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Gold is often seen as a safe investment, especially during economically uncertain periods. However, some investors and economists believe that investing in gold is highly speculative.
It is notoriously difficult to outperform the market. This concept is best formalized by the Efficient Market Hypothesis which is based on the insight that the price of a stock continually incorporates all the information that rational investors have access to. The theory is used to explain why actively managed funds over the long run typically fail to outperform an index.
There is intense debate as to whether Australia has a housing bubble. Metrics such as the historically high ratio of house prices to household income, which were indicative of the U.S. housing bubble, suggest a bubble. However, counterclaims suggest that this ratio reflects a permanent shift in the desires of Australian householders, or that a genuine lack of supply is here to stay. In addition, the cause of such a bubble is itself debated.
House prices in the United States have been nationally declining since they peaked in 2005. The exact cause of the bursting of the housing bubble is a subject of vigorous debate, but a number of factors are commonly cited. These include an unsustainable ratio between incomes and the amount spent of housing (whether via a mortgage or rent), low interest rates (encouraging more people to borrow), and sub-prime lending (where mortgages were granted to high-risk applicants).
Warren Buffett
[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
George Soros
When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.
Nouriel Roubini
Is gold a good hedge? Mostly Disagree
...since gold has no intrinsic value, there are significant risks of a downward correction... The recent rise in gold prices is only partially justified by fundamentals. Nor is it clear why investors should stock up on gold if the global economy dips into recession again and concerns about a near depression and rampant deflation rise sharply. If you truly fear a global economic meltdown, you should stock up on guns, canned food, and other commodities that you can actually use in your log cabin.
Robert Kiyosaki
The secret to surviving the next few years is keeping your wealth in real money, not in the U.S. dollar. Buy things that hold their value and are exchangeable all over the world. Commodities such as gold and silver have a world market that transcends national borders, politics, religions, and race. A person may not like someone else's religion, but he'll accept his gold.
Martin Feldstein
But is gold a good hedge against [the risk of inflation or possible declines in the value of the dollar or other currencies]? The short answer is no on all counts... The price of an ounce of gold in 1980 was $400... by the year 2000, when the U.S. consumer price index was more than twice its level in 1980, the price of gold had fallen to about $300 an ounce... Gold is a purely speculative investment.
Robin Hanson
...variations on the Efficient Markets Hypothesis [depend] on what info counts as “available.” Weak versions only count very widely and easily available info, while strong versions even count info available with difficulty to only a few. The strongest possible forms are silly, and no one ever believed them. Weak versions, which require info to be available to many deep-pocket market speculators, are much more plausible, and I don’t see recent history as offering much evidence against them.
Robert Kiyosaki
When the financial crisis began in 2007, the professional investors were already out (or getting out) of the market. The average investors did as they were told, which is to invest for the long-term, hanging on tight as the Dow plunged from 14,000 to below 7,000, a 50 percent loss in value. Many real estate flippers and homeowners enjoyed the same wild ride.
Paul Krugman
Of course, there have always been men of affairs wise enough to see past the current dogma. ...[but the problem is] do the lives of the [investing] sages carry useful lessons for the rest of us? Soros doesn’t really seem to have a method, except that of being smarter than anyone else. Buffett does have a method — figure out what a company is really worth, and buy it if you can get it cheap — but it’s not a method that would work for anyone without his gifts.

New Comments

0 Points       blacktrance       11 Feb 2011     Is gold a good hedge? Disagree
Gold is a big bubble and currently not worth investing in.

Some people possess some information that occasionally lets them outperform the market. Overall, the efficient market hypothesis is a good approximation of reality.

1 Point       Anonymous       17 Jun 2010     Is gold a good hedge? Mostly Agree
It's been a while since I studied this, but doesn't the price of gold vary inversely with some measures of a booming market? (GDP, stock indexes). If so, then it's a hedge. Definitionally. Maybe it's not a hedge against inflation or total meltdown, but it's a hedge against recessions and bad markets.

People usually confuse the efficient market hypothesis with the "overriding reason we got into this mess" which is why people don't want to believe it or want to blame it.

However, the efficiency of markets is a theory about how much information is stored in a stock price. Weak market efficiency is the belief that all past stock prices are incorporated into the price of the stock. Most people believe this, with the exception of people who operate (and lose money) doing charting. Medium efficiency is the belief that all publicly available information is available in the stock price. Generally this is proven by displaying how, statistically speaking, active investors tend not to deliver consistent returns higher than the market.

Strong form market efficiency is a theoretical level, which no finance professionals believe exists, which is that all private information is incorporated into the price of a stock.

Once this theory is explained in this form, it's pretty clear that this is not the problem most people have with current financial markets.

0 Points       ABCDiamond       11 Nov 2009     Is there a housing bubble in Australia? Disagree
I tend to feel that the comment "counterclaims suggest that this ratio reflects a permanent shift in the desires of Australian householders" may be quite accurate.

If you look at property prices more inland, rather than within an hour of the beaches etc., there appears to be a different pricing structure.

People that want the "location, location, location" as they say, seem prepared to pay what is being asked for such property.

Those that don't need, or want that, go further out and pay less.

It does appear though that the majority appear prepared to pay high prices for the locations they want.

0 Points       Benja       13 Sep 2008     Is there a housing bubble in the United States? General Comment
Ouch. Man those professors were wrong.

New Editorial Comments

0 Points       Benja       14 Oct 2008     Will retiring baby boomers cause a stockmarket crash? Editorial Comment
Need the economist's opinion here.

Investing Question Index

Is there a housing bubble in Australia?
Is gold a good hedge?
Is efficient market theory the best approximation of the truth for the average investor?
Is there a housing bubble in the United States?
Will Bear Stearns go bankrupt?
Are commodities a good investment?
Will retiring baby boomers cause a stockmarket crash?