I have updated the charts to show gold and silver vs. a weighted basket of those 5 base metals.
Here's the basket. I've based the ratios on the average prices from 1900 to 2008.
7.50 metric tons of aluminum
5.85 metric tons of copper
15.05 metric tons of lead
1.82 metric tons of nickel
12.45 metric tons of zinc
I'm now comparing one metric ton of gold and one metric ton of silver to that weighted basket.
The conclusions from my last post remain the same.
See Also:
Gold and Silver vs. Base Metals
Source Data:
USGS: Historical Mineral Prices
Kitco: Base Metals
Kitco: Precious Metals
Well we can agree to disagree on this one! While I am a believer in Ag/Au things do seem a little wild as of late. What was with that late day spike today? I have no idea.
ReplyDeleteI smell an Illusion of Prosperity line coming from this thing:
ReplyDeletehttp://tinyurl.com/2dgeurj
GYSC,
ReplyDeleteI smell an Illusion of Prosperity line coming from this thing:
If nothing else, I'll have plenty of aluminum to make hats to shield me from any new lack of reality!
Indeed!
ReplyDeleteStag,
ReplyDeleteCrikey, you just don't give up. ;)
Religion exists to justify what can't be justified. To explain the unexplainable. To give permanency to the fundamental laws of society.
I'm of the belief that gold will not attain full religious status.
It would be interesting to see this data going back a few hundred years. There has to be historical data.
ReplyDeleteIt might also be useful to merge gold and silver into the basket, and then just do a series of plots of X vs basket, using as X each and every one of the metals in the basket.
Wisdom speaker-
ReplyDeleteGood luck w 100s of years of Al data!
Otherwise, lnteresting idea. Do you know of a data source?
Mark - how did you pick the weighting in the base basket?
Thanks
- jus me
Wisdom Seeker (& mab & jus me),
ReplyDeleteAs jus me implies, aluminum going back another 100 years would make for some odd looking data. It wasn't even discovered until 1825. ;)
Consider this.
In 1900, world production was 6,800 metric tons.
In 2008, world production was 39,000,000 metric tons.
That's a 573,429% increase.
The hyperinflationists dwell on the expansion of money. In my opinion, the expansion of aluminum is also clearly worth considering. As mab would say, I'm a gold heretic clearly for even suggesting such a thing!
jus me,
The basket was made by first finding the average price of each from 1900 to 2008.
I then weighted each one to buy less of the more expensive ones and more of the cheaper ones in such a way that a constant dollar amount was spent on each of them (at that average price).
This reduced nickel's contribution from 54.9% down to 20.0% and increased zinc's contribution from 8.0% to 20.0%.
The total amount of minerals in the basket was rather arbitrary though. I was just looking to have the basket relatively balanced, with no mineral any more important than the others.
It didn't change the charts much though. Go figure.
jus me,
ReplyDeleteIn hindsight, I probably should have reduced the arbitrary base metals basket's size to exactly one metric ton for a pure apples to apples comparison.
However, it would not have changed the shape of the graph (only the scale of the Y axis) and that was all that was important to me.
Buying base metals sounds good until you realize what costs it would cause.
ReplyDeleteYou could use futures, but you will have rollover costs. For a fund like DBB you have additional yearly fees.
And if you want physical, how do you want to store it?
Current value in USD per gram:
Gold 48
Silver 0.8
Nickel 0.02
Copper 0.008
A 50,000USD investment in nickel would be more than 2t. Have fun moving with that.
Even if base metals are 50% undervalued vs PMs the costs associated with holding them make them less attractive if the holding period is long.
Anonymous,
ReplyDeleteEven if base metals are 50% undervalued vs PMs...
Or alternatively, PMs are 100% overvalued vs base metals. Doesn't exactly make me want to go out and buy PMs.
I would also add the conclusion from my previous post.
ReplyDeleteThis is not an endorsement to load up on base metals though. I'm not convinced fiat dollars are going to zero in the short-term. I could very well be wrong, but I still lean deflationary.
One more thought.
ReplyDeleteIf indeed gold is 100% (or more) overvalued relative to base metals then surely it is even more overvalued relative to toilet paper. Toilet paper prices have only moved up slightly over the last decade.
If so, then how is buying gold now at these overvalued levels going to protect me from rising toilet paper prices long-term?
Or is the theory that gold will continue to outperform toilet paper prices indefinitely? I'm just not a believer in that theory long-term.
For what it is worth, I'm all for hoarding toilet paper right now. I have done so and will continue to do so.
Mark, I would love to hoard toilet paper and oatmeal boxes, or whatever looks good in your long term ratios.
ReplyDeleteBut unless the world breaks apart and we have a barter economy I won't be able to sell them unless I open a supermarket.
I am with you that I don't believe that these long term ratios will stay elevated forever. I however doubt that they will revert quickly. The current wealth preservation environment justifies a premium for any commodity that is a suitable store of value.
In the current environment, I would rather look at gold reserves to monetary base ratios than at ratios to other commodities. This credit cycle contraction might not end until the USD has reverted to a full gold backing through appreciation of gold just as it did at the end of the 70s
http://www.oilprice.com/uploads/AB274.png
Following this assumption, gold is still massively undervalued vs currency. While this process happens there will be further credit contraction, probably not in nominal but definitely in real terms, which won't be too good for industrial metal demand.
I don't think that pm / base metal ratios will start to revert to mean until we go much closer to the 100% line, because demand for industrial commodities will grow slower than demand for alternative currencies.
Anonymous,
ReplyDeleteYou see gold as a good relative value. The World Gold Council shares your opinion. Consider the source though. As seen on their website:
"The World Gold Council’s mission is to stimulate and sustain the demand for gold and to create enduring value for its stakeholders."
"Our members are gold mining companies of all sizes, with operations spanning six continents."
To me, that's a bit like seeking the National Association of Realtors' opinion on housing prices.
I do not see gold as a good long-term store of value, especially at these prices and especially compared to the things I actually need and use.
I cannot eat gold. I cannot use it to pay my bills. I cannot use it to fuel my car. Its only value to me would be what others would pay me for it. As seen during the last 1970s style gold bubble bust, that is a precarious situation to be in.
I do not believe we will ever return to a gold standard. If anything, we've moved past barbaric gold as a standard and on to a modern plutonium standard instead. That's what our military has hoarded and for good reason. It is also something that we are not allowed to hoard and also for good reason.
Gold should not become a better store of value as it becomes more expensive. That's somewhat the argument here compared to nickel though. The more expensive gold becomes the less space a given dollar amount takes up. As gold's price approaches infinity its ability to be easily transported does as well.
Think if it worked that way for firewood. At $400 a cord $400 worth is difficult to transport. At $4 million per cord I could easily transport $400 worth in my pocket.
Just opinions of course. I'm not shorting gold but I have no desire to own it again. I'm done.
Anonymous,
ReplyDeleteI should also add that I freely admit that I could be wrong. I only know what gold is/was worth to me. There is no telling what others think it is ultimately worth to them. There is already a wide gap between myself and others. I owned gold from the low $400s to the $600s (from 2004 to 2006). Gold and silver were a full third of my investment nest egg. I felt no great need to push my luck.
Mark,
ReplyDeleteThanks for your comments. I didn't want to come over as pushing gold in the comment section of this blog. Just tried to make a counter argument for the sake of vetting my own ideas and mutual enlightenment.
In a credit contraction people chase money, and if central banks decide to hide deflation via QE, PMs are the best money. I don't like the 'barbaric relic' theory, it's only 30 years since the last time that it was proven false, and there was no major crisis since then. There simply is no historic evidence to support the theory. Also, there probably is a reason that central banks have become net purchasers again.
And my disclosure: 0% invested in gold. 10% in silver. I fear though, that we both became uncomfortable with gold valuation much too early.
Anonymous,
ReplyDeleteI can certainly understand the appeal of gold and silver.
As for the "barbaric relic" theory, my take on it is that we now have so many other metals that didn't even exist 5,000 years ago. To me, hoarding gold is a bit like hoarding spears and shields.
There was a primal instinct to do just that for me in 2004 though. Who is to say how many others might also catch the primal instinct bug? It really doesn't even matter if it is rational or not. That is why I don't short gold even though I think it is overpriced.
However, if we do continue into a true crisis (which I do think is likely) then perhaps hoarding even spears and shields is better than nothing though.
"I fear though, that we both became uncomfortable with gold valuation much too early."
I hear you!
Here's what the rising price of gold has done to me.
My Hoard
This is about half of it. You cannot see the other half in the picture.
Is gold a good long-term store of value at these prices? I don't think it is. All it does is make me want to hoard even more toilet paper. That's just my opinion though.
I think the best case scenario for gold bugs is that the crisis is far worse than most expect but not so bad as to be a Mad Max world. Mad Max had no interest in hoarding gold. It would have slowed him down.
You tell me how big that window is and how likely we fall within it and then I'll tell you if gold is a good value at these prices. Then we'll both know!
Thanks for your comments and thanks for sharing your opinions here.
A few more thoughts.
ReplyDeleteFor every bug who sees that 1980s spike in gold, there is another anti-bug who is looking at the decline in the years after it. Gold was one of the worst investments in this country's history from 1980 to 2000, both in nominal and inflation adjusted terms.
What made me especially nervous as a gold investor were bugs' constant comparisons to the peak inflationary price of that gold bubble.
There might not have been a true crisis then like we have now, but there were other factors in play.
Gold's price had been fixed for so long that it acted as a giant springboard for the bubble. The heavy inflation of the 1970s combined with that was a wonder to behold.
The silver charts are often more interesting to me, because they were even more intense.
Another argument of the gold bugs that I simply do not get is the constant comparison to oil.
We burn oil. We do not burn gold. In theory, we could run out of oil. All the gold that has ever been mined is mostly still in existence though. So why would there be a long-term stable gold to oil ratio? I'm just not buying it. At best it would seem coincidence to me and is not a good argument for predicting the future.
The best argument to me is simply the following paraphrased from memory. It tugs at one's emotions and all great bubbles need at least a little bit of that.
Always have enough gold to bribe the border guard.
In my opinion, it is probably the most rational argument there is for gold.
I'm not planning for that world though. If I'm looking to get out of the U.S. where would I really go? China? I find that laughable.
One more thought. I said, "I'm not planning for that world though."
ReplyDeleteI once considered what my reaction would have been had nuclear war broken out between us and the USSR.
I attended a college 10 miles from a US Air Force base. I would have not even bothered trying to evacuate. I would have simply pulled out a lawn chair and hoped that the fireworks show would be close enough to both amaze me and finish me off relatively painlessly.
That's kind of how I feel about our country. If things turn so bad that society as we know it completely breaks down, heaven help us all. The thought of living the life of a Chinese factory worker does not appeal to me and as I grow older will appeal to me even less.