I've been a fan of The Motley Fool for many years, and now several of the web-based news sources I frequent share content from them. As such, I often see their provocative headlines and know before clicking who is behind them. They have become very effective marketers over the years, but sometimes those headlines just seem silly to me. Nonetheless, I'm a big fan of their content, and I think one of their recent headlines is worth a comment: Warning! Gold Could Drop Below $500.

As a young student in Catholic grade school in the early 80s, I and my fellow students were expected to know the price of gold on a daily basis. If we came unprepared, unspeakable horrors would befall us. Just joking. Maybe. In retrospect, the nuns probably didn't particularly care about about the daily price of gold, but it served to keep us informed about the world around us. Kinda clever, really. The point is that they apparently selected the price of gold as their tool of choice because gold was very much in the news back then, as it is now. Of course, the price hadn't been floating freely for very long back then, and we've now got 30 years of additional price data. Here is what it looks like, without adjusting for inflation:

The point of the article, and the reason why its author suggests that the price of gold could drop below $500, is the fact that a) gold returns tend to revert to the mean, and b) recent gold returns have been astronomical. So what exactly is mean reversion? In this case, it means that annual returns on gold over time revert back to the mean, or average. In other words, the long-term average doesn't change significantly, and the farther returns get away from it, the farther they will have to go in the other direction to return to the average. Incidentally, this phenomenon is generally held to be true in the broad stock market as well.

Why should you care? Perhaps you shouldn't, but it's tough to avoid the fear-mongering hucksters who are trying to sell us gold through every medium available to them. Keeping a broad perspective is valuable in these cases.  So what is the average return to which gold could theoretically return?  The article makes the case that over the very long term (approximately 150 years), the average return is 0.7% annually, adjusted for inflation. If you ignore the past 5 years, though, it would be ZERO.  It's pretty easy to see where the notion of gold dropping below 500 originates.  Even if the underlying gold bullion was a great investment, the implicit and explicit costs associated with most means of purchasing gold significantly mute the returns.

There are plenty of ways to short gold, but I don't recommend that. Even if we're in a gold bubble, as many suggest, it could last a while. Playing either side of the gold coin (no pun intended) is a bet, right now. I prefer to invest my money where I have a solid reason to believe it will appreciate over time.