Click to enlarge.
I've once again zoomed in to show the detail in the 100 day moving average and how it relates to the exponential trend.
Like gold, I'm not willing to suggest that this is an exponential trend failure yet. The data is noisy. We're still pretty close to the red trend line. It is entirely possible that the data comes back up to meet the former trend.
That said, the chart does have a certain blow off top look about it. Silver investors who backed up the truck roughly one year ago can't be all that happy. Perhaps they will be ultimately redeemed. Perhaps not. Stay tuned.
For what it is worth, I do think both gold and silver are overpriced relative to toilet paper. I felt that was true when gold crossed $1,000 though, so take my opinion with a grain of salt.
I did own gold and silver from 2004 to 2006. They treated me well. As I've often joked here, I was once a believer and now I am a heretic. I just don't think any asset is good at any price. Eventually it all comes down to relative value.
Speaking of relative value, candy bar investors did extremely well over the past year.
That's an instant 10% return on investment for those who love candy. It won't make you wealthier though. Sorry.
Here's the good news. You won't pay tax on the capital gains. You can simply eat your inflationary profits.
I must admit that my girlfriend and I ate all of the inflationary profits. It's not that we love chocolate. We just didn't want the chocolate to go bad. Yeah, that's it. We were just being practical. :)
See Also:
GLD Trading Volume
Source Data:
Yahoo: SLV Historical Prices
Kitco: Historical Silver Prices
the only candy worth the money -- Cadbury eggs -- shrunk 10% in 2006.
ReplyDeleteQuantitatively that's not that significant, indeed on a calorie control basis it's a good idea to eat 10% less of everything, but Hershey (the US importer) also compromised the *qualitative* utility of the product -- I noticed immediately that the physical size shrink significantly increased the difficulty in lapping up the interior contents of a broken egg (I suppose this only affects adults).
~~
As for the third message, it referred to a very simple error which could be set right in a couple of minutes. As short a time ago as February, the Ministry of Plenty had issued a promise (a 'categorical pledge' were the official words) that there would be no reduction of the chocolate ration during 1984. Actually, as Winston was aware, the chocolate ration was to be reduced from thirty grammes to twenty at the end of the present week. All that was needed was to substitute for the original promise a warning that it would probably be necessary to reduce the ration at some time in April.
We joke about global warming, but it could really do a number on global cocoa bean production.
<a href="http://en.wikipedia.org/wiki/File:2005cocoa_bean.PNG'>http://en.wikipedia.org/wiki/File:2005cocoa_bean.PNG</a>
Well, one really good reason to invest in gold and silver is that you CAN'T eat your profits.
ReplyDeleteConsider it forced saving.
http://en.wikipedia.org/wiki/File:2005cocoa_bean.PNG
ReplyDeleteTroy,
ReplyDeleteFacebook crime.
"It was terribly dangerous to let your thoughts wander when you were in any public place or within range of a telescreen. The smallest thing could give you away. A nervous tic, an unconscious look of anxiety, a habit of muttering to yourself--anything that carried with it the suggestion of abnormality, of having something to hide. In any case, to wear an improper expression on your face...; was itself a punishable offense. There was even a word for it in Newspeak: facecrime..."
- George Orwell, 1984, Book 1, Chapter 5
MaxedOutMama,
ReplyDeleteWell, one really good reason to invest in gold and silver is that you CAN'T eat your profits.
Consider it forced saving.
Nice. On the other hand, there is no limit to the number of greater fools who would gladly take chocolate off of your hands. :)
Let's put this whole TP canard to rest, shall we?
ReplyDeleteToilet paper is easily manufactured from chipped wood, which isn't exactly rare nor hard to acquire. Therefore the only remotely logical "relative value" argument that can be made would be to water, the latter of which is much more essential to life than TP.
Water & TP both are subject to the "law of diminishing marginal utility". As noted in the Wiki:
The “law” of diminishing marginal utility is said to explain the “paradox of water and diamonds”, most commonly associated with Adam Smith[16] (though recognized by earlier thinkers).[17] Human beings cannot even survive without water, whereas diamonds are mere ornamentation or engraving bits. Yet water had a very low price, and diamonds a very high price, by any normal measure. Marginalists explained that it is the marginal usefulness of any given quantity that determines its price, rather than the usefulness of a class or of a totality. For most people, water was sufficiently abundant that the loss or gain of a gallon would withdraw or add only some very minor use if any; whereas diamonds were in much more restricted supply, so that the lost or gained use would be much greater.
Another problem with TP is that it is not practical to store large amounts of wealth. Space becomes an issue, as does portability. Otherwise, I have no issue with tissue.
ReplyDeleteOne more thing, I don't think GLD and SLV are equivalent to physical gold and silver. Derivatives are not the same thing, e.g. pork belly futures are not the same thing as bacon.
tj and the bear,
ReplyDeleteLet's put this whole TP canard to rest, shall we?
Gold's price will go to infinity and toilet paper's price will go to zero.
Just don't expect me to bet on it.
Mr Slippery,
ReplyDeleteGLD and SLV are not derivatives products. They are funds holding physical gold and physical silver.
GLD's price and SLV's price are therefore directly tied to the price of gold and silver.
tj and the bear,
ReplyDeleteAs a side note, it is my opinion that comparing the price of gold to the price of other assets I could own is not a canard. You seem to think it is. I guess we'll just have to agree to disagree. In any event, you have hardly put the debate to rest.
Toilet paper has done a fine job keeping up with inflation over the past 100 years. On the other hand, gold is all over the place.
People have made fortunes betting on gold's rise and being right. People have lost fortunes betting on gold's rise and being wrong.
Gold lost over 90% of its purchasing power between 1980 and 2000. Over the past 100 years, toilet paper has never lost that kind of value. And why is that? In my opinion, toilet paper is not prone to "speculative" booms and busts.
Correction
ReplyDeleteGold actually lost about 85% of its purchasing power from the peak in 1980 to the low point in 2000. Just want to be accurate here.
GLD and SLV are not derivatives products. They are funds holding physical gold and physical silver.
ReplyDeleteThey are marketed that way. The share prices track the futures price of the metals, but you can only take delivery using very large blocks of shares.
The prospectus also warns that your investment is at risk due to the insolvency of the Custodian (see MF Global) or sub-custodians.
Here is a pretty good list of the risks that make it nothing like holding gold.
Mr Slippery,
ReplyDeleteThe share prices track the futures price of the metals...
As a former GLD investor, I'm just not seeing that. The share price is determined continuously by gold and silver investors and has nothing to do with the derivatives markets.
Further, GLD and SLV net asset value prices are directly tied to global gold and silver prices and also have nothing to do with the derivatives markets.
From the SLV prospectus:
The trustee values the trust's silver on the basis of that day's London Fix.
From the GLD prospectus:
In determining the NAV of the Trust, the Trustee values the gold held by the Trust on the basis of the price of an ounce of gold as set by the afternoon session of the twice daily fix of the price of an ounce of gold which starts at 3:00 PM London, England time and is performed by the five members of the London gold fix.
Derivatives are not used to set the price of gold (within GLD). The price of gold is used to help determine the price of derivatives though.
Gold fixing
The London gold fixing or gold fix is the procedure by which the price of gold is determined twice each business day on the London market by the five members of The London Gold Market Fixing Ltd, on the premises of N M Rothschild & Sons. It is designed to fix a price for settling contracts between members of the London bullion market, but informally the gold fixing provides a recognized rate that is used as a benchmark for pricing the majority of gold products and derivatives throughout the world's markets.
There are risks to holding GLD and SLV. I'm not saying there isn't. My favorite risk is...
The amount of silver represented by the Shares will decrease over the life of the trust due to the sales necessary to pay the sponsor's fee and trust expenses. Without increases in the price of silver sufficient to compensate for that decrease, the price of Shares will decline and you will lose money on your investment in Shares.
Many silver investors in SLV expect silver to rise faster than inflation overall well into the distant future and therefore this risk would seem to be negligible. As seen in this post, I have serious doubts.
Maybe we are stuck on the meaning of the word derivative. My view is that any paper representation of the real thing, the physical thing, is a derivative. Hence, the increased risks of losing your investment through myriad counter party defaults, insolvencies, frauds, rehypothecations, etc. Maybe my definition is too broad for what are normally thought of as derivatives. I also consider mining stocks derivatives.
ReplyDeleteI no doubt tend to lose a few readers every time I post my heretical thoughts on gold and silver. I'm not exactly sticking to the mainstream bearish commentary.
ReplyDeleteThat said, it is what I believe.
Those who thought gold was the perfect safe haven in 1980 would have been better served buying toilet paper in the 20 years that followed. Much better.
And as for the paradox between diamonds and water I would remind everyone what industrial diamond prices have done thanks to modern technology.
And lastly, I have never suggested that a pound of gold should cost the same as a pound of toilet paper. I understand the implications of marginal utility.
A pound of toilet paper costs about a dollar. I just weighed some. A pound of gold costs over $24,000.
In my opinion, gold is not worth 24,000 times what toilet paper is worth (especially if the person just before you used the last square, lol). It is just an opinion of course. Your opinion may vary.
Mr Slippery,
ReplyDeleteI see where you are coming from now. I am in total agreement.
In 2004, I thought about buying a miner (Newmont Mining) but opted for the physical stuff instead. In hindsight, it was a really good choice.
Newmont Mining went virtually nowhere even as gold prices exploded higher.
And why did I make that choice? I was reminded of an old saying. A mine is a hole in the ground with a liar standing over it.
Promises! Promises!
Here's a bonus chart to consider.
ReplyDeleteEven with SLV's recent crash, it has still outperformed PAAS over the last 5 years (and by a wide margin).
That said, maybe it is a warning flag. They were tracking each other fairly well for the first year of the chart. If they meet up again someday then either silver's price will fall, PAAS's price will rise, or both.
Mr Slippery is making a analytical error here:
ReplyDelete"Derivatives are not the same thing, e.g. pork belly futures are not the same thing as bacon."
GLD & SLV -- for the purposes of price tracking -- are notionally the same as the corner bullion dealer's price poster.
If SLV were BCN, they would be buying and storing sliced bacon packs, not pork bellies, in their vault at JPM.
http://www.zerohedge.com/article/blackrock-issues-refutation-slv-fraud-allegations-it-time-panic-slv-holders
SLV & GLD is as money-good a derivative I can think of, over the short-term at least. Their 0.4%/0.5% overheads will eat the long-term investor up, but then again so will segregated vault fees for non-derivative gold held with someone else.
Troy,
ReplyDeleteTheir 0.4%/0.5% overheads will eat the long-term investor up, but then again so will segregated vault fees for non-derivative gold held with someone else.
The round trip cost to buy and sell the physical stuff hurts too.
NWT Mint
The difference between the buy and sell price is currently about 8%. That's higher than when I bought and sold at that very same company.
And then there was the safe to store it in, and the feeling that I needed to ride shotgun on it 24/7 (labor costs). Go figure.
Granted, my toilet paper can burn. That could hurt too I suppose. I'm trying to picture the insurance claim.
"You had HOW much TP?"
Hahaha! :)
Gold's price will go to infinity and toilet paper's price will go to zero.
ReplyDeleteBoth will always have value, but there's simply no relational significance to be drawn between them.
it is my opinion that comparing the price of gold to the price of other assets I could own is not a canard.
Comparing TP to gold is akin to comparing water to Cristal. What's the point?
Toilet paper has done a fine job keeping up with inflation over the past 100 years.
The cost of TP *should* closely track inflation for obvious reasons. The only time it shouldn't would be virtually Mad Max circumstances when normally abundant supplies are interrupted by sheer anarchy. Therefore, utilizing TP as a relative measure is useless due precisely to it's marginal utility.
On the other hand, gold is all over the place.
Of course it is. As I noted, it's a measure of political and economic instability, and those things tend to vary greatly over time.
In my opinion, toilet paper is not prone to "speculative" booms and busts.
No surprise -- it can't be. Again, marginal utility.
And as for the paradox between diamonds and water
Yep, and should someone find a way to cheaply manufacture gold -- say, out of wood chips -- the same thing would happen to it.
Those who thought gold was the perfect safe haven in 1980
There are always people that buy or sell something at exactly the wrong time. The 70's were obviously a time of instability, but the writing was on the wall when Sheriff Volcker arrived.
Afterwards there were 20 years of declining rates, plentiful energy, essentially full employment, increasing wealth, and a relatively peaceful world overall. It's no wonder that gold steadily declined -- no worries forward, and fading memories of worries past.
Since the turn of the century... not so much. Terrorism, debt, structural unemployment, peak energy, monetization, etc. all add up to ever-mounting crises, most of which have yet to have their full effects felt.
The potential for gold (and silver) to rise from here is akin to the gap between how bad things are and how bad they can get.
[Note: It would be irresponsible not to note that gold could drop back to $250, but that would require all the crises to magically resolve themselves. Fat chance. For example, we're so far down the rabbit hole that simply cutting the deficit to responsible levels would set the country afire.]
TP, OTOH, will keep soldiering on at a stable, inflation-adjusted rate due to virtually unlimited source material and a long-perfected manufacturing process. If it weren't for the energy (and minimal labor) inputs it probably wouldn't even track inflation.
Mark, you're a smart guy and put up a nice blog with great charts, but you really need to get past the TP thing.
It would be irresponsible not to note that gold could drop back to $250,
ReplyDeleteNo, average mining cost is around $500 now and if diesel doesn't go back to $2 I wouldn't expect gold to fall that much.
The deal with gold is that it measures expansion of the USD money base.
The more we print wrt the general wealth output of the world, the higher gold will go.
Oil serves a similar inflation signal, but since oil is a lot harder to warehouse it isn't subject to long-term speculative bubbles.
Gold investors are essentially front-running inflation by a factor of 3X now and it's still a crowded trade.
The question is is whether or not the nominal price level of the real economy will inflate out to what the goldbugs think is coming down the pike.
We can't print our way to lower fuel and health care costs, so printing alone is not a solution.
(Though printing USD may be necessary to successfully win any competitive devaluation battles, should we lack the political will to institute direct tariffs.)
AFAICT the baby boom's retirement is going to be immensely deflationary over the next 30 years.
Trillions of dollars a year are going to be ripped out of the paycheck economy and given to seniors to spend on the goods and services they want and need.
This spending will not be entirely a dead loss as it will support millions of new service sector jobs -- jobs serving the 80+ million retirees that will be cashing their retirement checks in 2025, double the population of today.
But this senior consumption footprint simply has to take spending power away from the paycheck economy, the resources the baby boom is going to consume in their retirement *are* going to be a dead loss for everyone else.
Our baby boom is really massive and its wave is just about to break -- the crest formed in 1955 and fell in 1961, so it will be arriving on the SSA gauge in 2017 and on the Medicare gauge in 2020.
The way I see things devolving, any dollar a non-boomer sees in 2025 is going to have to be spent into the private economy by a g-man first.
That's another dynamic of inflation that is not understood. For inflation to stick, there has to be monetary velocity, the same dollar has to cycle among buyers.
We're not seeing that. My thesis for that is the $50B/mo trade deficit is serving as moderating control rods in our economy, sucking velocity out of it as money flows out of the domestic economy to overseas holders (who have nothing better to do with their USD than buy gold, LOL).
I don't see massive inflation coming. I see massive deflation in home values and a continued fall in worker salaries to match the generous global norm of $10/day.
We won't be able to offshore senior health care -- though Medicare cruise ships to Asia and back might be a new cost-saving model.
tj and the bear,
ReplyDeleteTP, OTOH, will keep soldiering on at a stable, inflation-adjusted rate due to virtually unlimited source material and a long-perfected manufacturing process.
If true, that's fantastic news. I can simply keep doing what I am doing then with little risk of being financially ruined. Inflation overall will be relatively tame.
Meanwhile, vast fortunes will be made and lost around me chasing speculative booms (and busts), just as has been the case for thousands of years.
I'm completely fine with that.
Troy,
ReplyDeleteGold investors are essentially front-running inflation by a factor of 3X now and it's still a crowded trade.
The question is is whether or not the nominal price level of the real economy will inflate out to what the goldbugs think is coming down the pike.
In a sense, that was the dynamic in 1980. Even Warren Buffett couldn't see it coming.
The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil. - Warren Buffett, Shareholder Letter, 1979
When I made a substantial purchase (1/3rd of my nest egg) of gold and silver in 2004 I did so with the understanding that I would only buy and sell them once. Once I saw a price I liked I was done. I was in no way trying to time the ultimate peak. I guess you could say that I was front-running a bit, although it was my main intent to simply have a long-term inflation hedge (and real prices were low enough that it looked like a reasonable plan).
The main reason I would not be buying them back was because it would have been easy for the 1970s to financially ruined me. It would have been all too easy to think that we were about to hyperinflate (and therefore gold was good at any price).
I am fully aware that I have little hyperinflation insurance, but like you I don't see massive inflation coming. I have stated so many times on this blog. I cannot insure against all bad outcomes or the cost of insurance itself would financially ruin me. Insurance generally isn't that cheap (especially once everyone else sees the risks).
I can handle heavy inflation with my TIPS and I-Bonds. Hyperinflation would ruin me. It is a risk that I live with, much like many other risks in my life.
If it happens I can say this though. At least I won't have to buy toilet paper, lol. :)