Wednesday, March 30, 2011

Gold: "The Ultimate Bubble"

Click to enlarge.

This chart uses the theory that the price of a material is directly proportional to the inverse of how much of it is mined. I've averaged the prices and production levels from 2000 to 2009. The data therefore covers the full decade.

There is a very strong correlation here with gold being the obvious outlier. This rarity argument would suggest that gold was roughly 10x overvalued relative to cement, iron ore, aluminum, copper, zinc, nickel, and silver in the 2000s (2000 through 2009).

I have no interest in owning gold at these prices. Had I created this chart in 2004 I would never have bought gold. I would have simply bought more silver instead. I might have even held onto silver a bit longer. Who knows?

To put this in perspective, gold is roughly 8x rarer than silver but it is currently 38x more expensive. It is also worth noting that silver has
doubled in price over the last year and gold has not. That went a long way towards solving gold's 10x overvalued problem (at least relative to silver). It is more like a 5x problem now.

I wish I could do this chart using real-time data. I'd be curious to see where we stand right now.


Here's a chart based on current prices. It isn't perfect. It is still using the average production levels from the 2000s. I also haven't included cement or iron ore. The conclusions remain the same though.

Click to enlarge.

Update #2:

I noticed that the steepness of the trend line increased in the updated chart. The rising price of silver dragged it higher. I therefore looked to see what would happen if I no longer excluded gold from the trend.

Click to enlarge.

I think this chart is a keeper. The slope (of the logarithms) is 0.99 which is almost a perfect fit for what we would expect to see if rarity arguments alone drove the price of these commodities. The new conclusion is that gold remains very overpriced relative to silver (but not overpriced relative to copper, for what that is worth).

See Also:
Money vs. Stuff

Source Data:
USGS: Historical Mineral Statistics
Kitco: Precious Metals
Kitco: Base Metals


Mr Slippery said...

A number of metal traders follow the gold to silver ratio, which ranged from about 50-100 for most of the last 25 years. Only in the last year did it drop below 50 and now is around 40. In 1980, it hit 16, which also happens to be the monetary ratio Isaac Newton set it for England in the 1717. Newton moved England from the silver standard to the gold standard so you can blame him. There are many people who think we are headed back to 16-1.

dearieme said...

Ancient joke in Cambridge, about someone or other giving up academic life:
"He left Cambridge to make money."
"So did Newton."

Stagflationary Mark said...

Mr Slippery (& dearieme),

Here's the crazy part to me.

If I based my investment decisions on things that happened in 1717 then platinum would be right out. It wasn't even officially discovered until 1735. Ditto for aluminum and many other elements from the periodic table. I would also wonder why my investments in transportation were doing so poorly. I'd still be investing in horses. Steam engines, automobiles, and airplanes clearly came later.

November 22, 1999
Mr. Buffett on the Stock Market The most celebrated of investors says stocks can't possibly meet the public's expectations. As for the Internet? He notes how few people got rich from two other transforming industries, auto and aviation.

Sometimes, incidentally, it's much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money. But there was one obvious decision you could have made back then--it's better sometimes to turn these things upside down--and that was to short horses. Frankly, I'm disappointed that the Buffett family was not short horses through this entire period. And we really had no excuse: Living in Nebraska, we would have found it super-easy to borrow horses and avoid a "short squeeze."

U.S. Horse Population 1900: 21 million 1998: 5 million

In my opinion, the allure of gold is much like the allure of horses. I'd be very much surprised if the world returned to a gold standard for money, much like I would be surprised if the world returned to a horse standard for transportation.

Mr Slippery said...


I wasn't suggesting an investment strategy, just mentioning the gold to silver ratio and history. I find the monetary link to Newton fascinating.

I also doubt a formal return to a gold standard. It is not in the interests of government or financial powers. We might have a better chance at a horse standard when the cheap oil runs out.

Stagflationary Mark said...

Here's a bonus thought.

Let's say China amassed all the world's gold. What would happen if the rest of the world (like me) collectively said, "So what?"

Gold is so expensive now that it has few real uses. It isn't like gold would substantially improve my quality of life (unless I trade it to someone else to get what they have, but in that case I better hope they actually want gold in the future). If I was the last person on earth and was given the choice between a lifetime's supply of food, water, and toilet paper or a lifetime's supply of gold you can pretty much guess which option I would take.

I can say with nearly 100% conviction that there will never be another war fought to obtain gold. Energy is the new standard, oil in particular.

And lastly, I really distrust the gold to oil ratio as a long-term indicator. We burn oil. We do not burn gold. All that gold that's ever been mined is still in existence. To think that there is a constant ratio between the two that will stand the test of time therefore seems somewhat silly to me.

Stagflationary Mark said...

Mr Slippery,

I didn't mean to imply that you were suggesting an investment strategy. I just always go down that path since investment strategies are what I am always thinking about.

Protect the nest egg! Protect! ;)

Stagflationary Mark said...

I updated this post with a bonus chart based on current prices.

As a side note, it dawned on me that the rarity argument could someday be applied to horse prices perhaps.

From the link above:

U.S. Horse Population 1900: 21 million 1998: 5 million

The rarity of horses has risen by 4x. Go figure.

Stagflationary Mark said...

It is hard to see this in the chart, but the rise in the price of silver relative to the price of aluminum has steepened the slope of the trend line.

Stagflationary Mark said...

I just posted another update. I no longer exclude gold from the trend line.

Stagflationary Mark said...

I also want to point out that these charts are on a logarithmic scale.

Gold looks like it is close to the new trend line in this last chart. However, its price is nearly double the price that the trend line would imply.

Meanwhile, silver is roughly half the price that the trend line would imply.

mab said...


I just don't get gold. To me it's a bubble and a harmless one at that. Gold ain't money and never really was. Jewelry has no appeal to me either.

Maybe it works with things that glitter and metallic elements but mixing and matching usefulness and rarity with uselessness and rarity doesn't sit well with me.

I'm sure that there are numerous rare black, brown and grey minerals that are both useless and worthless.

I really liked the way you used the inverse though. I made a mental bookmark of that.

Stagflationary Mark said...


Maybe it works with things that glitter and metallic elements but mixing and matching usefulness and rarity with uselessness and rarity doesn't sit well with me.

Don't even get me started on antique wicker! That's certainly rare. It seems like something that would have been invented during the Spanish Inquisition in order to entice a confession.

My girlfriend and I were watching a bit of the Antique Roadshow today. I really don't get that either. My ongoing joke is that the item in question is worth about seven pounds to me. Am I referring to money? Or weight? I won't say! Hahaha! I was saying this long before the movie Seven Pounds came out. That makes it especially amusing to me these days of course.

As for jewelry, my girlfriend actually prefers silver. She thinks gold is tacky.

I gave her a silver pendant with a simulated red ruby once and it was like she died and went to heaven. It cost me about $50.

Someone stole it from her when she was at a doctor's office. They no doubt thought they hit the jackpot. Not really. Red glass is red glass. It had more than $50 worth of sentimental value though. Sigh.

That's the thing with jewelry. If people can't tell the difference, then why pay for the difference? The exception would be a wedding situation in my opinion (because it is the price of the thought that counts for most people), but that's about it.

Stagflationary Mark said...


The extremely rare red pieces, or "rubies" of the beach, might come from perfume bottles, the tail lights on old automobiles, lantern and traffic light lenses, or even some types of old beer bottles, like the bottles made by Anchor Hocking for Schlitz Beer in the 1950's.

People are strange.

Anonymous said...

A very interesting graph, very thought provoking.

At first blush, it seems to suggest we use the same dollar value of each material. But on second thought, is a bit of selection bias at work?

Perhaps it is saying that "common" materials are all approximately "common"?

If the graph included, say, scandium and osmium, might it look a little different?

- jus me

Anonymous said...

Oh yes, and adding petroleum to the graph, now that would be interesting!

- jus me

Stagflationary Mark said...

jus me,

At first blush, it seems to suggest we use the same dollar value of each material.

Keep in mind that the logarthmic scale can distort the picture a bit. Things that look close are only close in a "grand scheme of things" way.

In 2009...

Cement: $303 billion
Iron ore: $209 billion
Copper: $85 billion
Gold: $77 billion
Aluminum: $65 billion
Nickel: $20 billion
Zinc: $20 billion
Silver: $10 billion

The three biggest pure metal markets (by dollar amount) all followed that rule very closely in 2009. Note the totals for copper, gold, and aluminum. The production levels for each were wildly different though.

I find it very interesting that the world decided gold was more important than aluminum in 2009. I will be even more surprised if the world decides gold is more important than cement and iron ore someday, especially since iron ore can be used to build machines of war.

But on second thought, is a bit of selection bias at work?

Indeed. I intended well though. I actually tried to pick the materials that I thought would have the highest dollar value produced annually. The platinum group did not make the cut. I stopped at silver. I did not look at every material though. It is possible that I missed one.

If the graph included, say, scandium and osmium, might it look a little different?

I would definitely think so!

Oh yes, and adding petroleum to the graph, now that would be interesting!

I'll do that at some point in the near future. Good idea!

And lastly, it was never my intent to show that the same dollar value of each material should be the rule of thumb here. I'm just trying to say that if rarity was all that mattered, then it would. Clearly rarity alone is not all that matters though.

That said, I don't think a very rare metal with few uses is more important to me than a very common metal with many uses. Maybe that's just me.

Stagflationary Mark said...

I should also add that there were some materials I could not include. Wood comes to mind. There was no pricing data.