Monday, November 3, 2014

Gold: Four Reasons It Lost Its Luster

The following chart shows how many hours the average private production and nonsupervisory employee would need to work to buy one ounce of gold.

Click to enlarge.

Reason #1

Gold became too expensive relative to wages. Been there, done that. In hindsight (again), working 90+ hours to buy one ounce of gold seems excessive.

Reason #2

So many exponential trend failures, so little time. Exponential trend failures shatter faith. That's especially true of gold for me. I can't use gold personally (I don't own jewelry), so I require faith that the next person will want to buy my gold. Further, many people have already lived through one gold exponential trend failure (as seen earlier on this chart). The term shell shock comes to mind.

Reason #3

Thankfully, there was no terrorist attack on the 10th anniversary of 9/11. Unfortunately, for owners of gold, that is the very month when gold peaked and the trend therefore failed. I do not believe it is a coincidence.

There is still one reason left though. The following chart shows the number of ounces of gold it would take to buy the median new house.

Click to enlarge.

Reason #4

Unsurprisingly, at least to me, gold was unable to break through the resistance at the bottom of the trend channel. When given the choice between buying 100 ounces of gold and buying a brand new house, the temptation is just too great apparently.

Long time readers may remember that I bought a lot of gold and silver in 2004. I was prepared to hold indefinitely. However, I sold as they went parabolic in 2006. As my main goal was long-term safety, I wanted off the parabolic ride before the next person did. I sold gold for just under $700. It seemed like a fair price at the time. I turned very bearish on gold once it reached $1000. I felt that toilet paper would be a much better store of value over the long-term. For what it is worth, I still feel that way. Doesn't mean I'm right of course. It's just how I feel.

That said, when I bought gold in 2004 I did so on the "buy low" side of the median (in both of these charts). Since I continue to be bearish on our economy, I would be very tempted to buy gold yet again should it merely reach the median at some point in the future. If not, that's okay too. I'm relatively comfortable in long-term TIPS, I-Bonds, and a handful of EE-Bonds.

I would also offer the following observations about this last chart.

First, the last time we bounced off the bottom, there were many years of disinflation. One wonders what that might mean this time around, especially with the oil price falling and inflation already so low. It really doesn't sound all that hyperinflationary to me. Let's just put it that way.

Second, I'm not sure that I would necessarily be all that optimistic about housing prices or gold if I was looking at this last chart. The ratio could remain where it is as both housing and gold drop in price together. I think that is a distinct possibility.

November 3, 2014
First Time Home Buyers Decline in U.S.

Trend is Preventing a Stronger Housing Recovery

The trend's prevention is a bit like birth control, and the housing recovery is a bit like the baby. So, yeah. I would agree that the baby isn't all that strong right now, lol. Sigh.

Oops! More sarcasm! I almost made it through the entire post without any, but then I just had to read some news from the Wall Street Journal. What was I thinking? ;)

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart #1
St. Louis Fed: Custom Chart #2


Anonymous said...

I think people paid a premium for gold and sold gold at
a discount in most cases. That was bound to dampen
enthusiasm when there is no interest paid to hold gold

Stagflationary Mark said...


Fees do pose a problem.

When I owned physical gold, I paid a small premium to buy it and a small premium to sell it. I therefore told myself that I'd only be buying it once and selling it once. There was no way I was going to actively trade it.

GLD currently takes 0.4% of your gold each year (in fees).

It may not seem like much but, after 30 years they will have taken 11.3% of the gold (0.996^30 = 0.887)

Karlo said...

While I can understand someone wanting to have a small amount of gold or silver, the idea of hoarding gold never made much sense to me. In the end of the world scenario people keep talking about, gold seems like it would be worthless. It's just heavy and you can't do anything with it. I'd much rather own my nice Kifura backpack and a good pair of boots. (Not that they would save from a severe crisis either, but even so...)

Stagflationary Mark said...


When I bought in 2004, I told myself that I would only buy them once and sell them once. The time to sell came in 2006 for me. From there on out, I was/am done.

Did it make sense? It was like playing musical chairs. As with all exponential trends, eventually the music stops. It's a fairly dangerous game for supposed safe havens.

Had I been an investor in the late 1970s, gold and silver could have easily ruined me. With inflation running so high, it would have been hard to not to buy and hold at the wrong time. I tried to learn from that theoretical mistake.

All I wanted was an inflation hedge. They gave me many, many years in the short time I owned them. Recent investors? Not so much.

Dangerous. Mad Max would not approve. Canned goods are a better safe store of value. No greater fool needed and you can eat the inflationary gains tax-free!

Karlo said...