Although I think gold is in a bubble, a few weeks ago I wrote this post explaining why I thought at least some of gold's price moves were rational.Last night I ran across the following article and my thoughts on it will no doubt amuse the gold bugs. Hey, I'm an equal opportunity heckler.June 21, 20113 Reasons the Gold Bubble Will BurstMyth #1: Gold is an investmentI would define an investment as an asset that creates value and income over time. Stocks, bonds, real estate, even livestock and some machinery for businesses would all qualify.1. The asset must create value and income over time.2. Bonds qualify as an investment.3. TIPS are bonds, therefore TIPS are an investment.4. The real yield on 5-year TIPS is negative.5. 5-year TIPS cannot create value and income over time, therefore 5-year TIPS cannot be an investment.Using this article's own definition of an investment, 5-year TIPS are an investment and are not an investment.Clearly there is a serious logic problem in the author's definition of investment.
Don't even get me started on the lack of value creation and income generation of stock and real estate investments since I started this blog.Myth busted? Hardly.Myth #2: Gold is a store of valueThis is an easy one. Is gold a store of value? Absolutely.
As long as gold doesn't fall to zero dollars then it will store at least some value. Even a cracked glass can be a store of water (as long as you don't fill it above the crack).Greenspan said in 1966 that there can be no "safe" store of value in a welfare state. Is gold a safe store of value? No, but nothing is.
Is gold a good store of value at these price levels? I don't believe it is over the long-term but I could be wrong.
Even if it was the author's intent to suggest that gold is not a good store of value at these prices levels and/or over the long-term, then it is still impossible to bust the myth based solely on personal opinions.Myth busted? Hardly.Myth #3: Gold is a contrarian tradeThis claim is almost laughable, but it wasn’t born in a vacuum.Laughable?The total market capitalization of all publicly traded companies of the world was thought to be $51.2 trillion in 2007 and just $40 trillion in September 2008. Note the $11.2 trillion decline.The total debt of the world is thought to be $109 trillion in 2010.At $1750 per ounce, the total value of the world's gold is thought to be $9.2 trillion.Gold represents roughly 5.4% of the total ($51.2 trillion + $109 trillion + $9.2 trillion). Further, stocks lost more value from 2007 to 2008 than the value of all the gold that's ever been mined. It could easily happen again.That's not even counting the trillions upon trillions of dollars in global real estate ($18 trillion just in household real estate assets in the US).If one is seriously concerned about the state of the global stock markets, global real estate markets, and global debt markets then I think it could be easily argued that gold is still a contrarian trade.Myth busted? Hardly.On the one hand, I think gold is mighty expensive compared to toilet paper. I think that is a huge red warning flag.
On the other hand, I do not agree with the author's conclusion that the "gold’s bull run is based on weak arguments that don’t hold up to scrutiny." From where I stand, none of his three supposed myths hold up to scrutiny.
If holders of long-term treasury inflation protected securities (such as myself) experience serious pain, then hindsight will more than likely show that gold was a bargain even at these levels. The emphasis is on the word "if" though. Only in hindsight will we know for sure.The following chart shows what an investor can expect to earn by buying today's 0.9% 30-year TIPS and holding it until maturity.
Note what the combination of high inflation rates and high tax rates does to TIPS performance. Inflation protected securities offer pretty good protection but only if inflation doesn't get seriously out of hand.
Although TIPS investors would be doing much better than nominal treasury investors in such an environment, there would still be pain if inflation picked up (due to the taxation of the inflationary gains each year). The greater the inflation rate, the greater the pain.As a TIPS investor who holds TIPS to maturity, I am fairly well protected against a 1970s style inflationary environment that never ends (7.5% per year inflation). I am not well protected against hyperinflation. Gold investors are much better protected should that happen. The risk is not trivial but it is one I am willing to take.
I personally think gold is in a bubble and that it is unsafe to be investing in it at these levels (with the caveat that I don't think anything is safe right now, other than toilet paper and basic necessities). It is just an opinion though. I certainly cannot prove it beyond a reasonable doubt. In other words, if gold was on trial here I would have to find it not guilty.Update:Thanks to Troy for pointing out that the $18 trillion in real estate was just the household real estate assets, not all land value. I should definitely have made that more clear.
The following chart shows the improvement in employment since the previous major civilian employment peak.
Click to enlarge.
Civilian employment peaked at 146,584,000 in November of 2007. It is now 139,627,000. 45 months later it is still 4.75% below the peak.
The following chart shows civilian employment since 1948. I've included an exponential trend line based on the data from 1948 through 1999.
Click to enlarge.
We are 28.1 million jobs below the long-term exponential trend. As horrifying as that it, at least it isn't as bad as the 39.0 million missing jobs seen in payrolls. That would imply that at least some people have found work outside of the payroll system. One wonders how many have become stock market and/or eBay day traders though.
I would bet all that I own that we will never return to the red trend line. That's true even if we could magically put every single unemployed person back to work.
This time it is different. This is not an opinion. It is a fact based on simple math.
Source Data:
St. Louis Fed: Civilian Employment
We are below 1200 again on the S&P 500? Seriously? How is this possible?
I was so sure that #27 would be the final time.
That's it. I'm pulling out all the stops now. The next advance must be the last!
Panzerlied
Panzerlied
If one day we're deserted by treacherous luck,
And we don't return home anymore,
If a deadly bullet hits us, and fate calls us away,
Calls us away,
Then the tank shall become our honorable grave.
The following chart compares the payroll employment we currently have to the long-term payroll employment trend from 1939 to 2000.
The following chart shows the distance we are from the long-term trend line.
Although zero payroll jobs were added in August I am sarcastically optimistic that we'll still be back to that trend line in no time. Can't you just feel the prosperity accelerating?
On the other hand, I might just be experiencing a Luskin moment.
“The Luskin moment” is the month that Don Luskin argued that the US was on the verge of “accelerating prosperity”.
Source Data:
BLS: Employment
Let's say we want to invest in TIPS for 30 years and would like to maximize our risk adjusted return.
US Treasury: Yield Curve
5 Year: -0.82%
7 Year: -0.44%
10 Year: 0.07%
20 Year: 0.72%
30 Year: 1.07%
Let's assume a fairly modest long-term inflation rate (so it can be safely ignored from the calculations), shoot for a real return of 1.07% (not counting taxes), and do some back of the envelope math. It's not perfect but it is better than nothing.
I present 5 options that are roughly equivalent.
Option 1
Buy the 30-Year TIPS. Lock in 1.07%. Done deal.
1.0107^30 = 1.376
Option 2
Buy the 20-Year TIPS. Earn 0.72% for 20 years and earn 1.78% for the following 10 years.
(1.0072^20)*(1.0178^10) = 1.377
Option 3
Buy the 10-Year TIPS. Earn 0.07% for 10 years and earn 1.58% for the following 20 years.
(1.0007^10)*(1.0158^20) = 1.378
Option 4
Buy the 7-Year TIPS. Earn -0.44% for 7 years and earn 1.54% for the following 23 years.
(0.9956^7)*(1.0154^23) = 1.378
Option 5
Buy the 5-Year TIPS. Earn -0.82% for 5 years and earn 1.46% for the following 25 years.
(0.9918^5)*(1.0146^25) = 1.379
So the real question becomes...
Is it better to lock in today's rate of 1.07% or is it better to hope that making money off of money will become easier in the future?
I think it is a tough call. I very much think the bond market is struggling with that question right now, as am I. On the one hand, 1.07% is pretty low. On the other hand, so are my predictions of real long-term GDP growth.
This is the reason why I continue to hold 30 year TIPS even as their prices have risen. I'm not convinced that it will become easier to make money off of money in the future. That's the whole premise of my blog.
Could rates spike higher and present opportunities even if I am right to think this way? Absolutely. Do I wish to bet on that outcome? Not exactly. I have a bird in the hand mindset.
That said, I am sitting on more cash than normal. I'd certainly be willing to put some of it back to work if an opportunity appeared. I won't hold my breath though.
Q: What happens when gold inflates and diamonds deflate?
Click to enlarge.
Click to enlarge.
A: You get charts that require a log scale.
Note: The prices in the first chart are adjusted for inflation. The median price for gold (in today's dollars) from 1913 through 2009 was $409.12. It now stands at $1829.20.
Source Data:
USGS: Historical Mineral and Material Statistics
BLS: CPI
Thanks to the popularity of the Internet and the high price of gasoline, 20% of all retail sales (by dollar amount) can now be made without interacting with a human being. This isn't even counting the new self-checkout lanes at grocery stores.
20%!
Our automated self-serve economy isn't exactly churning out new jobs. Big shocker.
Source Data:
U.S. Census Bureau: Retail Trade
St. Louis Fed: All Employees: Gasoline Stations
St. Louis Fed: All Employees: Nonstore Retailers
St. Louis Fed: All Employees: Retail Trade
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