A few pieces of advice: under no circumstances do you want to get caught in the weeds of technical analysis, similarly stay away from the gold bugs, and finally learning is good, but don't jump in unless you are prepared to lose your shirt.
In particular, everyone in this community should read When Genius Failed as a cautionary tale. It had a big impact on my world view. Here's a case where the best and brightest formed an accurate, contrarian hypothesis and executed on it perfectly, but were then blinded by their own cleverness and succumbed to hubris (the partners were leveraging their personal wealth to increase their stakes in their fund) and lost it all.
Why is that? (I ask as someone who is genuinely curious and has no prejudice, not as someone who disagrees with you.)
similarly stay away from the gold bugs
What do you mean? Do you mean, "Don't buy gold," or do you mean something more than that? And, why? (Similar caveat to before, modulo that it looks obvious to me that gold is a much safer store of value than almost anything else and probably even a good investment.)
Technical analysis can give you a false sense of 'knowledge' - when you may only be picking up patterns in randomness. But it's very seductive in its certitude.
Gold : If the 'store of value' argument is obvious to you, it's also obvious to a lot of other people. The price of gold tends to balance out the two camps : Anyone who sells you gold believes (naturally) that the price is higher than can be justified (vs. other assets). Gold can certainly go up and down from here. People also used to believe that houses were a fantastic store of value ('everyone has to live somewhere') - that was only 6 years ago.
The typical trader's wisdom is that if a taxi driver (or some other version of 'the man in the street') offers an opinion about a 'sure thing' - run in the opposite direction. Currently, taxi drivers love gold. A few years ago, they had friends flipping condos. Before that it was internet stocks, etc...
If the 'store of value' argument is obvious to you, it's also obvious to a lot of other people.
I don't know, I mean, there's lots of smart people who think gold bugs are just nutty libertarian types, and then there are other smart people who aren't particularly bullish on gold (such as yourself).
But it seems kind of backwards to just "do the opposite of what everyone thinks is a sure thing" (as you said) or "do the same and jump on the bandwagon". Ultimately, in many cases, there will be economic fundamentals (and not just other people's sentiments) that will drive the value of things over time.
Which leads me to a more specific question: What kind of event would cause a major "correction" that would drive the gold price down (either over time, but a significant downward trend, or suddenly, like a bubble popping)? I can't really think of one. Can you?
I mean, one would be if everybody "sentimentally" just decided gold was in a huge bubble, but that seems quite unlikely without an underlying factual reason. Another would be if there were lots of much better investment opportunities, that would drive wealth stored in gold into factors of production... e.g. a very major, capital-intensive global economic boom. Right? Which is something I would be willing to bet against, at least over the course of the next decade.
1) It doesn't depend on how smart the person is. It only depends on whether or not they believe it.
2) It doesn't have to be everyone. It just has to be enough people.
> Which leads me to a more specific question: What kind of event would cause a major "correction" that would drive the gold price down (either over time, but a significant downward trend, or suddenly, like a bubble popping)? I can't really think of one. Can you?
This actually makes me wonder what it would take to synthetically manufacture gold. A glance at Wikipedia says that it's not feasible (possible only in "unmoderated reactors", and I don't know what that means), but we seem close enough that if we wanted to, we could probably do it.
I will be thoroughly entertained if Iran actually decides not only create a honest-to-God nuclear reactor, but uses it to synthesize gold and flood the market. It'll never happen, but it would be hilarious.
I'm fairly sure that refers to a nuclear reactor gone into meltdown. By the time you've knocked together enough particles to make gold nuclei it's quite hard to calm the thing down again...
Gold, on the other hand, is routinely melted down and recast.
Correction; women seem to want 'the real thing', but diamonds aren't themselves valuable, they are a status symbol. Girls don't want to show their friends a "fake" diamond and unfortunately due to marketing, they consider man-made fake even though it's real.
The value of gold has fallen a few times before. Mostly because people moved onto something else as an investment. When investing in industry is uncertain, like it has been when the solvency of countries are even in question, gold and other commodities is a good hedge. However, just like no one could perceive that house prices could collapse (since everyone needs somewhere to live and the population is growing), people struggle to understand that money put into gold now could be tempted to new investments tomorrow. Planetary Resources could also discover a golden asteroid.
So the high value of gold is predicated on the high value of gold -- think tulips, Miami condos, and dot com equity.
However, gold has been in this bubble for a very very long time. Consider the famous investing maxim "the market can stay irrational longer than you can stay solvent" and just stay away is my opinion.
In response to the sibling post on transmuting gold, the minimum possible energy cost is really, really high (due to the necessary gamma rays and the cross section of 198Hg). Unless we figure out a way to produce to nearly free energy it is never going to be worth it.
Hmm... Let's think:
Strengthening of the global economy.
Political crisis in China that prompted players with lots of money to flee.
Government action in the US, India or China banning or restricting gold ownership or import.
Accounting scandal affecting a major gold ETF.
Discovery of a new, large deposit of ore.
Changes in tax treatment.
Changes in margin requirements for investors.
There are people who are investing in gold today because the US debt situation is horrific and the economy is in a bad place -- they are rational investors. There are other people who have been predicting the fall of the monetary system since 1980, and are recommending that you orient your life toward the stockpiling of gold, and cash out your 401k for a 100% "gold IRA". Those folks are gold bugs.
As for gold bugs, you aren't going to learn anything about trading from them. They may be right or they maybe be wrong but if your answer to everything is buy gold, how interesting is that? On top of that, and something I'd rather not get into a huge debate about, their understanding of macro tends to be pretty medieval.
Paul Krugman wrote an excellent critique of the gold bugs in 1996: http://www.slate.com/articles/business/the_dismal_science/19...
The price of gold has had a nice run since Krugman wrote that column, but if you look at the longer-run historical data, you can see that it’s gone down before: http://en.wikipedia.org/wiki/File:Gold_Spot_Price_per_Gram_f...