a book today about gold reaching $10,000. Apparently, Barisheff believes that a $10,000 gold price “could be justified.” I have little d...

I’m not in the business of making short-term price forecasts for stocks, bonds, or anything else, including gold. Gold has had quite a run over the last decade. I thought it would be a good idea to take a look at a gold chart from the last time gold had a great run (1970 to 1980). The chart below shows that decade plus a couple of extra years. Now this might look like I’m predicting that gold is going to crash soon. In fact, I just want to point out that this is a possibility. This shouldn’t be a great concern for those who have a small slice of their portfolios in gold. But for those who are piling into gold with the bulk of their portfolios because of government debt fears, inflation fears, or just bullishness on gold, such a crash is one of the many future possibilities. Diversification is a good thing even when it comes to gold.

Over the past decade, the price of gold has risen from about US$270 to US$1358 per ounce. This is a staggering average compound gain of 17.5% per year. Human nature compels us to imagine this trend continuing, but such high prices should make us wary, not bullish. If we cast our view back to before the most recent decade, gold actually lost value. For the 20 years ending 10 years ago, gold lost an average of 4% per year! This isn’t an after-inflation figure. If we take into account inflation, gold lost much more value than this. The tough thing about valuing gold is that it has almost no inherent value. Stocks correspond to businesses that have profits, losses, and dividends. We can at least measure the price of stocks relative to the earnings of these businesses. In the case of gold, how do we measure value? Of course, currencies have a similar problem. Why do we value dollars? The short answer is that governments act in a manner designed to stabilize the value of curr...

Warren Buffett’s partner, Charlie Munger, is a very smart and well-informed guy with strong opinions on a wide range of topics, financial and otherwise. He recently commented on several subjects including investing in gold. Munger believes we have a “moral obligation to become rational,” that hoarding gold is irrational, and that “even if it works, you’re a jerk.” It sounds like Munger won’t be getting any Christmas cards from gold bugs. On other subjects, Munger believes that our best option for alternative energy is solar and that running cars on corn is crazy. He believes that stocks are a better bet than government bonds at current rates. A good quote was his reference to “the nutcase that runs North Korea.” It must be great to feel comfortable enough to say what you really think.

Gold bugs often say that it’s important to own gold because it is something real that will retain its value even if runaway inflation devalues cash. I don’t spend much time planning for the breakdown of society, but recent events in Haiti can cause us to think about what we should own that will retain some value when everything else is becoming worthless. In the face of extreme societal breakdown, nothing can really retain much value, but for lesser calamities, some things are better than others. It’s certainly true that poor fiscal management by governments combined with demographic changes, depletion of natural resources, and natural disasters could cause major instability leading to very high inflation. However, I don’t see gold as the answer. It has little inherent value. In the face of food shortages, why would anyone trade some food for gold? It’s true that money only has value because we all agree it has value. But the same is true of gold. If things get bad enough, w...

We’ve had no shortage of headlines proclaiming “Gold Hits New Record!” When you’re in the business of writing something new every day, it’s easier to write about gold prices than to find something substantial to talk about. Leaving the value of such reports aside, are they true? Well, recent stories announced that gold had reached US$1150 per ounce. Back in 1980, gold peaked at US$850 per ounce, which is obviously a smaller number than US$1150, but what about inflation? US$850 in 1980 had the same buying power as US$2230 has today. So, an ounce of gold today has a little over half the buying power it had at gold’s peak in 1980. I’d say that this is a much more reasonable way to judge the price of gold, but it makes for less exciting headlines. If we look at everything in absolute dollars, we can pump out headlines for record prices of many items every time inflation nudges up another 0.1%. Alarmist stories are great for reporters, but not much good for readers. Wake me up...