Thursday, March 31, 2011

Gold: "The Ultimate Bubble" v.2

Per jus me's request, I've added oil to the charts.





Both gold and oil are similarly pricey when looking at these charts. So here's the gold bug question of the day.

Do we burn gold like we burn oil or does gold continue to accumulate each year?

See Also:
Gold: "The Ultimate Bubble"

Source Data:
USGS: Historical Mineral Statistics
Kitco: Precious Metals
Kitco: Base Metals
EIA: World Crude Oil Production
Bloomberg: Energy & Oil Prices

18 comments:

getyourselfconnected said...

No Comment :)

Mr Slippery said...

Great chart!

As the resident gold bug, I'll try to answer the gold bug question of the day.

Do we burn gold like we burn oil or does gold continue to accumulate each year?

No. Gold is practically indestructible. As we dig it out of the ground, the available stock grows each year.

Being indestructible is precisely one of the properties that makes it ideal as a store of wealth. It is not easy to store 100 barrels of oil in a safe deposit box.

Despite the fact that gold stocks grow about 2% a year, the amount of gold per capita in the world is shrinking. There is less than one ounce of gold above ground per living human right now. And most of that has been hoarded by governments.

Mr Slippery said...

One more comment for the paper bugs.

Do we burn dollars like we burn oil or do dollars continue to accumulate each year?

Bonus question: how many new dollars did the Federal Reserve create in their computer over the last 3 years (hint: the answer is in trillions)

Stagflationary Mark said...

Mr Slippery,

Being indestructible is precisely one of the properties that makes it ideal as a store of wealth. It is not easy to store 100 barrels of oil in a safe deposit box.

That's a good point. However, the fundamental question I have is why do we even care about gold at all?

I have no need for it personally. Its only value is what I think others will pay me for it. Further, I know that deep down they don't really have a need for it personally either.

I do have a strong need for oil though. It is a very strong need.

If the economy does extremely well, at these prices gold will be an extremely horrible store of wealth. We'll keep thinking up new things that we enjoy better. We saw this in the 1980s and 1990s. On a personal note, video games come to mind. A one ounce gold coin can now buy many years of video game entertainment.

If the economy does extremely poorly (apocalypse type poorly), gold would also be a horrible store of wealth. Mad Max had no interest in gold. Canned food was something he cherished. Although not shown in the movies, I strongly suspect he'd have been a fan of toilet paper too. Gold would have simply slowed him down.

So for gold to do well at these prices, I think the economy has to do poorly but not too poorly. That way the true faith in holding a golden metallic rock as a store of value won't be questioned too closely.

That could certainly be the case long-term, but if it is then my TIPS will probably do just fine too.

Stagflationary Mark said...

Mr Slippery,

Bonus question: how many new dollars did the Federal Reserve create in their computer over the last 3 years (hint: the answer is in trillions)

Yes, but that's the same sort of argument that got real estate investors into trouble.

In other words, since dollars will become more and more worthless then I can therefore buy real estate at any price. Oops.

Stagflationary Mark said...

One more thought.

Real estate is even more finite than gold. There has been no additional real estate created since this planet was formed.

That did not stop real estate from being in a bubble though, even as we all knew that dollars would become more and more worthless over time.

Stagflationary Mark said...

I also want to point out that I am not advocating burying dollars in one's back yard in hopes that they will be a good store of wealth.

I'm not that level of "paper bug".

I'm more of a "toilet paper bug", because at these prices I think toilet paper is a screaming bargain relative to gold long-term.

It is not my intention to heckle those who have backed up the truck on basic necessities and only then turned to gold as an investment idea. However, those investing in gold without also backing the truck up on toilet paper are the investors that true gold bugs should be worried about. That's greed pure and simple. The reason is that they aren't looking to protect wealth. They are looking to make money.

I'm also a TIPS bug. I freely admit that might be a long-term mistake being in that paper. There are no risk-free investments in a welfare state. Sigh.

Stagflationary Mark said...

I enjoyed the debate.

Want to guess where I am heading today?

Costco! I'm about to put my money where my mouth is again today. Can't ever seem to have too much toilet paper, lol. ;)

mab said...

On gold. I can't predict anyone's future desire for gold but my own.

A decade or so ago when gold traded around $300/oz my desire for the barbarous was zero. Today, with gold at over $1400/oz my desire is still zero and arguably negative.

I'll take worthless dollars and the cpi goods they buy anyday.

Also, the Fed did not create trillions of dollars last year. The Fed swapped zero interest dollars for interest bearing assets. Those same assets netted the Fed over $100 billion!

I'll be the first to say the Fed has done a horrible job, but it's not the dollars per se that are the problem. It's the bad debt created on Wall Street that is the problem.

In my mind, preventing deflation is NOT the same as causing high or hyper-inflation.

Mr Slippery said...

That's a good point. However, the fundamental question I have is why do we even care about gold at all?

You already stated it, because other people care about it. And not just any other people, the people who create the fiat currencies care about it and hoard. That is part of the reason I have some.

Is it as useful as oil. Of course not. I completely agree with you on food, water, shelter, and oil (energy).

Gold has unique properties that make it really good at being money. Digital fiat money has some properties that are really good, too, like electronic transactions. But the down side is that it can be created in near infinite amounts by the people in control.

My hypothesis is that the central bankers understand this, and they don't trust each other, so they hoard gold. I can't prove it, but there it is.

getyourselfconnected said...

I am with Mr Slippery (big surprise!). Gold is the ultimate honesty enforcer. I won't bore you all with the money since time began stuff, it is what it is. Look nobody thinks the world is going mad max, red herring. What is very probable is that paper debt permanent roll over gurantees will prove to be nothing more than empty book keeping promises. Just think, in the span of maybe 3 days, should Ireland show some balls, billions in paper promises (debt) will simply vanish. Gone. I have written much and maybe wasted 3 years writing about what notional money is and how we ended up here. Can't we get a candy pony post or something?

Stagflationary Mark said...

So much for going to Costco today. Other things came up.

Rather than beat a dead horse, here comes a candy pony post! There is a problem with the "butt twizzler" though.

Be warned. You'll never get those two minutes back. Once you spend them they are gone forever, lol.

Stagflationary Mark said...

One more thought.

There are 4 of us debating gold.

2 won't buy it and 2 won't sell it. There's a certain sense of balance about it.

It would be interesting to see what gold's price would be if the four of us represented everyone.

I'm tempted to think NaN.

I think we're also doing a great job simulating Democrats vs. Republicans. Neither side wants to buy what the other side is selling.

Stagflationary Mark said...

Food-Price Spiral Will Swamp Consumers With More Inflation, Superfund Says

It’s “an incredibly difficult humanitarian story because the poorest countries will be hit the hardest,” Smith said. “The average person is going to be swamped by food inflation. The new arms race is food and energy.”

An indirect way of betting on food prices is to buy gold, because it tends to do well when inflation accelerates, he said. Gold has gained the past 10 years and reached a record $1,447.82 an ounce last week, while silver is up 22 percent this year at $37.775 an ounce. Gold will climb to $2,000 and silver to $60 in three years, he said.

“I think that gold, and to a lesser extent silver, will dramatically underperform soft commodities, but will at least have a high correlation to them,” Smith said. “When we see short-term rates in the U.S. at double digits then you can start to speculate that gold might be getting close to the end of its run.”


The poorest countries have to already be hurting big time. Let's hope he's wrong.

I'm not buying that it will take double digit short-term rates to absolutely put a fork in this leveraged global economy though, so that makes the entire article suspect. That's assuming I am right to think this way of course.

mab said...

I'm not buying that it will take double digit short-term rates to absolutely put a fork in this leveraged global economy though, so that makes the entire article suspect.

Double digit rates???? No way! Seriously, how can an uber-leveraged global financial system withstand high interest rates? The notion that free market forces set interest rates is total bs.

Private sector mistakes (fraud really) caused the current distress. Gov't solutions (or lack thereof) will be the next source of distress imo.

From a narrative perspective, I just don't see how trillions and trillions of fraud and eCONomic idiocy can occur without commensurate punishment.

I could be wrong though. Maybe venal Gov'ts and self serving banks CAN bring global prosperity.

Charles Kiting said...

2 won't buy it and 2 won't sell it. There's a certain sense of balance about it.

But the 2 who won't buy it WOULD SELL IT if they had some. And the 2 who won't sell it WOULD BUY IT if they have something the would-be sellers would want in return.

Money likely does nothing for anyone in shit-hitting-the-fan emergencies. But even when we have those they only last for a month or two.

Stagflationary Mark said...

mab,

...and self serving banks...

How about self service banks?

You drive into them and pump all the liquidity you want without even having to talk to an actual person. Now that's prosperity!

The annoying part might be if the machine asks if you also want a car wash though. Life isn't perfect of course.

Stagflationary Mark said...

Charles Kiting,

I like where you went with this.

Since mab and I do not own gold then all we can do is someday buy it. We argue that we won't.

Since GYSC and Mr Slippery do own gold then they will sell it someday. They might argue that they won't.

Of course, if you never sell gold then it would do you little good.