I live in the USA and I am concerned about the future. I created this blog to share my thoughts on the economy and anything else that might catch my attention.
Wednesday, October 3, 2012
Gold vs. New Homes
Click to enlarge.
I may be a permabear, but I have absolutely no desire to own gold at anywhere near these prices.
This exponential trend has failed. It is my opinion that the failure is permanent. Keep in mind that it is just an opinion.
It is conceivable that the trend has not permanently failed (see the exponential trend failure after the 1972 to 1975 period, followed by a renewed exponential trend from 1976 to 1980). That is clearly not my opinion though.
May your crystal ball be clearer than mine. Once again, this is not investment advice.
When I say permanent, I don't mean for all of eternity. There may very well come a time in the distant future when gold reaches 1% of the median new home price again.
Glad you did a gold post. I saw one mildly and unintentionally ironic the other day that IIRC had the title "Gold up 50x in 40 yrs" and then a graph showing the price of gold in Weimar marks.
The graph was an exponential one showing the price going up some 10x in the first 2 years, a what had to be scary as hell 50% draw-down, before a bounce back and then relative stability for a year with things going, shall we say, historic over the next two years.
Now, by my reckoning, with gold up 5x in 10 yrs and 2x in 4 yrs we've still got plenty of time. No worries. ;-)
OK, my question is, leading into those hyperinflation episodes, what did base metals do? I'm thinking gold undoubtedly leads, but is there some point where base metals confirm the move? I rather suspect they weren't confirming in 1980.
I've seen it said a long, long time ago and repeated from time to time that gold isn't an inflation hedge, as it is totally uncorrelated to realized inflation, rather it is an inverse measure of real rates of return. Every one wants to own gold, but not if the opportunity cost is going to cost them. I think we're seeing that the last number of years. However, it does have a call option on inflation. Wait, maybe that's the crux of it all, gold is a call option on inflation... the lower real rates go, the cheaper the option?
Anyway, I'm thinking is there a better/cheaper inflation hedge than gold? One without the false positives? (And that's scalable, sorry a PODS full of Costco merch doesn't cut it.) Which, back to the Wiemar mark's chart, some other commodity that followed gold, but at a lag.
OK, my question is, leading into those hyperinflation episodes, what did base metals do? I'm thinking gold undoubtedly leads, but is there some point where base metals confirm the move? I rather suspect they weren't confirming in 1980.
There's not even a whiff in the air that aluminum is trying to do that this time though. How can we hyperinflate if aluminum can't go up in price?
I've seen it said a long, long time ago and repeated from time to time that gold isn't an inflation hedge, as it is totally uncorrelated to realized inflation, rather it is an inverse measure of real rates of return.
I am a complete believer in that theory. That's why I bought gold and silver in 2004 to 2006. However, I am also a believer that it isn't the road to permanent riches. At some point, it just becomes too darned expensive for the trend to continue.
In a way, you could say the same about housing. Renters thought they saw a real negative return for each year they waited to buy homes. For those who waited too long, that didn't work out so well.
Anyway, I'm thinking is there a better/cheaper inflation hedge than gold? One without the false positives?
If you believe that we will hyperinflate in our lifetimes, then I can see the appeal of gold even at these prices perhaps. On the other hand, I prefer 0.0% I-Bonds for their false positives as you put it. I can cash them out any time I like without requiring a greater fool. (I have yet to ever cash out an I-Bond though.)
My bets have been on an economy that slows over the long-term (regardless of what inflation does or does not do). That's why I've been partial to TIPS and I-Bonds.
I will say this though. I have very little hyperinflation protection. It would ruin me just like it would most people. I'd be slightly better off but not by much.
On the other hand, I'm very well protected if we don't hyperinflate. I'm still earning a 1.7% real yield on average (and most of it is locked in for many, many years).
Once again, not investment advice! Just saying what I have done and am doing.
Unfortunately, I think the best defense was an early offense.
We're well past the point of early. I don't know what the best defense would be now. It's kind of like asking how to insure against a house fire once the house is on fire.
Those who bought gold (or even 3.4% long-term I-Bonds) in 2000 were clearly very protected for what was coming.
It was my plan from the beginning to buy gold and silver in 2004 and then switch more to TIPS once I saw a parabola. I got one gold and silver parabola in 2006. I sold. I can hardly complain though. I wish all my investments would go up 50% in just 2 years (like gold and silver did).
It was also my plan to not buy gold and silver back again. It was a one-shot ride for me.
According to Dr. Norbert Einstein, Albert's cousin and a banker, who told me this story 25 years ago, their Aunt Rosa was caught in the post-World War I inflation, just like everyone else in Germany. Like most Germans, she did not understand monetary theory. She did not understand that the German central bank was inflation's cause: money creation. She dutifully held marks as they depreciated to a million per dollar and then much lower. Finally, she caught on. She figured out that she had to get rid of marks. But by that time, nobody was selling hard goods at a price she could afford. It was too late. Finally, an opportunity appeared: bedpans. She could buy a pile of used bedpans. She did. This was in late 1923. Not long after this, the German central bank abandoned the old mark, brought out a new mark, and stopped printing money. A depression began. Prices of hard goods fell. There, figuratively speaking, was Aunt Rosa, sitting on top of a pile of used bedpans.
Also, if aluminum moved 3x in the 70's, that seems a fair enough premium to inflation, assuming its draw down in the 80's was negligible, or at least forecasted by gold & "the economy."
The crux (there's that word again :-) of the question is are we in 1919 or 1979?
I've come to believe that we are in neither. I've been a bear for 8 years so far.
I'm not all that worried about hyperinflation. I'm not even all that worried about inflation for that matter. Our massive trade deficit notwithstanding, there are a lot of deflationary pressures in the world and I don't see them going away anytime soon.
Real yields, real growth, and real jobs, well, that's another story.
If you do believe it will bust in 2014, then you aren't you cutting it kind of close?
That said, Soros once said that the last bit of a bubble is the juiciest part (I'm paraphrasing). Good luck to you.
I would also point out that this is a common theme with boom and bust cycles. Investors tend to think they can get out in time. I'm not saying you won't but... be careful.
Zhu Qiuxia, for one, is not worried about a bubble. The power grid worker has put all her savings into shares, and is planning to keep them there until the Olympic Games next year, when she plans to put her original principal back in the bank and continue to speculate with the profit she's made.
In hindsight, her exit plan didn't work out so well. The top of the bubble was actually hit on October 16, 2007 (6,092.06). She just didn't know it yet. The index is down 66% since then.
Just sayin'. Once again, this is not investment advice.
This exponential trend has failed. It is my opinion that the failure is permanent. Keep in mind that it is just an opinion.
ReplyDeleteIt is conceivable that the trend has not permanently failed (see the exponential trend failure after the 1972 to 1975 period, followed by a renewed exponential trend from 1976 to 1980). That is clearly not my opinion though.
May your crystal ball be clearer than mine. Once again, this is not investment advice.
One more thought.
ReplyDeleteWhen I say permanent, I don't mean for all of eternity. There may very well come a time in the distant future when gold reaches 1% of the median new home price again.
Never say never. Right?
Yet another thought.
ReplyDeleteGLD Inception Date: November 18, 2004
That's very close to this chart's exponential trend starting point.
We've seen the pump. I strongly believe that there will be a dump. No idea on the timing.
Once again, just opinions.
Hey Mark,
ReplyDeleteGlad you did a gold post. I saw one mildly and unintentionally ironic the other day that IIRC had the title "Gold up 50x in 40 yrs" and then a graph showing the price of gold in Weimar marks.
The graph was an exponential one showing the price going up some 10x in the first 2 years, a what had to be scary as hell 50% draw-down, before a bounce back and then relative stability for a year with things going, shall we say, historic over the next two years.
Now, by my reckoning, with gold up 5x in 10 yrs and 2x in 4 yrs we've still got plenty of time. No worries. ;-)
OK, my question is, leading into those hyperinflation episodes, what did base metals do? I'm thinking gold undoubtedly leads, but is there some point where base metals confirm the move? I rather suspect they weren't confirming in 1980.
I've seen it said a long, long time ago and repeated from time to time that gold isn't an inflation hedge, as it is totally uncorrelated to realized inflation, rather it is an inverse measure of real rates of return. Every one wants to own gold, but not if the opportunity cost is going to cost them. I think we're seeing that the last number of years. However, it does have a call option on inflation. Wait, maybe that's the crux of it all, gold is a call option on inflation... the lower real rates go, the cheaper the option?
Anyway, I'm thinking is there a better/cheaper inflation hedge than gold? One without the false positives? (And that's scalable, sorry a PODS full of Costco merch doesn't cut it.) Which, back to the Wiemar mark's chart, some other commodity that followed gold, but at a lag.
AllanF,
ReplyDeleteOK, my question is, leading into those hyperinflation episodes, what did base metals do? I'm thinking gold undoubtedly leads, but is there some point where base metals confirm the move? I rather suspect they weren't confirming in 1980.
As seen here, aluminum tripled.
There's not even a whiff in the air that aluminum is trying to do that this time though. How can we hyperinflate if aluminum can't go up in price?
I've seen it said a long, long time ago and repeated from time to time that gold isn't an inflation hedge, as it is totally uncorrelated to realized inflation, rather it is an inverse measure of real rates of return.
I am a complete believer in that theory. That's why I bought gold and silver in 2004 to 2006. However, I am also a believer that it isn't the road to permanent riches. At some point, it just becomes too darned expensive for the trend to continue.
In a way, you could say the same about housing. Renters thought they saw a real negative return for each year they waited to buy homes. For those who waited too long, that didn't work out so well.
Anyway, I'm thinking is there a better/cheaper inflation hedge than gold? One without the false positives?
If you believe that we will hyperinflate in our lifetimes, then I can see the appeal of gold even at these prices perhaps. On the other hand, I prefer 0.0% I-Bonds for their false positives as you put it. I can cash them out any time I like without requiring a greater fool. (I have yet to ever cash out an I-Bond though.)
My bets have been on an economy that slows over the long-term (regardless of what inflation does or does not do). That's why I've been partial to TIPS and I-Bonds.
I will say this though. I have very little hyperinflation protection. It would ruin me just like it would most people. I'd be slightly better off but not by much.
On the other hand, I'm very well protected if we don't hyperinflate. I'm still earning a 1.7% real yield on average (and most of it is locked in for many, many years).
Once again, not investment advice! Just saying what I have done and am doing.
AllanF,
ReplyDeleteUnfortunately, I think the best defense was an early offense.
We're well past the point of early. I don't know what the best defense would be now. It's kind of like asking how to insure against a house fire once the house is on fire.
Those who bought gold (or even 3.4% long-term I-Bonds) in 2000 were clearly very protected for what was coming.
It was my plan from the beginning to buy gold and silver in 2004 and then switch more to TIPS once I saw a parabola. I got one gold and silver parabola in 2006. I sold. I can hardly complain though. I wish all my investments would go up 50% in just 2 years (like gold and silver did).
It was also my plan to not buy gold and silver back again. It was a one-shot ride for me.
You might find this article interesting.
The Gold Wars: Why Gresham's Law Has Not Been Repealed, and Why You Had Better Honor It
According to Dr. Norbert Einstein, Albert's cousin and a banker, who told me this story 25 years ago, their Aunt Rosa was caught in the post-World War I inflation, just like everyone else in Germany. Like most Germans, she did not understand monetary theory. She did not understand that the German central bank was inflation's cause: money creation. She dutifully held marks as they depreciated to a million per dollar and then much lower. Finally, she caught on. She figured out that she had to get rid of marks. But by that time, nobody was selling hard goods at a price she could afford. It was too late. Finally, an opportunity appeared: bedpans. She could buy a pile of used bedpans. She did. This was in late 1923. Not long after this, the German central bank abandoned the old mark, brought out a new mark, and stopped printing money. A depression began. Prices of hard goods fell. There, figuratively speaking, was Aunt Rosa, sitting on top of a pile of used bedpans.
No easy answers.
I-bonds don't scale.
ReplyDeleteAlso, if aluminum moved 3x in the 70's, that seems a fair enough premium to inflation, assuming its draw down in the 80's was negligible, or at least forecasted by gold & "the economy."
The crux (there's that word again :-) of the question is are we in 1919 or 1979?
ReplyDeleteI think a lot of economic indicators point to 1979. However, looking at the unfunded liabilities it seems 1919 can't be easily ruled out.
So, is there some capital insurance policy that would have paid out in the early 1920's that didn't crash and burn like gold in the 1980's?
Yeah, yeah... I tell you and we'll both know. ;-)
AllanF,
ReplyDeleteThe crux (there's that word again :-) of the question is are we in 1919 or 1979?
I've come to believe that we are in neither. I've been a bear for 8 years so far.
I'm not all that worried about hyperinflation. I'm not even all that worried about inflation for that matter. Our massive trade deficit notwithstanding, there are a lot of deflationary pressures in the world and I don't see them going away anytime soon.
Real yields, real growth, and real jobs, well, that's another story.
Gold also is protection for bad things unknown so its hard to measure its worth as an investment until that happens.
ReplyDeleteHard to measure gold against the past as what we are seeing today by central bankers has never been done...
10-20-30 years ago Gold was a european and american market..Chinese like gold and their appetite for gold is huge...
I have silver going to 81 before I get out, gold much higher, we are now in a commodity bull market..it will bust in 2014..
honestcreditguy,
ReplyDeleteIf you do believe it will bust in 2014, then you aren't you cutting it kind of close?
That said, Soros once said that the last bit of a bubble is the juiciest part (I'm paraphrasing). Good luck to you.
I would also point out that this is a common theme with boom and bust cycles. Investors tend to think they can get out in time. I'm not saying you won't but... be careful.
November 6, 2007
Savvy Chinese Know Exactly When Bubble Will Burst!
Zhu Qiuxia, for one, is not worried about a bubble. The power grid worker has put all her savings into shares, and is planning to keep them there until the Olympic Games next year, when she plans to put her original principal back in the bank and continue to speculate with the profit she's made.
In hindsight, her exit plan didn't work out so well. The top of the bubble was actually hit on October 16, 2007 (6,092.06). She just didn't know it yet. The index is down 66% since then.
Just sayin'. Once again, this is not investment advice.
Forgive the first sentence's grammar. I was in a rearrange it mood and should have read it again before posting.
ReplyDeletethanks Mark,
ReplyDeleteI'm positioning for exit but right now we are in the public buying interest in silver
until now its been mostly spec and bear bugs...
heck the last push back up from 26 was beautiful..its well over 360 now and it will launch when 50 crosses 360...
honestcreditguy,
ReplyDeleteI was early in (2004) and early out (2006). You can probably guess that I'm not much of a risk taker. Still got me a 50% gain though.
And when I went in, I went in big. I put a full third of my investment nest egg in gold and silver.
Once again, good luck to you.