BullionBullsCanada: The Impossibility of a Gold Bubble
In an ocean of propaganda, there are few forms of disinformation as annoying as the endless “gold bubble” babble.
Then prepare to be annoyed some more.
Despite the quintupling of the price of gold off of its absolute bottom, gold is arguably just as “cheap” today as it was when the price was below $300/oz. The reason is simple: the fiat paper currencies in which the price of gold must be expressed have been debauched/diluted by Western central banks (and the governments they represent) just as fast as the price of gold has been able to rise.
Who honestly believes that?
According to Kitco.com, gold's absolute bottom was $252.80 on July 20, 1999. It now trades at $1,384.00. That's a 447.5% increase over 11.4 years. That works out to about 16.2% per year.
Meanwhile the seasonally adjusted CPI-U has risen from 166.700 (July 1999) to 219.146 (November 2010). That's an increase of 31.5% over 11.3 years. That works out to about 2.5% per year.
Gold has outperformed overall inflation by a whopping 13.7% per year and has done so for a full decade. And yet I'm told by "Bullion Bulls Canada" that a gold bubble is impossible?
Some might argue that the official government inflation figures are WAY off. Let's go down this path for a moment. Surely we'd see his "debauched/diluted" claim reflected in my electricity bill. We've been in an energy bull market for a full decade. Right?
So here's what my electricity bill has done.
The top rate for July 1999 was 6.8493 cents per KwH.
The top rate for October 2010 was 10.3527 cents per KwH.
That's a 51.1% increase over 11.25 years. That works out to about 3.7% per year. It's a bit higher than the overall CPI-U but consider that I'm specifically picking an energy product here. I have not cherry picked deflating computer and TV prices in order to make my point.
Meanwhile...
BullionBullsCanada: A Conservative Silver Forecast
Let’s assume that this 30% per year appreciation-rate is deemed “optimal” by these big-buyers. We can make a fairly persuasive argument that this is the case.
That passes for conservative these days? Even David Lereah wasn't *that* bold 10 years into a housing boom.
Update:
I was off a year on my math. It was just over 11 years (not 10) and that's been corrected. I should have double checked my math before posting but at least I eventually got around to it. Sorry!
The price of gold also considers future inflation, so there is that. Lower housing keeps inflation looking lower than it is now, but even then its probably not soaring.
ReplyDeleteOf course, the best reason for gold being in a bubble?
Because we have seen bubble after bubble in everything else...tech, housing, China, T-bills, ammo, hope and change, so why not gold too?
Anonymous,
ReplyDeleteI agree.
"The price of gold also considers future inflation, so there is that."
Unfortunately, it doesn't have the greatest of track records in doing that. Those buying in 1980 were sorely disappointed.
"Because we have seen bubble after bubble in everything else...tech, housing, China, T-bills, ammo, hope and change, so why not gold too?"
No joke. It's just one after another. Where it ends nobody knows. I wonder what could come next? I hope it isn't toilet paper. I've certainly hoarded more than my fair share of that. I figure what's the harm. It isn't like there are leveraged toilet paper funds, at least not yet.
http://directorblue.blogspot.com/2010/12/inevitable-failure-of-eurozone-watch.html
ReplyDeleteOK, so say you are one of these Eurocitizens who is worried about the national bank, the Euro, etc. Do you maybe withdraw money and buy physical?
Because I would not want to be holding the bag when the government decides the conversion rate from Euros to the new local currency.
Anon,
ReplyDelete"Lower housing keeps inflation looking lower than it is now"
If true I believe CPI, all items, would be running about -12% YOY right now. But if I know 1/10th of what I should, housing is based on rent prices where it concerns CPI calculations. So we miss out on the impact of the housing debacle.
Mark, is this about right?
Anon,
"Because I would not want to be holding the bag when the government decides the conversion rate from Euros to the new local currency."
So right! Call me an economic worrywart if you want, go ahead, I won't mind ;)
Anonymous,
ReplyDelete"OK, so say you are one of these Eurocitizens who is worried about the national bank, the Euro, etc. Do you maybe withdraw money and buy physical?"
That certainly poses a problem. What price is too high though? If the ultimate goal is to convert gold back into cattle, aluminum, salt, and so on and it is already extremely expensive relative to those things then what?
For example, if society truly broke down would one pound of gold ($20,000) really buy 40,000 cans of soup (@ 50 cents per can)? It does now. I have my doubts.
Further, from where I sit I see so much greed in the gold community now. It's like rabid dogs that smell blood.
G.H.,
ReplyDeleteThe CPI-U was relatively tame as housing prices exploded higher because rents did not similarly rise. The CPI-U was also tame as housing prices crashed because rents did not similarly crash.
I'd estimate that if housing prices were currently part of the CPI-U that we'd be seeing about 3% to 4% bonus deflation for every 10% drop in YOY national housing prices. That's just a ballpark guess though. I could provide a better estimate if I looked at the data closely.
Yet sites like "shadowstats" continue to believe that the CPI-U "always" understates inflation. Go figure.