Monday, June 7, 2010

A Century of Gold Bubbles

The platinum group includes palladium, platinum, and small amounts of iridium, osmium, rhodium, and ruthenium.

As with many of my charts concerning gold, you will note that I am once again not comparing gold to dollars. I am simply comparing gold to other useful assets one might own regardless of what the dollar does or doesn't do.

That said, there are at least 4 notable bubbles in gold compared to the platinum group in the chart above. I would argue that there is more than a decent chance we are now in bubble #5. Those who hoarded gold during the previous 4 bubbles lost a lot of purchasing power in the following years.

1900 was a horrible time to hoard gold. Its price went nowhere for 30 years even as inflation rose. The platinum group was the bargain of the century though. It tripled in price from 1900 to 1901.

1933 was a horrible time to hoard gold. Not only was it already overpriced relative to the platinum group, but it was actually confiscated and fixed in price for 4 decades. It doesn't get much worse than that.

1980 was a horrible time to hoard gold. We all know how that turned out.

1995 was a horrible time to hoard gold. It dropped more than 35% in price over the next 5 years even as inflation continued to rise.

In my opinion...

The smart money hoarded gold during the roaring 1920s when nobody else wanted it. It then sold when everyone wanted it.

The smart money bought gold at the first instant gold was allowed to be owned by the public in 1971. It then sold when everyone else wanted it.

The smart money also hoarded gold in 2001. That we know for sure. We don't yet know how that will turn out though.

I can say this. I don't consider my purchase in 2004 to be the smart money. I was 3 years too late. I was not looking to make money off of gold though. I was simply trying to preserve my wealth. I bought right on that "average" line and I pretty much sold it right on that line too (in 2006 for a 50%+ gain).

See Also:
Gold vs. The World's Oldest Money
Gold to Aluminum Price Ratio

Source Data:
USGS: Historical Mineral Statistics


EconomicDisconnect said...

First oof, I need to know is PS3 can use this controller?:

Second, oh where to start.

iridium figures huge in the dinosaur debate, the K-T boundary is where the truth lies.

Buy at peaks and its not good, that much is clear. Your graph shows huge time spans at baseline which shows the store of value angle. You note the times not o buy gold but there were plenty of time to be accumulating on the graph.

A step back macro wise shows a plethora of "bubbles" as of late. Has gold been a huge investment vehicle multiple times or has fiat money been abused multiple times as of late?

Good stuff but plenty of ways to see it. I think by the fall we will have some answers one way or the other.

EconomicDisconnect said...

Sorry, besides terrible spelling here is that link:

Stagflationary Mark said...


LOL at the controller!

You note the times not o buy gold but there were plenty of time to be accumulating on the graph.

I pointed those times out in my commentary (1920s, 1971, 2001). In my opinion, this is not one of them.

Has gold been a huge investment vehicle multiple times or has fiat money been abused multiple times as of late?

The chart does not concern itself with fiat money. It has been removed. It's just gold vs. the platinum group.

EconomicDisconnect said...

"The chart does not concern itself with fiat money. It has been removed. It's just gold vs. the platinum group."

Well this info cannot exist in a vacuum. Say in deflation palladium, whose main usage is in car catalytic converters, has price depression because no one buys a car. If the government goes ape chit and prints trillions in new money to combat deflation, gold may go up while palladium will go down. No tie to fiat money?

We are like dueling swordsmen!

EconomicDisconnect said...

I was checking my sitemeter thing and I had two hits from AltaVista!!?? They still exist? Who uses it?

Stagflationary Mark said...


Oh please. Not the gold has more value than platinum metals simply because gold does not have an actual use theory again.

Platinum is 7 times rarer than gold. Like gold, it is used in high end jewelry but is priced at a premium. You have to pay a bit more if you want it. Further, platinum has MORE uses than gold. That's a bonus. It should not be a penalty.

If palladium and all other commodities that I actually need and use crash in price as per your example, then all I need to do to protect wealth is bury cash in my backyard and then buy those assets back when they are a better value.

On the one hand you want to scare me into buying gold because of all the money printing, but on the other hand you are talking about prices actually collapsing.

Cash is plenty good enough in such a world. I do not need to take on the risk by owning gold, an extremely volatile asset that has risen in price nearly 500% from its recent bottom.

Stagflationary Mark said...


According to site meter, someone clicked on my "our pets" label today.

Whoever that was, I thank you. It really made my day. :)

Stagflationary Mark said...

I should correct that previous comment of mine. I don't much care for the wording I used.

I said gold had risen 500%. It is 500% of what it was in 2001, but it has only risen 400%.

EconomicDisconnect said...

agree to disagree. Like I said by the fall we will have some kind of answer I imagine. To any and all, gold can go down sell now!

To any and all, please make gold under $500; I think it will all disappear.

Pet note:
Looking to add another pug to the family; its my way of dodging kids!

Stagflationary Mark said...


Agree to disagree. Absolutely. :)

Looking to add another pug to the family; its my way of dodging kids!

I hear that. We're up to one dog, one cat, one bird, and two horses.

The horses thing is a sad miracle though, in more ways than one.

There was a dying woman who left her horse named "Miracle" to my girlfriend complete with a trust fund to pay for the horses expenses. Shortly afterwards, the horse died unexpectedly due to colic.

Colic is especially bad for a horse because horses can neither burp nor vomit.

My girlfriend was heartbroken and the person who gave the horse to her set up yet another trust so she could care for TWO horses (just before she passed away). It's a once in lifetime story since my girlfriend does not have the means to own horses otherwise, nor would even I more than likely.

A few days ago, one of the horses got colic. Scary! The horse is doing okay now though.

You are probably wondering why this woman wanted my girlfriend to look after her horse in the first place. It seems her family was hovering over her like vultures on her death bed. She felt she could trust my girlfriend, who she barely knew, to look out for the horse's interests far more than her relatives.

This woman was doing all she could to make sure her family got pretty much nothing in the inheritance, and one was to set up trusts for all her horses.

It's just so tragic. I am glad to see that greed didn't pay in this case though.

My girlfriend is frugal with those horses much to the attorney's surprise. The horses are financially better off than she is. They are entitled to new saddles, a truck with trailer, and so on. My girlfriend buys stuff used though and the horses may never be seeing a truck and trailer. It's kind of funny. The less my girlfriend wanted on behalf of the horses, the more that was offered.

The stuff that goes with the horses doesn't matter though. It's just stuff. The fun comes from showing up at the barn and seeing the horses come to greet her.

EconomicDisconnect said...

OK, I gotta ban your blog because if my wife sees you have a horse I am in huge trouble! My wife almost died when a horse threw her in her teens and she still wants one! Talk about bubbles, horse bubble???

Both you and the lady sound like caring folks for those that have no defender. I appreciate that.

Stagflationary Mark said...


In case your wife sees this...

My girlfriend broke her pelvis riding Miracle. She was fast racking him (with no saddle and rusty riding skills) and she had him stop by turning him to the left. Unfortunately, she just kept going straight and landed on her, well, you know!

She also broke two ribs when the saddle got loose. The horn part of the saddle met up with her, well, you know!

That's not all though. You might want to consider getting rid of your TV and phone. My girlfriend was watching TV and broke her ankle when she got up to answer the phone. She'd been sitting on her foot to the point it fell asleep.

I think I'm going to be in trouble if my girlfriend reads this, so now we're even.

Hey, nobody is immune though. I put a screwdriver into my hand applying "leverage" to my weedeater. The line was stuck. I also stood up under an open cabinet door in an attempt to recreate the blood spurting moments from Monty Python's Black Knight.

We've been together for 10 years. Things happen, lol.

Stevie b. said...

"platinum has MORE uses than gold. That's a bonus. It should not be a penalty."

I think your view is ... er ... um .... a bonus of contention.

Stagflationary Mark said...
This comment has been removed by the author.
Stagflationary Mark said...

Stevie b.,

If gold ceased to exist at midnight tonight, how would it affect my life?

I would answer, "Not much."

If a machine was created that could generate gold at essentially no cost at midnight tonight, how would it affect my life?

I would answer, "Not much."

You are right. I would probably say pretty much the same thing about platinum too though.


If aluminum ceased to exist at midnight tonight, how would it affect my life?

I would answer, "Huge impact. Life would become MUCH worse. My car would cease to function more than likely and I'd have a huge mess to clean up where my soda hoard currently sits."

If a machine was created that could generate aluminum at essentially no cost at midnight tonight, how would it affect my life?

I would answer, "Huge impact. Life would become MUCH better. I rely on aluminum each and every day."

(I had to delete my previous comment due to a copy and paste error.)

Stevie b. said...

Mark - you see the thing is you're talking about your life where you are happy with money money.

I and many others are not happy with money money alone. I am also not willing to have anything economically cyclical as part of my money assets, however economically useful it might be. I AM happy to have something globally and historically regarded as a money substitute and the less use it has in purely economic terms the better. This does not mean it is not cyclical, but money is cyclical too - you can lose for long periods of ownership.

I cannot think of 1 investable thing that could be considered a gold substitute, except possibly farmland - but that's hardly portable or easily divisible/transferable into small change.

Stagflationary Mark said...

Stevie b.,

And that is exactly why we differ. You see gold as money and I do not.

First there were cattle as money, during a period when cattle were an indication of wealth.

Then gold and silver were money, during a period when jewelry was an indication of wealth. Silver really lost that status though as seen in the 600 year long-term chart.

If anything, oil is now money because oil is an indication of wealth.

Gold is not oil though. I cannot fill my tank with gold and expect to go very far. Gold is therefore fairly useless to me.

I would argue that no two modern industrial nations will ever go to war over gold again, regardless of what happens to fiat currencies. That's how "barbaric" gold is to me.

However, if China accumulated the entire world's supply of oil it would have very serious consequences.

Gold may have the history, but Christopher Columbus sailed using wind power. Nobody had the slightest clue how important energy would become. Gasoline did not even exist, nor did nuclear power.

Stevie b. said...

Mark - but - the price of oil is constrained by the price of alternatives, as well as the willingness or otherwise of the global PTB (in say the next 5 years or however long it takes alternatives to have a meaningful effect) to sanction recession/depression/hyperinflation as the quid pro quo for high oil prices.

There are of course constraints on gold, not excluding variations of a police state. I guess I'll have to deal with that one when it comes - as indeed you may have to deal with laws that prohibit the storage of more than a basic amount of food etc. But we are where we are, & have to deal with some sort of reasonable reality as we see it now and into the future, and for me that reality includes gold as the only universally valued portable alternative to fiat money.

Stagflationary Mark said...

Stevie b.,

I don't really think we are all that far apart now.

You eliminated the options for a safe store of value and you were left with just gold. That's why I bought gold in 2004.

I have eliminated all of the options for a safe store of value now that gold is pricey and am left with just basic necessities (but in insufficient amounts to matter).

I am basically saying that there are no safe stores of value now.

I have very little defense for hyperinflation or default. I'm hoping that government approved "safer" stores of value (TIPS, I-Bonds) will be sufficient though, at least in my lifetime.

They say that in a bear market the goal is to lose less than the next guy. It's been 10 years so far and I can't really complain about the choices I've made. As a saver in TIPS and I-Bonds, I am and have been somewhat protected from both stagflation and deflation.

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves." - Alan Greenspan, 1966

It is certainly not a given that either of us can protect ourselves. Alan Greenspan argued that it's impossible.

Stevie b. said...

Mark - just as you had gold, so I had Index-Linked gilts - decades ago now.
I guess I felt gold was a better alternative (but with a smaller amount) and I haven't regretted it, just as you're happy with your I-L gilt equivalent.

And you're right about bear markets, but I'd put it slightly diffently - Overall, I'm going to lose, but the goal is to lose as little as possible and (frankly) I don't care how the next guy does!

I like Greenspan's quote, but despite it and in this day & age, I feel that for now you're missing out on 1 extra layer of protection. Boring that we -nearly- agree! Maybe you're a tiny tad too risk-averse to see the bigger picture...

Stagflationary Mark said...

Stevie b.,

It isn't risk aversion that's stopping me from owning gold. I think it is overpriced. I see it as a poor value right now. It's just that simple.

If you told me that I must invest 10% of my portfolio either buying gold or shorting gold, then I would choose to short it. It would also force me to use another 10% of my portfolio to buy metals from the platinum group and aluminum as a hedge.

I'm not being forced to do that though.

I've been watching CNBC an hour and I've heard the word "gold" about every 30 seconds.

Stevie b. said...

Every 30 let me see...every 45 seconds and i wouldn't be worried? Should I wait for every 15 seconds and then panic?

OK, every 30 seconds is indeed a tad unsettling, but I guess if it goes down $20 to $30 bucks, it'll be off the front page. 'Til it's back on. And off. Etc, etc.

Stevie b. said...

...and when a lot of things are crap economy-wise, what other positive things have they got to talk about anyway? After all, programs about money talk about money and for an increasing number of people, gold could be becoming a partial money alternative.

Stagflationary Mark said...

Stevie b.,

I suppose they could have mentioned one of the other 108 elements from the periodic table once just to balance out the coverage a bit. Just a thought.

Stevie b. said...

Mark - could have, but probably felt talking about Ytterbium or Ununtrium might not help their ratings...

Ye gods, as i type the main BBC radio 1 hour news program has their second item on the gold price, but thank god quickly switched to the Euro and Sterling and other stuff - whew!

AllanF said...

The Greenspan quote certainly applies to gold bugs. Here's one for the TIPS bugs:

"The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."
- Vladimir Ilyich Lenin

Stagflationary Mark said...

Stevie b.,

Instead of talking about gold nonstop for an hour, CNBC might have considered talking about palladium (from the platinum group). It is 2.5% more expensive than it was at this time yesterday. Sigh.

I'm not exactly endorsing hard assets in general right now, but history may show I was wrong to think this way.

I considered buying palladium in the high $200s in 2009. I certainly walked around the house mumbling about it enough back then, as my girlfriend would know.

I couldn't pull the trigger. The transaction costs to buy and sell physical palladium are just too steep for my liking.

$489.50 to buy 50 or more
$419.50 to sell

That's a 14% loss if bought and sold moments later. You've got to be darned sure you know the price will go up substantially, and I'm just not that sure about anything these days.

Stagflationary Mark said...


I'm certainly at risk of getting a few limbs ground up in the taxation and inflation machine.

That said, at least I won't be going in feet first if it happens. That is reserved for holders of treasuries without inflation protection.

I'll see your Vladimir and raise you a Bee Gee, lol.

"As long as you're having fun, that's the key. The moment it becomes a grind, it's over." - Barry Gibb

Yikes!! ;)

AllanF said...

Ha! I almost wrote, "I'll see your Greenspan and raise you a Lenin." Even had it typed in. Decided I didn't want to digress the thread into a sting of inane quotes. Hey it's your blog. ;-)

Stagflationary Mark said...


AllanF said...

Oh and the thing about the Lenin quote -- it seems appropriate for TIPS-bugs because they talk like they've figured out the perfect inflation hedge. As you've said many times, TIPS still get hammered by hyperinflation from the taxes.

Obviously you're not a TIPS-bug. 1) You appreciate they are not impervious to inflation. 2) You sold them last year when they got too expensive.

Anonymous said...

Mark - another very good analysis.

- jus me

Stagflationary Mark said...


I've put most of that money back to work in TIPS, but at decent reentry points. I still have more cash than normal though.

While the TIP fund has gone virtually nowhere since I exited in November (much to the surprise of some there who thought 10% per year was a given), I bought the 30 Year TIPS directly in February when so few others wanted it.

I paid 97 cents on the dollar for a 2.13% rate over inflation. People are now paying 108.5 cents on the dollar to get the lower 1.76% yield.

Buying the 30-Year TIPS certainly shows that I am not completely risk averse. There's ample risk there.

My 10-Year purchases and 5-Year purchases are also up.

I had to really hold my nose to buy the 5-Year. I need that money in 5 years though simply for cash flow reasons.

I even bought I-Bonds at just 0.3% back in April. That just stinks. However, at least they won't "grind" someday due to taxation since they can be tax deferred for 30 years. I have a healthy respect for the potential grinding!

And lastly, the money I pulled from TIP and used to buy 5-Year TIPS directly has much better deflation protection. Unlike TIP, I will get my original principal back. TIP can deflate though, because the bonds inside have inflated.

Stagflationary Mark said...

jus me,

Thanks. :)