If history is any guide, it could easily be argued that gold was expensive compared to all four of these hard assets back in 2008. Gold was $871 an ounce then and has continued to climb in price.
The key, at least to me, is what happens to the price of those other hard assets. Should they fall, then gold would seem to be even more overpriced.
Here's a mix of inflationary and deflationary stew for you to digest.
As China’s Wages Rise, Export Prices Could Follow
“For a long time, China has been the anchor of global disinflation,” said Dong Tao, an economist at Credit Suisse, referring to how the two-decade-long shift to manufacturing in China helped many global companies lower costs and prices. “But this may be the beginning of the end of an era.”
China worried over high steel prices
The switch to quarterly pricing for iron ore and a similar switch potentially lying ahead for coking coal is the biggest structural change to impact the global steel industry for decades. Various steel producers and bodies have warned that it will increase price volatility in both costs paid for raw steel-making materials and prices passed down to consumers.
Copper to Drop as China Chokes Off Property Boom: Chart of Day
“There could be further downward pressure on the copper price,” MF Global analyst Jeremy Cave wrote in a report. “Over 40 percent of copper is used in construction, so the relationship with Chinese property markets is clear.”
Copper Enters Bear Market on Jobs Data; Zinc, Nickel Plunge
Copper has fallen 23 percent since reaching a 20-month high in April on signs that growth is slowing in the U.S., China and Europe. The Reuters/Jefferies CRB Index of 19 commodities fell as much as 2.4 percent today, led by declines in metals. Zinc plunged 15 percent this week, the most since February 2007, and nickel lost 16 percent, the biggest drop since October 2008.
“The jobs number was very bad,” said Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York. “It means that the economy doesn’t have any traction. Markets will struggle from here and people are going to sell base metals.”
China bubble
It is very difficult saying when a bubble will pop. As John Maynard Keynes once famously said, “The markets can remain irrational longer than you can remain solvent.” But the available evidence seems to suggest that the Chinese property bubble cannot go on for long. And as when it pops, Chinese manufacturers will start dumping all the steel and the cement that they produce, on other parts of the world. As and when then happens, steel and cement prices will crash.
At that point of time, you wouldn’t want to be holding these stocks, anywhere in the world, India included.
Beijing chills hot property market
James Chanos, a hedge fund manager, went so far as to warn earlier this year that China was “on a treadmill to hell”.
...
Despite the effects the measures have had, analysts are predicting further action. In particular, it seems likely that a property tax will be introduced. It is expected to be a tax on those holding properties, rather than a transaction tax. This will give local authorities a more stable income and make them less reliant on the revenue from land sales, something that has helped fuel the price increases.
In sharp contrast to Forbes, I find the opinions of James Chanos to be rational. I continue to lean deflationary. It is not a sure thing though.
See Also:
A Century of Gold Bubbles
Gold vs. The World's Oldest Money
Gold to Aluminum Price Ratio
Gold to Salt Price Ratio
Source Data:
USGS: Historical Mineral Prices
Whoooaaa, glad I missed the last comment thread! Wowza.
ReplyDeleteEveryone is a prisoner of their own thought bias, nobody can be exempt as there are no real "fact" or "truths" and even if there were it does not mean those facts or truths would be accepted or adopted at large.
The argument "its different this time" is weak when applied to something that is not time based but of course every year is different and it IS different this time as to the size of the credit bubble and the interconnectedness (not a word I think!) of the world.
That said, I can sit here and argue and feel 100% confident that I could not be swayed otherwise that looking at the graphs for cement, steel, copper, and nickel that as soon as the gold window was closed in 1971 gold found its non-fixed price outside of bretton woods and then took off when allowed to run into the early 1980's. Only after severe action was taken by Volker via high interest rates (cash flows in) and then a concerted effort to suppress gold via central bank selling and coordinated shorts by large banks did gold get back down to old prices. Now things are getting crazy again and money is losing it's faith based acceptance and golds price is again going back to it's non suppressed price. It wouuld still have another 100% to go up in this scenario.
Now I do not really think that, but you can make that argument and I could be swayed by it!
We will not know what the answer is until we know. That time is getting closer because it will be decusion time for central banks the world over by the fall I imagine. Then we can argue some more!
GYSC,
ReplyDelete"We will not know what the answer is until we know."
Indeed. It's pretty clear what my thoughts on gold are these days and what your thoughts are on gold.
I think gold is overpriced. However, there are lots of ways I could be wrong.
We could be experiencing some form of peak gold, at least in the short-term.
A bigger way I could be wrong would be if I am wrong about China. If I am, then you would definitely want to be buying gold before they did. From what I can see, they do love gold and there are a great many of them.
Although I'm deflationary, I could definitely hoard something from the periodic table. Assuming the price is right, oxygen looks pretty good to me. There have certainly been plenty of "gasps" on Wall Street lately! ;)
Mark - you're posts inspired me to spend a few minutes on the web looking for an element "more useless" than Gold.
ReplyDeleteStaring at the periodic table, I couldn't recall what the heck Technetium was. So I figured that was a good candidate.
After spending a couple moments with Google & wiki, it appears Technetium is rarer than Gold, and is more useless than Gold.
It's also apparently worthless.
Just thought I'd share that.
- jus me
(well, it's also radioactive)
I'd like to retract the previous comment.
ReplyDeleteTechnetium is disposed of in nuclear waste, which made me think it's useless and worthless.
However, it is sought after for some applications.
The price, apparently, is ~$60/gram.
Whereas gold price ~$40/gram.
Oh well, nevermind.
-jus me
jus me,
ReplyDeleteWhat about Technetium's jewelry potential?
Sometimes it is better to look good, than to feel good, if you know what I mean.
The one thing about wage demands when they are gained via strike, media pressure, or government fiat is that the demands could easily come back over and over. This is what happens in Vietnam, where workers strike early and often for any crazy reason they can come up with, e.g. the rice is not white enough in the cafeteria. (not a joke - actual anecdote. whiter rice was just the excuse for a pay raise of course.)
ReplyDeleteI am curious if we will see more wage demands and this is not a one off. Its also a sign of inflation when wages get into the act of going up to pay for everything else going up. China has had high food prices of late.
OTOH, according to your articles steel and copper are coming down due to fall off in demand. (Though I heard a story that China's government was going to build low income housing now - great idea to continue the bubble, eh.)
Coba Coba 98
Coba Coba 98,
ReplyDeleteThis is a really tough investing environment, even if all one wants to do is just preserve wealth.
I heard a great quote in a movie today. I paraphrase. Be careful of trusting your gut. Once it sees something that's probably all you are going to see. We're all guilty of that from time to time.
I suspect everyone here will see it regardless, but Mish has a post on Bernanke stating what Mark's been saying href="http://globaleconomicanalysis.blogspot.com/2010/06/bernanke-says-gold-acting-differently.html">Gold acting differently from every other commodity.
ReplyDeleteImplied by Bernanke (and Mark) is that gold will eventually stop acting differently once the uncertainty premium (ironically being caused by the Fed themselves) is gone. Countered by Mish is that gold is doing exactly as expected amid endless talk and action of fiat monetization (ie quantitative easing) around the world.
The thing is central bankers are expect to talk like politicians: stay on message no matter how big the lie. Bernanke can't come out and say he is the source of the world's fiat anxiety and those concerns are completely a) justified b) ridiculous. So I'm not sure there's any use to his commenting on gold. He seems to imply the monetization will continue until commodities Mark cares about show increases. Of course, by the time that happens there might be some serious inflation baked into the cake.
AllanF,
ReplyDeleteWe posted that link almost simultaneously. Mine's in the most recent post. I called it...
Bernanke said "gold" in public.
Nice summary of its importance. Here's my take.
Mish thinks its deflation and default risk. Yahoo message boards no doubt think its inflation. Other commodities, Treasuries, Bernanke, and I think gold's overpriced. Chinese investors and/or gold believers think it is underpriced.
Some opinions are definitely wrong. Which ones would be good to know. ;)
One more thought.
ReplyDeleteI recall Bernanke telling us in 2008 that inflation would moderate. Seeing that I have stagflation in my name and oil was pushing $100, I was certainly skeptical as was nearly every other bear.
He was right though. Inflation did moderate, much like Jaws moderated swimmers. D'oh!
I posted this on the gold thread, but seeing as all the gold talk is on this thread, re-posting here:
ReplyDeleteI suspect everyone here will see it regardless [this was true, Mark even posted the link above before seeing my comment], but Mish has a post on Bernanke stating what Mark's been saying Gold acting differently from every other commodity.
Implied by Bernanke (and Mark) is that gold will eventually stop acting differently once the uncertainty premium (ironically being caused by the Fed themselves) is gone. Countered by Mish is that gold is doing exactly as expected amid endless talk and action of fiat monetization (ie quantitative easing) around the world.
The thing is central bankers are expected to talk like politicians: stay on message no matter how big the lie. Bernanke can't come out and say he is the source of the world's fiat anxiety and those concerns are completely a) justified -or- b) ridiculous. So I'm not sure there's any use to his commenting on gold. He seems to imply the monetization will continue until the commodities Mark cares about show increases. Of course, by the time that happens there might be some serious inflation baked into the cake.