Friday, August 2, 2013

Gold: Bulls vs. Bears

The following charts show how many hours the average production and nonsupervisory employee would have to work to buy one ounce of gold (assuming for the sake of argument that no taxes would be paid on the earnings).

Click to enlarge.

The exponential trend has failed. Working 80+ hours to buy a single ounce of gold is absolutely ridiculous. Just think how many rolls of toilet paper and cans of food that could buy! The gold bubble is popping just like it did in the early 1980s. Table pounding screaming sell!

Click to enlarge.

The exponential trend has not failed. The economy still stinks. Two-year treasuries pay just 0.3%. The economy is clearly not strong enough to support higher real yields. Any talk of rising real yields is therefore absolutely ridiculous! Gold sits at the very bottom of its exponential trend channel. Table pounding screaming buy!

I think I've pretty much summed up what you should do with gold. Invest accordingly, lol. Sigh.

Source Data:
St. Louis Fed: Custom Chart


Stagflationary Mark said...

As a side note, 2-year treasuries yielded 0.35% before today's employment report.

They now yield just 0.30%.

For those who have yet to figure it out, the employment report was bad.

Want to guess what the 2-year yielded exactly 2 years ago?


Behold the rising interest rate environment in all its grandeur!

Please forgive me if I remain skeptical.

Mr Slippery said...

I am not as bullish on gold as I was 2 years ago, but I am still slightly bullish, and I still like it as a hedge against the current monetary system.

On the first chart, is the bubble popping like the 1980s or like 1974-1977? In the 1980s, people could sell their gold and buy 20% treasuries. Where do you get 20% today? Not even junk bonds give you 20%.

OTOH, my US debt to gold price model failed early this year and now I don't even have a weak rationalization for coming with a gold price. Table pounding screaming "I don't know".

Troy said...

too much money at the top, obviously.

this regime is turning me into a communist, LOL

Stagflationary Mark said...

Mr Slippery,

On the first chart, is the bubble popping like the 1980s or like 1974-1977? In the 1980s, people could sell their gold and buy 20% treasuries.

People could buy 15% 30-year treasuries with 15% inflation (and pay hefty taxes on that 15%, losing serious purchasing power in real terms in theory) on the hope that inflation would stop rising and actually begin to fall again. They also had no opportunity to buy TIPS, since they didn't exist yet.

This is how I would sum up the long-term treasury investors back then.

Balls of Steel

I could not have done it. It sure paid off for them though. Big time.

There is one common theme between now and then. It's really hard to convince people to buy 30-year treasuries. It is "common knowledge" that it is one of the worst investments one could make. Just like then, many seem so convinced that serious inflation is coming. Time will tell.

One reason that gold may have been beaten up is that 5 years of ZIRP hasn't created all that much consumer inflation. This is hardly in line with the theories of Peter Schiff and shadowstats.

Perhaps it is making people start to question how serious inflation can appear any time soon if even ZIRP can't do it.

Stagflationary Mark said...


It is nice to see that Warren Buffett is making money off of his financial "weapons of mass destruction".

Perhaps there is hope for us yet, lol. Sigh.

Gallows humor! ;)

Mr Slippery said...

Short term rates hit 20% in May, 1981. I am not sure if that was the 1-month bill, 3-month bill, or benchmark rate set by the Fed. Even with inflation running 13%, that is a good deal and didn't require the balls of buying a 30 year bond.

Stagflationary Mark said...

Mr Slippery,

I believe that's the Fed Funds rate. That's not the interest rate that the general public could invest at.

The 3-Month Treasury Bill peaked well below that. Further, that was just a spike. In any event, I would disagree that it was a good deal. Factor in the taxation on that interest and see what you have net.

The 1970s were definitely not kind to those who stuck to short-term treasuries. It was absolutely brutal in fact. That's why I was quick to embrace I-Bonds. It was one of my first posts on my blog.

December 11, 2007
1970s Real Treasury Bill Yields (After Taxes)

This is the sort of thing that just gradually sneaks up on you too. When three month treasury bills are underwater there is always hope that things will change for the better in just three more months. It isn't like you are locked in. Only what if things don't change for the better? What if we keep stagnating? There was a serious recession in 1974-1975. Real yields were not exactly positive. The deflationists expecting Great Depression level real yields at that time must have been sorely disappointed.

Once taxation is considered, 3-month treasury bills are performing pretty much just like they did in the 1970s. Slow, constant pain!