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Taking Stock: Greater fool theory governs price of gold

Malcolm Berko: Gold has not been a particularly good long-term investment.
By Malcolm Berko Published: July 14, 2013

Dear Mr. Berko: I need advice on buying $40,000 in gold bars being offered by Morgan Gold. I would buy them in my individual retirement account. You told me to buy gold in 2001, when it was $275.

So please tell me whether you would recommend this purchase now or you think I should wait to see whether gold falls more in price. And could you tell me the reason or theory as to why gold is supposed to increase in value? The registered financial consultant at Morgan thinks gold will go to $5,000 an ounce by 2014. He says his company can buy gold for me at a lower price than any competitor can. I know gold has almost doubled since 2009, but do you think it will do as well by the time I retire in 2030?

HW, Syracuse, N.Y.

Dear HW: The most accepted theory explaining the increase in the price of gold is called the greater fool theory. I believe gold and diamonds possess a similar value and a similar history. Both have historical significance; both have tangible industrial and personal use; and both have been sought after for thousands of years. But truth be told, the only thing that makes a 5-carat flawless diamond or a 440-ounce gold bar a wonder to look at is the realization of how much some silly idiot is willing to pay for it.

However, I think you have me confused with someone else. I'm certain as sunshine that I never recommended the purchase of gold in 2001 at $275 an ounce; in fact, I never have advised anyone to purchase the stuff and doubt I ever will.

The price of gold has actually been quite stable for several hundred years. In 1716, Sir Isaac Newton, who was master of the British mint, set the price of gold at today's equivalent of $19.75 a troy ounce.

In 1776, when George Washington was being rowed across the Delaware, gold was still $19.75 an ounce. The official U.S. government price of gold has changed only four times since then. It was raised to $20.67 in 1834, when Andrew Jackson was president, and raised again, to $35 an ounce, in 1934, during FDR's first term. A two-tiered pricing system was created in 1968, and the price of gold was allowed to fluctuate.

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