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So, here's my attempt to see where we are. I'd say a picture is worth at least a thousand words.
In 2004, I bought gold pretty much right on that red line. I expected to hold it forever as a long-term inflation hedge. Just two years later I sold for more than a 50% profit (even after transaction fees to buy the gold and resell it to the Mint). As long as gold stays well above that red line, I'm not even remotely interested in buying it back.
At the risk of sounding like a broken record I will once again offer my standard opinion.
In order for gold to justify its current price, we better start seeing some serious inflation pretty soon. Even then, I honestly believe that there are far better things to hoard right now.
For example, toilet paper has yet to explode in price (as gold has) and would surely rise in price substantially if inflation becomes a serious problem.
If you believe serious inflation is coming then take a long tour of Costco, Sam's Club, and Wal-Mart. Back up the truck. There are plenty of items you will someday need that haven't even remotely exploded in price yet. Further, if inflation does not come then you won't be required to sell your hoard at a loss to a lesser fool. You can simply consume it in the future.
I have hoarded a great many items at reasonable prices. While possible that hindsight will show I was a fool to do so, it is very unlikely history will show that I was the greater fool.
For example, hindsight is not being all that kind to my sneaker hoard. I have accumulated eight extra pairs since 2004. They cost me $14.99 a pair at Costco when I first started. They still cost $14.99 at Costco. It's amazing just how much the rest of the world wants to make us cheap goods.
I think mab (a commenter on my blog) really hit the nail on the head recently. This isn't a battle between deflation and inflation. It's a battle between deflation and anti-deflation. Based on my sneaker example above, I truly think that puts it in the right perspective.
Just something to think about.
Source Data:
USGS Historical Mineral Prices
Historical CPI
7 comments:
Mark,
that graph is terribly interesting and I think all "gold bugs" would do well to take a long look at it.
That said, while I am a strong metals (heavy metal music, gold and silver bullion) fan there are more reasons I hold them than just inflation hedge. I think Mish has shown very well that gold does great, ok, and terrible during inflation; as it does great, ok, and terrible during deflation.
We are fast approaching a time wher the Keynesians may finally have an answer to the age old question: "Can a central bank in good standing create all the money they want?"
While thus far the money created by the FED has not made its way into the money supply (for various reasons) it is an easy breezt argument that it indeed has caused massive inflation. How so? Imagine home prices without the FED help? Imagine stock prices wthout governemnt backstop. Imagine banking without the taxpayer safety net. While deflation in real terms is ocurring right now, relativly inflation of asset prices is running very high indeed (as opposed to where they would be). Again, leave the inflation out and I think about it terms of eventual dollar devaluation. I really cannot see another way to go.
Great topic, and that graph will probably make me set up strong stops near $975 for the late positions I have. The rest have a LONG way to go (closer $500) before I would need to pull the plug on a nice gain.
GYSC,
I don't buy Mish's arguments about gold and deflation. Not one bit. He seems to ignore the spring loaded nature of our last gold bubble just like most people seem to. Namely...
You fix the price of gold for many decades. You release the price of gold. You watch it skyrocket into a stellar bubble as it tries to find its actual free market price (during severe inflation no less!). Then, over the next decade or so the bubble deflates. That's what I see when I look at gold.
He uses that last bubble deflating part to imply that gold doesn't do well during inflation (since we had never ending inflation in the 1980s and 1990s).
The truth of the matter, as I see it, is that gold is a long-term inflation hedge. I can't speak for others of course, but that's the ONLY reason I bought it in 2004. Had I known deflation was imminent and my buried cash would have suddenly become able to buy more stuff, I wouldn't have even given gold a second thought. In sharp contrast, I was VERY worried that the insanely low interest rates would bring inflation and I'd be stuck in dollars that would become more and more worthless.
I also don't think it is a coincidence that oil and gold tend to move together. As the price of oil rises, people fear long-term inflation. Some people can actually remember the 1970s (or can at least read about it).
Keep in mind that based on the chart I have presented, gold has already priced in a lot of dollar devaluation. Far more than toilet paper has. I say stick with the things that haven't priced it in yet.
Soros has a lot of great quotes that would apply here and I will paraphrase from memory.
1. Money is not made by betting on the obvious.
2. It isn't about being right or wrong. It is about how much money you make when you are right vs. how much money you lose when you are wrong.
With gold trading so much higher than its average inflation adjusted price, I would argue that no matter what inflation does there is a lot of risk to the downside (when adjusted for inflation).
GYSC,
One more thought.
It wasn't until recently that I started reading Mish again. It took time for his "salt water" powered car post from 2007 to wear off.
http://globaleconomicanalysis.blogspot.com/2007/06/running-car-on-saltwater.html
"I am not a physicist so I simply do not know. But I am convinced that this is both a new method and not a hoax. Proof that it is not a hoax are the patents given to the process. Here is a list of John Kanzius Patents. As best as I know, not a single patent has ever been erroneously given to the maker of a perpetual motion device."
As a person with both a Physics degree AND a patent who can also easily search the Internet for erroneously given perpetual motion device patents (there are SO many), I have forgiven him but I will never forget.
I do find a lot of what Mish writes to be worthy of reading, but certainly not all of it. That's good enough of course. I could easily say the same about what I write! Nobody is perfect. I've certainly made faulty predictions and conclusions in the past, just like everyone else has.
Mark,
it is doubtful much of anything that I write is worth more than entertainment value!
I like it that we see things diffferent beacuse it makes me really look at what and why of things I see. While defaltion is happening, it is far too early to declare ones dollars are able to buy much more of anything. time will tell.
GYSC,
"I like it that we see things diffferent beacuse it makes me really look at what and why of things I see."
I would never had made that chart if it wasn't for our back and forth discussions. In fact, had we both simply been yes men agreeing to agree, then nothing much at all would ever get done. Would it? We could BOTH just sit afloat in the sea of ignorance and just assume all sorts of things.
I really value the opinions of those that post on my blog. Had nobody ever posted a comment, I would not have dug deeper into a great many topics that could potentially protect my nest egg. I am actually quite thankful.
http://despair.com/meetings.html
That said, none of us are as dumb as all of us! Hahaha! :)
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