Opinions

Everyone is entitled to have an opinion. They are also, at least in most western countries entitled to express it. As we approach the middle of January 2010, I have heard any number of pundits express any number of opinions. The problem that I have with most of them is that they often don't provide enough logical backup.

Now, I will admit that many of these opinions are expressed in forums that really don't allow enough time for someone to fully support their positions. It is certainly possible that the simplistic explanations for the positions i.e. "the Government has printed too much money" or "the Chinese are fudging their numbers" or "the economy can't recover if the unemployment rate stays this high" may have a lot more reasoning behind them then the time allowed to express them.

However, I do think that many of the analysts are what I call long pole people. They have decided that a single indicator, probably because there was a good correlation in the past is enough to determine the future. Now, that prior correlation may have resulted in significant profits, but the question always exists about cause and effect vs coincidence.

It seems pretty simple to say that if there is more money created by the Government that prices will go up since the increased supply of money will decrease its value. However, there is so much more complexity involved in price increases and money supply than this statement would imply. First, if as a whole consumption falls and goods then become more available, that would indicate a decrease in prices. If the money being printed does not go into circulation, it does not lead to higher prices. If the supply of a particular item increases faster than the amount of money in circulation, it would imply a reduction in price.

The price of gold has been increasing and you hear more and more people jump on the bandwagon and maintain that gold should be a part of your portfolio. I particularly like the ads that talk about how gold is a "real" asset that will never go to zero value. Of course, gold could become completely worthless, although I doubt that would happen, but having lived through the last big run up in gold prices in the late 70s, I know that it doesn't have to go all the way to zero to be disastrous. There was a time when gold was above $800 an ounce in 1980 dollars and everyone was saying it is going higher. Well it didn't and in fact it basically collapsed (can we say bubble?). Even at current prices, it hasn't exceeded those prices on an inflation adjusted basis and if you were one of the last to jump on the gold bandwagon then, you are still not really back to even.

Now, gold may continue to increase, and maybe, just maybe it will retain a lot of the current value. However, it could easily repeat the past and drop to levels 50-75% below where they are now. Anyone who tells you different is simply either deceiving themselves or deceiving you. Of course, if you can hold it for 30 years or so, you can possibly wait out any drop in price.

Am I saying we are having a gold bubble? I suspect we may be on the verge of one but similar to other bubbles it is very hard to know if we have passed from high range prices to a bubble. I have some investment in Gold and I'm not getting out of it yet, so I clearly don't think we are about to see it collapse. Of course, that is my opinion and I'm entitled to it. I may of course be wrong.