What Is Fool's Gold?

Any flashy but ultimately worthless investment may be called fool's gold in finance. The term originally referred only to iron pyrite, which is commonly mistaken for gold.

In finance, the term refers to an investment believed to be valuable that later ends up worthless or near worthless.

Key Takeaways

  • Any flashy but ultimately worthless investment may be called fool's gold in finance.
  • The term originally referred only to iron pyrite, which is commonly mistaken for gold.
  • The greater fool theory and fool's gold are two separate concepts, but they are frequently used together.
  • There is substantial inconsistency in the spelling of fool's gold over time.

Understanding Fool's Gold

Iron pyrite is a shiny mineral composed of iron disulfide. It looks somewhat like real gold, so it came to be called fool's gold. Fool's gold was often found during the gold rush of the 1840s in the U.S. Many inexperienced miners believed that they hit the mother lode upon finding a cache of iron pyrite. Unlike the real thing, fool's gold is a relatively worthless commodity because of its natural abundance and lack of industrial utility.

Fool's Gold in Finance

Investments in hot stocks that seemed too good to be true, only to crash and burn, can be referred to as fool's gold. Journalists and Wall Street analysts sometimes use the term to describe overvalued stocks or bonds. They title their articles with headlines like, "Fool's Gold in High Tech" or "Mining Company Debt is Fool's Gold."

The term "fool's gold" was used to describe various cryptocurrencies as their values rose rapidly during 2016 and 2017. The name seemed particularly fitting to critics who saw cryptocurrencies as false currencies, just as fool's gold is false gold. Prices crashed in 2018, and many cryptocurrencies proved to be fool's gold. Some cryptocurrencies, such as bitcoin, survived, and their prices recovered considerably during the first half of 2019.

The idea of fool's gold was also applied to technology stocks during the 1990s. Many of the tech companies of that era originated near San Francisco, site of the original gold rush. Some analysts warned that the dotcom bubble was a modern gold rush, and they derided tech stocks as fool's gold. The technology sector later crashed spectacularly between 2000 and 2002.

While many of the technology stocks of the late 1990s were fool's gold, a few ultimately lived up to high expectations. Amazon (AMZN) and Apple (AAPL) were notably worth far more in 2019 than they were in 1999.

The Greater Fool Theory and Fool's Gold

The greater fool theory and fool's gold are two separate concepts, but they are frequently used together. A speculator may acknowledge that a particular investment has no inherent value, and then buy it because of anticipated price gains.

In this case, the speculator would be buying fool's gold based on the greater fool theory. The belief that a greater fool will pay a higher price provides a justification for knowingly investing in fool's gold.

Fool's Gold, Fools Gold, or Fools' Gold?

There is substantial inconsistency in the spelling of fool's gold over time. Because of the informal origins of fool's gold, the use of the term in popular culture seems to have a significant influence on its spelling. A headline in the Atlanta Constitution in 1888 containing the term "fools' gold" is commonly cited as one of the earliest recorded uses.

In 1989, the Stone Roses released a highly successful song titled "Fools Gold," popularizing a different spelling. Finally, a movie starring Matthew McConaughey and Kate Hudson entitled "Fool's Gold" came to theaters in 2008.

As of 2019, "fool's gold" appears to be the most common spelling.