Posts
September 23, 2002
Gold and the CRB Index
The principle underlying this gold/CRB relationship is very simple. Rising commodity prices are a signal that inflationary pressures in the economy are building. If inflationary pressures are building, the purchasing power of the dollar is declining and the gold price should be rising as well.
There's a chart in the article that is worth a look. The left scale shows the CRB Index from 180 to 280. The right scale shows the price of gold from 250 to 500. That makes sense to me. I see no conspiracies. I see no indication whatsoever that gold is both an inflation hedge AND a deflation hedge. All I see is a basket of commodities compared to one specific commodity (gold). In my opinion, the correlation is quite high.
Now take a look at the following charts.
StockCharts.com: CRB Weekly Index
Note that the CRB Index closed at 270.86 on December 11, 2009.
That's roughly the same level it was in 1983. It clearly has not kept up with inflation over the past 26 years. Blame the sheer size of modern mining equipment and advances in automation and productivity for that more than likely.
Kitco: 24 Hour Spot Gold
Note that the price of gold is currently $1,113.50 per ounce.
Now take those two numbers and plug them into the chart in the first link. I have and this is my conclusion.
All things being equal, either the price of gold is more than twice as expensive as history would suggest it should be, the CRB Index is at least twice as inexpensive as history would suggest it should be, or there's a bit of both.
Of all the investment assets, the price of gold is most influenced by what you think it will be worth to others when you someday sell it. How can one possibly put a fair and objective price on that? Gold can't be eaten. It can't be lived in. It can't fuel a vehicle. It does have to be protected though (stored, insured, and/or hidden). As an investment, the utility of gold comes only at the time you sell it to others. At that point, you hope that they will want it at least as much as you did when you bought it.
I'm not an anti-gold bug. I want to make that clear. I bought it. I sold it. I no longer find its price attractive. I am not actively betting against it. Further, I thought it was very overpriced at $1000 (when compared to toilet paper and canned goods). I stated this on my blog and continue to think so. That doesn't mean gold can't go higher and stay there. Maybe it is different this time.
Thinking that one particular asset class is much better than all others and that the asset is also good at any price is one of the primary reasons we're in crisis mode though. One need merely point to housing. I simply offer this as food for thought.
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
-
At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
17 hours ago
43 comments:
Mark,
there is no inflation and has not been for 2 years. If folks have been buying gold the last 2 years as an "inflation hedge" they are fing morons.
Could there be inflation? I think of all those reserves at the banks ready to roll, but they need the "all clear". That could come tomorrow at another pow wow at the white house where Obama and company will press the banks to lend like they did at the top of the credit bubble.
Ireland riots and union strikes, Italy aggression against the PM, Greece, Ukraine, Spain......it never ends.
Bad debts may finally show fiat currency for what it is, not much. Maybe gold is attractive in that secanrio, but then maybe SPAM, toilet paper, and bullets are more so!
GYSC,
It's a crazy world and I doubt it gets any less crazy going forward. Sigh.
History schmistory! I know it's dangerous to say "this time it's different", but that's what gold is for! And I wouldn't be in the slightest bothered if everyone else got to think the same way - by that time gold could be the de facto global currency for all I know or care! I do know that there is not a better, easier hedge against what everyone used to think - namely that major currencies were a good, reliable store of value. In essence, I'm backing some of my potentially rubbish currency with gold. If i'm wrong, i'll be laughing all the way to the bank, assuming it's still there.....
Stevie B.,
If gold is truly a safe store of value, then how do you explain that it now buys twice as much as it usually does (as seen in the chart I provided)? In my opinion, a true safe store of value always buys exactly the same amount.
At what point would you consider gold overpriced? When it buys 4x? 8x? Ever?
I'm not arguing where the dollar is headed long-term. I'm arguing that gold seems very expensive relative to other stores of value.
Just opinions of course.
After the Spam is eaten, and the toilet paper has served it's purpose, and the landscape looks like a 'Fallout 3' backdrop, I'll finally be left alone with "my precious", admiring the soft golden glow, feeling the familiar heft in my one remaining hand...oh? Sorry Mark I thought I was posting a comment over at 321 Gold : )
Seriously though Mark, I really enjoy posts like this one, it causes me to ask tough questions on why I'm still hanging on to my PMs.
GYSC had a link to a Zero Hedge article on the Spam vs Gold argument:
http://tinyurl.com/yd3tcqe
And down in the comment section an Anonymous poster had this to say:
"Bottom line: If you haven't stocked up your pantry like a Tribulation prepper, plus some lead to protect it, plus some camping gear to deal with austere conditions, and a car you can live in if push comes to shove, you are a fool to buy gold."
Now that is some investment advice I can agree with, not that I would hold out much hope for a long happy life if it came to that.
Mark
The thing is, I don't care about other relative stores of value against which gold may be overvalued or undervalued at any one (possibly long) moment in time. I'm not a speculator. Other stores of value (such as t-p or spam in enough quantity to matter value-wise) have their drawbacks. I genuinely don't understand what you mean when you say "a true safe store of value always buys exactly the same amount". Can you please give me an example?
I'm not interested in commodities in general - i'm sure there are myriads of reasons why each one is down. To my mind, gold is not just another commodity, and I'm not smart enough to know that gold is overpriced at $1000 or whatever arbitrary price looks "right".
It's surely very simple - gold will be overpriced for me when major developed currencies are underpriced!
For all I know the $ may be temporarily underpriced. Then the £ may be. Then the Euro, etc,etc,etc. But they're all tarred with the same brush and that brush does not have the label "undervalued" attached to it!
If I was feeling stupid (and I frequently do), I would say that the developed world's currencies will never "recover". Yes, general commodities may catch-up and overtake gold. So be it. As long as gold maintains a store of value relative to my domestic currency, it's serving it's purpose. And if gold does not maintain value, then it will still have served it's purpose because at least against gold my domestic currency will be maintaining some sort of value, and that's more important to my future than the value of gold.
Nice chatting!
watchtower,
Very amusing comments. :)
"Bottom line: If you haven't stocked up your pantry like a Tribulation prepper, plus some lead to protect it, plus some camping gear to deal with austere conditions, and a car you can live in if push comes to shove, you are a fool to buy gold."
I think that is pretty decent advice. If hindsight really does show that gold is expensive to these other things, then it will be because few have bought the other things, yet. Just my opinion of course.
Camping gear!? It is a LONG walk from Mass to someplace warm! Let us hope things do not get that bad.
Stevie b.,
I genuinely don't understand what you mean when you say "a true safe store of value always buys exactly the same amount". Can you please give me an example?
Here's my thinking for what it is worth.
If I was truly looking for the ultimate safe store of value I would want an inflationary hedge that exactly mirrored all my future expenses. I could then sell this item as future expenses appeared and I would neither be better off or worse off. That to me is the perfect safe store of value. You can never pay too much for it and you can never pay too little for it. It will never make you poorer and it will never make you richer.
Right or wrong, we know with 100% certainty that gold does not satisfy that requirement.
Those who bought gold in 1982 and used it as a safe store of value over the next 20 years were financially ruined. It bought dramatically less stuff (like toilet paper) in 2002 than it did in 1982.
Those who bought gold in 1999 and used it as a safe store of value over the next 10 years were not just maintaining their wealth, but growing richer. Much, much richer. It buys dramatically more stuff (like toilet paper) in 2009 than it did in 1999.
This tells me that gold can be very expensive and gold can be very inexpensive. It very much depends on the price you paid for it when you bought it. This also confirms what my gut thinks. No asset is good at any price.
In the grand scheme of things, it is definitely possible that gold is still very inexpensive. I would not rule it out. Perhaps 6.7 billion people will hoard gold like there's literally no tomorrow. There's no limit to how high the price can go. I would be a complete fool to think it couldn't happen.
It is also possible that after a 4x increase in price over the last 10 years that gold is now very expensive. I'm not arguing that gold might be 4x too expensive though. Instead, I think the price 10 years ago was the bargain of the century. There were no gold infomercials on TV. Gold was not mentioned constantly on CNBC. It was unloved. I don't see it becoming unloved again to that level, ever.
I also wish to point out my personal top risk for gold going forward. Here's a "what if" scenario.
Gold is real. You used cash to buy it. There's no debt. It sits in your hand and it offers what seems to be perfect safety. I understand that appeal. If I knew everyone was doing just that and only that then I'd be much more comfortable owning gold even at these prices.
What if all your neighbors bought their gold using credit cards though? What if they started thinking that gold only goes up in price and decided that if a little gain was a good thing, then a heavily leveraged gain was even better? What if they started making serious money off if it and opted to take out a second mortgage to buy more?
We really have no idea how much borrowed money is chasing gold. I'm not suggesting your neighbors are doing that, but it would not surprise me in the slightest if massive amounts of borrowed money are chasing gold right now. Borrowed money always loves "sure things".
I want borrow money from the bank to buy gold is it the best way to do that during world recession?
http://answers.yahoo.com/question/index?qid=20081123093321AAoVyoZ
In hindsight, he/she would have done very well to make the bet. My point is that it was a bet though.
GYSC,
Camping gear!? It is a LONG walk from Mass to someplace warm! Let us hope things do not get that bad.
"Halo XXIV: The Apocalypse Version" will have virtual camping gear. You'll never even have to leave your house! ;)
Mark,
wow you think as far ahead as Halo XXIV! You are a genius.
I would add that I too have no idea how much borrowing has been done to BUY gold, but I would place it at very low. Like really low. On the other hand there are plenty of examples of leveraged SHORT positions on both the metals so we have that.
Mark,
how many responses did you leave on that Yahoo thread? (kidding):
1.)I believe you definitely should not take out a loan to buy gold. You will need to constantly repay the principle on that loan as well as interest. Most likely those payments will be much higher than any return that you get from gold. Save your money. If you want to take out a loan to invest in something consider starting your own business, purchasing investment real estate, or even stocks (though I don't recommend that). The return on any of those will most likely be much greater than gold.
2.)i would not do it if i were you.
the gold is now 700++ the highest is 1000++(ridiculously high, too overbought),.
how long do you want to hold the position for gold?
assuming you have a long period of 5-10 years even 15 is the best.(which is the most recommended).
if gold hits 1400, you will only double your $$.
why not go for cheap stocks like citigroup(and of course many more) which is now trading below $4.00?
the highest for citigroup was more than $50.
3.)Borrowing money to buy a commodity is the worst decision you could possibly make
Looks to me that stocks are going to be the next bubble (again). A Citi buy call, too funny.
You heard it from the man himself:
"Halo XXIV: The Apocalypse Version"
This just goes to show you that if you hang around here long enough you will get a glimpse into the clandestine inner workings of 'Halo'.
Whisper Watchtower, whisper.....and all will be revealed.
Mark,
Nice comparison. As a self-proclaimed non-financial technical person, I'm going to describe my opinion with an emotional twist for a change ;)
Physical Gold is very powerful. I had some recently and I remember how I liked to hold it and feel it's weight. I thought to my self: "i'm going to hold onto this regardless of the price for many years in case everything goes to sh!t". My wife liked the idea, It had some pride attached to it, I hid the stash in one of my plants and checked on it once in a while. It made me happy.
Fortunately, I snapped out of the hypnotic siege that gold had placed on me... I realized how powerful and illogical of a hold it had on me and I got rid of it as fast as I could.
While selling my physical gold, I realized something even more scary: you could be waiting on the phone for an hour or more trying to sell your gold and the price can plummet before your very eyes!
Mark you mentioned when the gold bubble collapsed in the 80's... You also mentioned that it is 4x what it was 10-years ago. These facts are undeniable and difficult to argue against. Gold is out of sync.
When "the powers that be" decide that the USD can go back up relative to other currencies (can take months/years) gold can collapse back to $400 (arbitrary guess).
my 2 cents
I am still waiting for gold at $0 so I can buy it all. Ditto for silver.
GYSC,
I would add that I too have no idea how much borrowing has been done to BUY gold, but I would place it at very low. Like really low.
I would take the other side of that bet, unless "it is different this time". Heck, Goldman even has "gold" in their name. It's probably a matter of pride. ;)
If there is momentum money to be made investing in a trend, then I would bet every last dollar I own that there is an ample supply of people using leverage to make even more money off of it. That's the American way.
Will Goldman Sachs be “Trading Places” with the Hunt Brothers?
http://www.fueltracker.com/content/will-goldman-sachs-be-%E2%80%9Ctrading-places%E2%80%9D-hunt-brothers
The highly leveraged Hunt Brothers, unable to meet their margin calls, were forced to sell.
...
Will Larry Gensler do the right thing and be able to get out of the “good old boy” network to implement the “Eddie Murphy” rule? Only time will tell, but if he does follow through gasoline and diesel fuel will become affordable again just like orange juice did after the Duke Brothers went belly up. But after all that was just a comedy movie based on fictional plot and characters – or was it?
You know my thoughts on gasoline vs. natural gas (from an earlier post). I think gasoline is either twice as expensive as it should be or natural gas is twice as cheap, or both.
Nelson Bunker Hunt
http://en.wikipedia.org/wiki/Nelson_Bunker_Hunt
He is best known as a former billionaire whose fortune collapsed after he and his brother William Herbert Hunt tried but failed to corner the world market in silver.
What prompted a billionaire to risk it all? I'd really like to know.
Remy,
Physical Gold is very powerful. I had some recently and I remember how I liked to hold it and feel it's weight. I thought to my self: "i'm going to hold onto this regardless of the price for many years in case everything goes to sh!t". My wife liked the idea, It had some pride attached to it, I hid the stash in one of my plants and checked on it once in a while. It made me happy.
I know the feeling. Holding even just a single one ounce gold Krugerrand in one's hand is very hypnotizing.
There is nothing "sexy" about storing its equivalent in a back room. One one-ounce $1,100 gold coin will now buy roughly 2,000 rolls of toilet paper at Costco ($21.89 + 9.5% tax, 45 rolls, 2-ply, 500 sheets per roll).
As Stevie B. wisely points out, there is a limit to how much wealth you can protect storing toilet paper, canned goods, and other basic necessities. However, people should at least start there these days in my opinion. If one must buy gold at these prices, at least buy the other stuff first.
I've said this before so forgive me for repeating it. Once you factor in the 28% tax rate on gold (since it is considered a collectible), gold's price actually needs to increase faster than the price of other things in order for it to be a decent inflation hedge. If it merely tracks inflation then over the long-term you can expect to lose nearly 28% of it to taxes. It is therefore vital in my opinion, that you get a really, really good price on it when you buy it.
Toilet paper does not have that problem. It is a decent inflation hedge if all it does is track inflation. I'll have capital gains due to inflation, but the government can't tax them (unless the laws are changed and the government wants to go digging in my septic system to see how well I did on my investment, lol).
I was at Washington State's largest mall this evening. I would have never guessed there are just 11 more days until Christmas.
At roughly 6:30pm I was able to park very close to the entrance and did not even need to circle. In fact, had I been greedier I could have had "rock star" parking. For those willing to walk just a few more feet, there was a football field sized section of empty parking spots available.
The inside of the mall looked much like a ghost town. Granted, it is Monday and it is raining here today. However, I have never seen a mall look so empty this close to Christmas.
Holiday shopping: Overcoming the post-Thanksgiving buying lull
http://lubbockonline.com/stories/121309/bus_535152319.shtml
Stores are determined to prevent a repeat of last year, when it was unusually quiet after a solid start to the season. Shoppers didn't return to stores until the final days before Christmas, making it the weakest holiday season in four decades.
Good luck on that one. Do check out the "FREE LAYAWAY" sign in the article courtesy of Foot Locker at the mall I just visited this evening.
Even the "Cash for Gold" kiosk (a sign of the times if ever there was one) had no customers as I walked by. The same goes for the very large Albert Lee Appliance kiosk. It also was true of the Ivar's Fish & Chip mini-restaurant in the food court (two employees seen, zero customers). The food court itself was nearly empty at 6:30pm.
Speaking of food, I stopped by McDonalds on the way there. I had the $1 double burger and the $1.29 fries. Big spender. I represented roughly 20% of their sit-down customers while I was there.
Mark,
"Krugerrand in one's hand is very hypnotizing"
It must be that copper look.
I'm kind of partial to Maple leafs, Chinese Pandas, or Australian Philharmonics myself and Eagles have that silver color which really takes away from the real gold look if you ask me but to each gold bug his own I guess.
Not that I'm a true gold bug mind you as I'm just a speculator like all the gold bugs are that just don't know it or won't admit it.
LOL
Word verification: PROWORKE
Now that would suck, actually I'm antiworke as I would rather speculate then work but that just me.
Kevin
Kevin,
I was a cheapskate. I can only imagine how much more hypnotic maple leafs would have been!
I'm mixed on your word. There seems to be a missing letter.
PROWORKER doesn't seem right. I don't see much of anything proworker these days.
PROWORKED seems right though. I think there might even be a glut.
What's the significance of the missing letter?
R = Recession?
D = Depression?
Aha! Proworked it is!
Mark - thank god for that! I'd read your comment about a true safe store of value the wrong way and thought there was some sort of mystical nirvana of an investment out there that was some sort of secret that I knew nothing about. Phew! Didn't somebody say something like "gold is a rotten investment (for serious money) until you look at the alternatives"?
I take you excellent point completely about gold via borrowed money. At the moment, the gold ads on tv are IMO a net positive for gold. It means the balance of opportunity for the public would appear to be in selling, not borrowing to buy. Yes, it means more supply from weak hands and that may slow the ascent of gold, but I'd rather gold was the tortoise and not the hare. When the ads are banks wanting e.g. to lend you money against your gold to buy more, then you're right and that would really put the wind up me. After all, we're both contrarians at heart!
Finally, 2 unrelated things. The Hunt brothers obviously felt they weren't rich enough and were sure they saw an opportunity to show how smart they were. And your tax point is well-made - although here in the UK there is no tax on gold other than capital gains tax on profits over £10k p.a. and I believe British sovereigns and Britannia coins are tax exempt, hence perhaps their higher premium. Obviously this could all change and i'd have thought one would want to own gold before the PTB found new ways of taxing it, especially if it was e.g. in Europe via VAT on new purchases.
Cheers!
Stevie b.,
I'm with Greenspan on this if not much else. I don't think it is possible to have a safe store of value in a welfare state. Like you, I see no mystical nirvana of an investment out there that meets the standards for a safe store of value. It is all relative.
In small quantities, I think toilet paper is a decent safe store of value. It goes up in price a bit each year. No wild swings in price. Hard to pay too much. Hard to pay too little.
In large quantities, I don't think truly safe stores of value exist. If there were then China would ditch the dollar and be ALL over them in a heartbeat.
Fortunately and unfortunately, I'm somewhere in between. As a plus, unlike China I'm small enough so that I can ditch any investment without the market knowing or caring. That gives me an advantage. As a minus, I'm big enough that I clearly can't protect much of my nest egg simply by buying toilet paper.
As for the demand to buy gold being an indicator, I would simply offer my story from 1982 again. The speculators really, really wanted my three silver dollars I got as a high school graduation present. I can remember the ads in the newspaper. I visited a rather nice hotel in Spokane, WA that year and they threw my coins in a bucket right along with everyone else's coins. They paid me $18 each. To this day, I clearly have no complaints. At the time I thought that maybe I was the sucker. At the time I certainly didn't know who the patsy was. In hindsight, it was clearly somebody else. Go figure. It was a great trade for me, but only out of ignorance. I knew squat back then. Probably still do, lol.
As for a gold tax, our state's governor was really pushing a sales tax on gold in Washington State when she was running. It sent chills down my spine because I owned it at the time. Nothing ever came of it though, at least so far. Perhaps that did have an effect on me. I was worried about my safe store of value back then, let me assure you. On the one hand, like you it would seem better to buy before the tax. On the other hand, if fewer people buy after the tax then there goes demand. Without demand, watch out below.
And let's not forget that at least some of the gold selling on TV (as opposed to buying) is actually reducing gold demand. I point to the 31mg gold coin reproductions. People think they are getting gold and they are. 1/1000th of an ounce for $20? Good grief. It's bad money chasing out the good. It's the eternal gold bug's nightmare. I could breathe 31mg of gold and not even notice. Sigh.
Mark "On the other hand, if fewer people buy after the tax then there goes demand."
I seem to remember the first coins I bought in the '70's included some sort of purchase tax, but it didn't put me off cos things looked really rotten at that time. I think it would be an open question as to whether demand would fall - after all, things would have to be pretty desperate for the PTB to introduce some sort of tax - in fact just the sort of scenario some like Andy Xie see in a couple of years time.
And assuming the tax was not introduced globally, perhaps others who remain untaxed might equally assume that the developed economies were finito and make up the demand difference - who knows?!
Whatever, we live in interesting and challenging times!
Stevie b.,
To back your point, the sales tax has risen from 8.9% to 9.5% where I live. I didn't exactly complain that I had already bought a LOT of toilet paper before they raised it.
Our modern "challenging times" economy seems to eventually reward loss avoidance strategies. Sometimes it's in tiny increments and sometimes it's in big dotcom sized chunks.
Mark,
"I'm mixed on your word. There seems to be a missing letter."
Try this Mark, pro-work-E, I kind of prefer no-work-E at least if I'm the one that is going to have to be doing the work-E.
U no 8x5 = 40 kind of work-E.
LOL
Kevin
Stag,
It looks like China is still exponentially pyramiding debt.
http://www.bloomberg.com/apps/news?pid=20601089&sid=axy.8AK6fsWo
Who knows? Maybe a butterfly flapping its wings in Dubai will trigger a cascade of debt bombs in China. Of course, if Chinese wages suddenly quadruple, things will be peachy.
Kevin,
Could be worse. Could be hard-labor-E. ;)
mab,
Credit growth of this magnitude inevitably places a strain on banks’ internal risk management...
$1.2 trillion?
You wanna play rough? Okay. Say hello to my little friend! - Tony Montana, Scarface (1983)
At least China can bail themselves out with their own money.
TAE had a nifty piece about China today:
http://theautomaticearth.blogspot.com/2009/12/december-15-2009-why-china-wont-succeed.html
I don't fully agree with you on you argument of automation and productivity. It might have gotten cheap over the last couple of decades but production costs only have one way to go from now on: up.
Both these measures benefited from easy money and cheap financing over the last 20 years. Once again falling interest rates had a lot to do with it. Cheap money has affected every sector of the economy and there is nowhere to hide.
That includes gold.
I thought about loading up on the yellow rock but soon realized that it was a futile exercise without a well stocked pantry and an army to defend my stash.
The reality is that gold can go up to the stratosphere but 99% of the population will not be able to hold onto to it when it really counts.
In the great derpession, by 1935 it was time to jump back into equities but barely anyone had any money left.
While everyone says it's different this time, I say history repeats itself. It only depends on whether you have a secular or cyclical outlook.
Anonymous,
I agree with almost everything you said. Our only difference seems to be on production costs. I'm not convinced up is guaranteed.
I think automation has and will put serious pressure on this planet's 6.7 billion people when it comes to employment opportunities. Without work, people can't afford to pay high prices.
All this cheap and easy credit is an attempt to prop up the unsustainable. I'm mainly arguing that the attempt may fail, just like it did in Japan.
Aluminum Global Glut to Decline 54%, Marubeni Says (Update2)
http://www.bloomberg.com/apps/news?pid=20601080&sid=avG3k.L5UCwc
Dec. 4 (Bloomberg) -- The global aluminum surplus will narrow by 54 percent in 2010 from this year as China, the world’s largest consumer, leads a gain in demand as economies recover, Japanese trading company Marubeni Corp. said.
It all comes down to this. Is China in a bubble or is it not? I very much tend to think it is.
In my opinion, they are taking our place during our Great Depression of the 1930s. They just don't know it yet.
I see overcapacity and I see China's desire to keep everyone employed leading to even more overcapacity.
If I end up being wrong, then we will end up being in complete agreement. It's certainly possible.
just came across this sort-of balanced view re gold
http://raphaelkahan.blogspot.com/2009/12/gold-is-this-bubble-yet.html
Stevie b.,
Nice find. That looks like pretty solid unbiased analysis to me, and from many different angles. I agree with almost all of it. I'll simply offer my opinion directly on part of it, only because I have done similar charts.
The ratio of gold to commodities is close to the sample period highs reached in 1980, and if you believe (as I do) that it is more likely the ratio will go back down rather than make new highs, then there are two possible conclusions: either gold has to come down, or commodity prices have to increase more than gold prices. I'm of the latter view.
As you know, I'm a believer in the theory that either gold has to come down, commodity prices have to go up, or they will meet somewhere in the middle.
Here's the rub. If commodity prices double in order to catch up to gold, then gold wouldn't necessarily be a good hedge against inflation while that was going on.
As an example, picture toilet paper quadrupling in price but gold prices only doubling. In nominal terms, gold investors would do okay but in inflation adjusted terms they might not. That's the risk to me even if gold doesn't drop in price.
On the other hand, it is entirely possible that it really is different this time. Gold is a rare metal. If enough billionaires decide to make it a permanent part of their portfolio then the price can clearly go up and stay there.
And lastly, based on the last 10 years...
Stocks and real estate are moving from "sure thing" status to known evil.
Gold is moving from known evil to "sure thing".
Clearly there is a danger when gold completes its transformation. I can't say it is there yet, but it may be getting close. I can say this though. If toilet paper as am asset class moves from known evil to "sure thing" then there's a lot more pain coming.
Mark - what none of the charts show is the real potential for the real decline and fall of the developed world this time around, and that's what i'm trying to guard against.
We're basically on the same page, it's just that I don't think gold is "getting close" to "completing its transformation" & i think the possibility has greater weight than you admit that things really are different this time around. If so then historic price relationships have little value - for the time being at least. And yes, "for the time being" will need to be kept under constant review, but I think you underestimate the potential demand - "enough billionaires" may not be as powerful as enough billions of the world's population!
Stevie b.,
I'm actually quite open to the "it is different this time arguments" or my blog would be just named "Prosperity" and nothing more. ;)
I do think gold has a chance to continue to outpace inflation. I don't think it will, but I have no great insight into what other people will pay for it. I only know what I would pay for it. Compared to a basket of commodities, it seems expensive. Since I'm relatively deflationary in the short term, the basket of commodities looks a bit expensive too.
It is not stopping me from continuing to add to my modest hoard of basic necessities though.
In other news, saw a Monex ad on TV today. Buy gold with 20% down and get 5x leverage. That's the kind of thing that sends shivers down my spine. When I bought gold, I had this "romantic" belief that it was an anti-leverage bet in an overleveraged world. You might say I've lost my faith.
The financial system sucks the value out of everything it touches... from human labor to commodities to dollars to gold.
The only thing we can say with absolute certainty is that gold has less value now than it had at $275. At least some of the value was sucked out of it. How much value is left? Perhaps a lot. Perhaps not so much.
We may never know. This debate will continue no matter what the price of gold does going forward. There's even a chance we'll be on the same side of the debate someday, not that our thinking is all that different in the grand scheme of things. I think it is safe to say that we both see major problems going forward.
Mark "I think it is safe to say that we both see major problems going forward".
No worries on that score!
"In other news, saw a Monex ad on TV today. Buy gold with 20% down and get 5x leverage."
Now that does give me worries! They used to say there was a time lag (6 months from memory?) between fads like this in the US getting to the UK. This certainly needs watching. If these ads become as prevalent as the "flog-us-your-unwanted-gold" ads, I'd get really worried....but...at least it should mean cash buys more, so for a while anyway this golden cloud would have a (for me) sterling lining...:-)
Stevie b.,
The dollar is trying to scream "Return of the Deflationary Event" today. Gold and oil hear it but TIP doesn't. It's actually up a bit today.
Somebody needs to stop sucking the value out of my inflation protected bond fund of choice. I want back in long-term.
As seen on Yahoo's TIP message board a week ago...
"deflation"
"does anyone know off hand on how the dividend payout for tip is determined in an deflationary environment."
Nobody answered. The elephant in the room is completely invisible. In the paraphrased words of Candy Mountain, "Shun the non-believer!"
Mark - looks like you've got company:
http://ftalphaville.ft.com/blog/2009/12/17/113021/saxos-outrageous-predictions-for-2010/
@getyourselfconnected:
Um, look at the CPI for all urban consumers, and PPI for all commodities, we had a lot of inflation in early 2008, and a lot of deflation in the second half of 2008.
2009 has been almost entirely CPI inflationary.
About gold, I predicted a high in gold at about 1200. Then the bubble would burst and it would drop a bit more than 20%. After that, I predict it will start rising again. I was a bit off on the peak, so lets see what happens. (DISCLAIMER, I sold my GLD ETFs already)
I have no mathematical model for my prediction, just my intuition of what bubbles, and anti-bubbles feel like.
Stevie b.,
Love the outrageous predictions. I don't even care about the accuracy. Beats the heck out of hearing the same predictions endlessly repeated on CNBC. Have you heard? The data gets better each month. People are more optimistic. Blah blah blah. ;)
Doc Merlin,
It will be interesting to see if the price of oil is now high enough to expose a few more cracks in China. In my opinion, it has to be causing serious pain.
Every one want to save there wealth physically gold bullion is good choice.Thanks for the great reading, we buy gold coins in a recession. I will pass this on to our Ira clients to read.
Gold Coins
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