A friend sent me an email re: Gold Bubble
RobertS
Posts: 485
It was an article by eldelman finances, my friend pointed out the part regarding gold being a bubble. Could someone point me to an article that debunks the bubble angle.
0
Comments
Men have been killing other men for gold since the beginning of recorded time. "gold fever" has existed in good times and bad times. Gold ain't like apples and it ain't like tech stocks.
I'd like to see two of them smart fellers take a walk through my neighborhood. One man fills his pocket with apples and the other fills his with gold and lets see who walks out the other side.
Gold is always in demand, tech stocks and apples ain't.
Liberty: Parent of Science & Industry
Liberty: Parent of Science & Industry
<< <i>I can't find an article that debunks the notion that you can't eat gold. >>
Whenever someone tells me that, I tell them that there can't be less calories in gold than there is in digital numbers.
Sometimes they come back with "yeah well if TSHTF you'd be better off with holding oil/apples/etc". Then I tell them I hope they stock up on those, so I can buy them with my gold... Assuming the food he has hasn't rotted by that time.
Edit for the OP: Just show them this chart, and find another of the price of gold over the last century. Should be pretty obvious that it's an inverse relationship, with little chance of suddenly reversing. (pic ripped this from another thread)
<< <i>
<< <i>I can't find an article that debunks the notion that you can't eat gold. >>
Whenever someone tells me that, I tell them that there can't be less calories in gold than there is in digital numbers.
Sometimes they come back with "yeah well if TSHTF you'd be better off with holding oil/apples/etc". Then I tell them I hope they stock up on those, so I can buy them with my gold... Assuming the food he has hasn't rotted by that time.
Edit for the OP: Just show them this chart, and find another of the price of gold over the last century. Should be pretty obvious that it's an inverse relationship, with little chance of suddenly reversing. (pic ripped this from another thread)
You're comparing an inflation adjusted chart in the value of the dollar to the nominal price of gold. Here is a inflation adjusted gold chart for the same period. As the chart shows, the inflation adjusted price of gold was basically flat untill 2005, and gold has yet to reach the inflation adjusted high of $2,200 from 1980.
In any case, there is little need to win arguments. Rule #1 is that on the Internet, no one wins an argument. It is much easier to settle this way: folks put their money up, and the market settles it. Those that continue to call bubble can put up their money, or not. Those that think there is more room to run, can do like wise. Many of the bubble talk folks ignore gold, they don't actively short it. While most that think gold is going to go higher continue to put up real money. I have no need to convince people. If asked, I tell them what I think. If nobody asks, I tend to keep quiet. Really, it would be better if 99% of folks were on the other side, 99% gold bubble talkers, then the rally would be much more likely to explode to the upside.
<< <i>On a serious note, I do kind of agree with the author's premise, and predict that when the price of gold stops going up, it's going to then go down. >>
One caveat to your prediction. The price of Gold could stay at the same price if it doesn't go up and it doesn't go down.
Apples have been getting canned for thousands of years for instance. We're so wasteful now days
that "excess" production is likely to rot on the tree because the farmers don't want the price to drop.
But this is one of the reasons gold is going up; widespread senseless waste. They make products
that have no value and go almost straight to landfill and they make them inefficiently and ship the
parts, raw materials, and finished products all over the world.
People treat money like it grows on trees and the governments print it like they can do it all virtually
with a few keystrokes.
Sure there's more gold every year but there are more people and more people who want to protect
what government hasn't already laid hands on. So long as we argue about the size of the debt in-
crease gold will be a good investment. Well... ...in real life right before we stop arguing about it gold
will come crashing down to only ten or twenty thousand dollars an ounce.
Whether you're growing apples or buying golsd there is always risk. Use common sense. Nobody
can really predict the future.
When these are true people will buy gold. (or at least they "always" have in the past)
Of course if it goes up too fast, then it may correct, but that is not a bubble.
I would watch out for margin rate changes, like the one SLV had awhile back to stall gold.
Other signs are when and if investments come up in casual conversation at the gym, the coffee shop, parties, at church, or wherever, and gold gets front and center billing. Instead of talking real estate, mutual funds or stocks, gold chatter trumps all. Every ear perks up like the old E.F. Hutton commercials, when the gold word is mentioned. The previous know-nothings and bubble talkers who never cared for gold for the past 11 straight up years, will brag to you how they just bought a 10 ounce silver bar or quarter ounce gold eagle. Many may start spouting advice, about how important it is for you to get in now. And if you are smart, you'll just smile and nod and have the nerve to start selling. Again, there is no need to win arguments or try and separate fools from folly, perhaps with an exception for close friends or family.
/edit to add: as to what to say to a "friend" who sends you that kind of email. Say nothing, or if asked be polite and say something like "thanks for sending that, it was interesting reading." If pressed, say something like "There are some good points in that article, I have to think about it some more." Again, arguing can be one of the least productive of activities, an exception might be a group where all involved are used to that kind of Socratic teaching method.
// it was actually the old E.F. Hutton brokerage commercials that had people stopping to listen, Smith Barney's slogan was "we make money the old fashioned way, we EARN IT."
Yep, all the gold that is mined tends to exist in perpetuity. Dollars that get created tend to multiply like fruit flies. Apples vs. Oranges.
I knew it would happen.
<< <i> Dollars that get created tend to multiply like fruit flies. Apples vs. Oranges. >>
ROFL.
Fruit flies will multiply on rotten apples even faster than our chickens come home to roost.
<< <i>One more note, folks here will likely have a front row seat for the bubble stage. In a classic bubble top there will be a huge influx of newbies to this forum from the U. S. coin forum. They will have newbie questions, such as what to buy, when to buy, where to buy. When they start buying, especially if they are dumb and using credit card money to buy, that is the a sign of the top, glowing in neon and blinking.
Other signs are when and if investments come up in casual conversation at the gym, the coffee shop, parties, at church, or wherever, and gold gets front and center billing. Instead of talking real estate, mutual funds or stocks, gold chatter trumps all. Every ear perks up like the old Smith Barney commercials, when the gold word is mentioned. The previous know-nothings and bubble talkers who never cared for gold for the past 11 straight up years, will brag to you how they just bought a 10 ounce silver bar or quarter ounce gold eagle. Many may start spouting advice, about how important it is for you to get in now. And if you are smart, you'll just smile and nod and have the nerve to start selling. Again, there is no need to win arguments or try and separate fools from folly, perhaps with an exception for close friends or family.
/edit to add: as to what to say to a "friend" who sends you that kind of email. Say nothing, or if asked be polite and say something like "thanks for sending that, it was interesting reading." If pressed, say something like "There are some good points in that article, I have to think about it some more." Again, arguing can be one of the least productive of activities, an exception might be a group where all involved are used to that kind of Socratic teaching method. >>
I'm a huge fan of anecdotal evidence. Frankly in many ways it seems to pan out better
than even when you can do the math.
All the anecdotal evidence I encounter is still very very heavily anti-gold.
Who needs puny tools like reason and math when you can peek into peoples' heads.
<< <i>The guy doesn't utter one word about the dollar. Demand has a bit of influence, but gold's price isn't really about gold. It's about the dollar. The author is myopic and has an agenda. He's a dime a dozen.
Yep, all the gold that is mined tends to exist in perpetuity. Dollars that get created tend to multiply like fruit flies. Apples vs. Oranges. >>
I'd say currently it's about demand from emerging economies and about fear. Fear of inflation, fear that paper assets will return to their intrinsic value (zero), fear that governments around the world will not be able to pay their debts and countries like Greece, Ireland, Iceland, Portugal and yes even the United States will not be able to pay their debts, fear that markets will collapse, fear that the housing market will continue to collapse. Yes, there is plenty of fear in the market these days to fuel the price of gold.
<< <i>To put it in simpler terms the gold supply is growing arithmatically while the money supply is growing geometrically.
When these are true people will buy gold. (or at least they "always" have in the past) >>
That's exactly what the author's in the OP's link got wrong. They separated gold from the money supply which you can't do. It's always linked.
There is a bubble out there, but it's not in gold, but rather in fiat money and debt. The US just raised its debt ceiling by 17%. Gold has been generally following
the debt ceiling for the past 40 yrs. Another 17% in debt targets gold at $1930.
World gold production adds about 1.7-1.8% per year to the gold pile. But let's face it, currency printing is running at plus 5-15% per year in the developed nations. Some much higher
than those levels, and very few any lower. As long as that difference exists, then gold should gain against fiat. And this doesn't even bring into the debate the role of future
entitlements, sovereign debts, and $1.14 QUAD in reported otc derivative bets.
China is now the world's leading gold producer. They would prefer to keep all the gold mined in China and send it to the central bank. That gold is not available to meet world demand.
China would add 50% of the world's gold production to their own coffers each year if they could do it w/o spiking the gold price. So they buy as much as they can, when they can w/o
making too much of a show. Their goal is to get to 8133 tons and match the USA. So they can add gold for the next 4-5 yrs at 1400 tons per year if they can find it. They're probably
only adding at a rate of 500-1000 tons per year. They have TRILLIONs in US reserves in which to buy gold and key commodities with. That's just China though. You can toss in India,
Saudi Arabia, Russia, Brazil, and Mexico as countries who want to beef up their gold reserves. If China wants to become the world's next super economic power, they will need
gold reserves several multiple of their currently claimed 1054 tons. All the gold in the world is currently worth around $9 TRILL. That's a drop in the bucket compared to world debt,
world derivatives, and world entitlements. If China could buy 8,133 tons of gold tomorrow with a check for $430 BILL drawn on their US dollars & TBonds, they would certainly do it if
there were no negative ramifications from the US side.
Without that 1400 tons of recirculated gold and gold jewelry each year, the price of gold would explode. But that 1400 tons is not going to keep on growing. I would expect at some
point it will taper off as people start to hang on to their gold. Before the $Cash4Gold schemes came around world recycled gold was only around 500 tons per year. At some point the
little people won't have any more gold jewelry to cough up so that fresh coins and bars can be minted for investors. And even in 3-5 yrs mine production is not expected to increase by
more than 5-15%. So it's either recycled gold or the highway.
roadrunner
<< <i>You're comparing an inflation adjusted chart in the value of the dollar to the nominal price of gold. Here is a inflation adjusted gold chart for the same period. As the chart shows, the inflation adjusted price of gold was basically flat untill 2005, and gold has yet to reach the inflation adjusted high of $2,200 from 1980. >>
I posted the correct chart. It makes no sense to use the chart you did, because it effectively masks what inflation has done to the worth of dollars, which is linked directly to the price of gold (as another posted above said).
You can manipulate the numbers on charts all you want. There's no disputing the fact that the BUYING POWER (this is the key) of fiat dollars has steadily declined. Gold, in turn, has (with some peaks and troughs along the way due to speculation and other market forces) steadily increased.
If anything, this is the fiat currency bubble in the process of popping.
<< <i>
<< <i>You're comparing an inflation adjusted chart in the value of the dollar to the nominal price of gold. Here is a inflation adjusted gold chart for the same period. As the chart shows, the inflation adjusted price of gold was basically flat untill 2005, and gold has yet to reach the inflation adjusted high of $2,200 from 1980. >>
I posted the correct chart. It makes no sense to use the chart you did, because it effectively masks what inflation has done to the worth of dollars, which is linked directly to the price of gold (as another posted above said).
You can manipulate the numbers on charts all you want. There's no disputing the fact that the BUYING POWER (this is the key) of fiat dollars has steadily declined. Gold, in turn, has (with some peaks and troughs along the way due to speculation and other market forces) steadily increased.
If anything, this is the fiat currency bubble in the process of popping. >>
<< <i>There's no disputing the fact that the BUYING POWER (this is the key) of fiat dollars has steadily declined. Gold, in turn, has (with some peaks and troughs along the way due to speculation and other market forces) steadily increased. >>
The fact the purchasing power of the dollar has decreased has nothing to do with gold. The dollar was at least partially backed by gold until 1971 and it still went down in value. The fact of the matter is if you purchased an ounce of gold in 1913 in real terms, the price increase is less than 400% over a span of close to 100 years, which is as much and likely worse than any other commodity you could have bought in 1913.
$1650/$20.67 is a lot higher than a 400% increase. How about 80X.
The purchasing power of the dollar is proportional to the price of gold, at least during periods when gold is allowed to float (ie not 1913-1971). All arguments of gold really need to pertain
to post-August 1971 as that's when gold started floating free. The dollar is down around 39% "on paper" over the past 10 yrs. But gold is up 6.5X. Clearly the relationship between gold
and the dollar is exponential in nature, not linear. Gold would have floated internationally much higher in price during the 1960's if not for the actions of the London Gold Pool (1961-1968).
roadrunner
<< <i>The fact the purchasing power of the dollar has decreased has nothing to do with gold. The dollar was at least partially backed by gold until 1971 and it still went down in value. The fact of the matter is if you purchased an ounce of gold in 1913 in real terms, the price increase is less than 400% over a span of close to 100 years, which is as much and likely worse than any other commodity you could have bought in 1913. >>
Let me rephrase it. Dollars/British Pounds/etc were backed to a hard, fairly constant value asset (aka gold) for a long long time. Gold coins were issued and interchangeable with dollars/etc. Inflation was little to none.
Then dollars were partially backed by the same gold, inflation starts rearing it's ugly head. This is due to the printing of more money than there was gold to back it. If the world had $5T in dollar bills and x tonnes of gold, once the world paper money supply grows to $10T and the amount of gold says at x, the relative value of the dollar is now half of what it was relative to this same asset.
Since 1971 and the complete unbacked fiat currency, inflation has literally gone to the moon, money supply is growing exponentially, purchasing power is in steep decline.
On a sidenote, your chart uses federal statistics on inflation to determine the numbers. Those stats can be very deceiving because they pick and choose certain goods/services/etc to calculate the annual rate of inflation. Using hard values, $20 used to BE nearly 1 oz in gold (pre-1933) and now it takes $1650 to buy that same 1 oz of gold. That looks to be like $20 doesn't buy 1/80th of what it used to. And this isn't limited to gold, look at any other commodity, even cars/housing/etc.
Five Things You Need to Know About the Economy
"To use a metaphor, the situation today is akin to a bunch of gunfighters facing off in a dusty street, hands poised over their six-shooters, eyes nervously shifting this way and that - to the eurozone, to the housing markets, to the situation in Japan, to the U.S. government spending, to the crumbling balance sheets of the banks, to the Fed. Everyone is anxiously watching, waiting for someone else to start making the first move. The standoff can't last - and when the lead starts flying, there will be few places to hide."
"Simply, there is no magic wand that can be waved in order to make the debt go away. In order for this crisis to end, someone's ox has to be gored, and gored badly."
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
...the situation today is akin to a bunch of gunfighters facing off in a dusty street, hands poised over their six-shooters, eyes nervously shifting this way and that - to the eurozone, to the housing markets, to the situation in Japan, to the U.S. government spending, to the crumbling balance sheets of the banks, to the Fed. Everyone is anxiously watching, waiting for someone else to start making the first move. The standoff can't last - and when the lead starts flying, there will be few places to hide.
High Drama. I'm bettin' on precious metals. (cue music)
I knew it would happen.
<< <i>Let me rephrase it. Dollars/British Pounds/etc were backed to a hard, fairly constant value asset (aka gold) for a long long time. Gold coins were issued and interchangeable with dollars/etc. Inflation was little to none. >>
Actually, the British used Tally Sticks, which are notched pieces of wood, as money from 1100 - 1854. The tally stick system worked really well for 700 years. It was the most successful form of currency in recent history and the British Empire was actually built under the Tally Stick system. It wasn't until Central Banks took control the money supply that inflation became a problem. What matters is who controls the issuance of a currency, not what backs it.
<< <i>
<< <i>Let me rephrase it. Dollars/British Pounds/etc were backed to a hard, fairly constant value asset (aka gold) for a long long time. Gold coins were issued and interchangeable with dollars/etc. Inflation was little to none. >>
Actually, the British used Tally Sticks, which are notched pieces of wood, as money from 1100 - 1854. The tally stick system worked really well for 700 years. It was the most successful form of currency in recent history and the British Empire was actually built under the Tally Stick system. It wasn't until Central Banks took control the money supply that inflation became a problem. What matters is who controls the issuance of a currency, not what backs it. >>
Some good points.
But one reason why gold/silver (and to some extent copper/bronze) have been used as currency so often, is that they are naturally scarce. To get more precious metals for use in currency takes time/labour/money which inherently helps regulate how much can be minted/issued. They aren't perfect, but IMO a lot better than issuing dollars out of thin air whenever a government or private companies need more.
"There's two type of people. Those with bullets.... and those who dig."
<< <i>"Simply, there is no magic wand that can be waved in order to make the debt go away. In order for this crisis to end, someone's ox has to be gored, and gored badly." >>
There's never been a magic wand and no one ever believed in magic wands until modern times.
Sceptres are machine parts and palaces are factories.
Nature always has the final say and you can never cheat her (them).
People have always been superstitious but never moreso than today.
You can't take more out of a basket than you put in it even if your name is Santa Claus or Ben Bernanke.
I do not think when gold goes up, the dollar is the counterweight. It is extremely self-centered to think that the US government and the dollar is the end-all and be-all of the cause of the price of gold to change. It is fashionable to blame our Government or the dollar for all our problems and inversely say that it is the sole reason gold is going up. Gold is a commodity and it will go up when there is stronger buying pressure than selling pressure. I think the flight to gold from stocks was what drove up gold today, not a weakening of the dollar. Tomorrow it may be a weakening of the euro. Next day it may be another University decides to buy $1,000,000,000 worth and take delivery.
As for the debt, It got way out of hand during Bush II and now we're paying for two unpaid wars and huge tax cuts during wartime. Who ever heard of such lunacy! Historians will really wonder what they were thinking. It's done now, so we have to deal with it. Austerity during a recession has been done before too and we have the history to show that it doesn't end well. Ask Herbert Hoover about that.
The flight to gold from stocks should accelerate as more people get a dose of fear of the short-term future of stock prices. But that's when the bubble will form.
<< <i>
<< <i>The guy doesn't utter one word about the dollar. Demand has a bit of influence, but gold's price isn't really about gold. It's about the dollar. The author is myopic and has an agenda. He's a dime a dozen.
Yep, all the gold that is mined tends to exist in perpetuity. Dollars that get created tend to multiply like fruit flies. Apples vs. Oranges. >>
I'd say currently it's about demand from emerging economies and about fear. Fear of inflation, fear that paper assets will return to their intrinsic value (zero), fear that governments around the world will not be able to pay their debts and countries like Greece, Ireland, Iceland, Portugal and yes even the United States will not be able to pay their debts, fear that markets will collapse, fear that the housing market will continue to collapse. Yes, there is plenty of fear in the market these days to fuel the price of gold. >>
Is it fear, or just common knowlege? I dont "fear" that the U.S. wont be able to pay its debts.....I "know" it cant.
<< <i>The debts will be paid.... With vastly inflated dollars. I don't see any other way it could go. >>
+1
<< <i>
<< <i>
<< <i>The guy doesn't utter one word about the dollar. Demand has a bit of influence, but gold's price isn't really about gold. It's about the dollar. The author is myopic and has an agenda. He's a dime a dozen.
Yep, all the gold that is mined tends to exist in perpetuity. Dollars that get created tend to multiply like fruit flies. Apples vs. Oranges. >>
I'd say currently it's about demand from emerging economies and about fear. Fear of inflation, fear that paper assets will return to their intrinsic value (zero), fear that governments around the world will not be able to pay their debts and countries like Greece, Ireland, Iceland, Portugal and yes even the United States will not be able to pay their debts, fear that markets will collapse, fear that the housing market will continue to collapse. Yes, there is plenty of fear in the market these days to fuel the price of gold. >>
Is it fear, or just common knowlege? I dont "fear" that the U.S. wont be able to pay its debts.....I "know" it cant. >>
'Know' or 'hope'? There are many things the government 'could' do to pay off the debt without inflating the currency. Rolling back the Bush and Reagan tax cuts to the wealthiest Americans, closing corporate tax loopholes, ending our reckless wars and military bases around the world or even selling the gold supposedly in Fort Knox are all ways we could pay back the debt. The real question is whether that is something we 'want' to do as a nation in order to live within our means.
What is meaningless is the CPI-U considering all the high jinks conducted to the methodology over the past 28 yrs. This is why gold is up 80X since 1913 and not 23X as the
BLS inflation calculator would suggest. If one uses the 1980 CPI methodology today, CPI would be 3.5X higher than currently reported. Apply those same errors year after since 1983
and the CPI 30 yr change is off by a country mile.
BLS inflation calculator....or should I say the "BS" inflation calculator.
Note that when one plugs $450.13 for 1913 into the BLS calculator........it says that it has the "same buying power" as $10,263.05 in 2011. Nothing stated there about nominal gains.
Obviously you and the BLS disagree as to what buying/purchasing power means as you differ by a factor of 6X. Or put another way, today's gold ounce at $1656, would have the
same buying power as $72.63 in 1913....a factor of 3.5X off as I suggested above to get to $20.67 (see SGS alt CPI in shadowstats link below). There's no advantage for the BLS to
accurately state CPI as the more accurate it is, the more money it costs the govt. Clinton, Rubin, and Summers were masters of CPI adjustments. The current crop of politicians
have recently discovered that if they once again modify how CPI is calculated, they can save some money down the road and cut into the debt. When analysts continually state that
today's dollar is worth 3c to 5c of the 1913 dollar, they are refering to puchasing power, not nominal gains. All I know is that with that $20 gold coin picked up in 1913 for $20.67, I can
go out there today and buy $1656 worth of merchandise/services for it.....not $471.
All or part of the gold in Fort Knox has probably already been leased or sold to European nations. I'd wager the odds at 0% that it's anything else. The only question is how much gold
has been sold or leased or promised. Some of it may have been swapped for estimated future production still in the ground. But as long as it's still in our possession, the 9 tenths
possession rule applies.
roadrunner
Right on, RR !!
<< <i>Nominal gains are meaningless. What really matters is purchasing power, and in that sense, what cost $20.67 in 1913 would cost $450.13 in 2011 adjusting for inflation according to the CPI. So in 2011 dollars, an ounce of gold cost $450.13 in 1913 compared to $1,656 today = 368% increase over 100 years.
What is meaningless is the CPI-U considering all the high jinks conducted to the methodology over the past 28 yrs. This is why gold is up 80X since 1913 and not 23X as the
BLS inflation calculator would suggest. If one uses the 1980 CPI methodology today, CPI would be 3.5X higher than currently reported. Apply those same errors year after since 1983
and the CPI 30 yr change is off by a country mile.
BLS inflation calculator....or should I say the "BS" inflation calculator.
Note that when one plugs $450.13 for 1913 into the BLS calculator........it says that it has the "same buying power" as $10,263.05 in 2011. Obviously you and the BLS disagree as to
what buying/purchasing power means as you differ by a factor of 6X. Or put another way, today's gold ounce at $1656, would have the same buying power as $72.63 in 1913....
a factor of 3.5X off as I suggested above to get to $20.67 (see SGS alt CPI in shadowstats link below). There's no advantage for the BLS to accurately state CPI as the more accurate
it is, the more money it costs the govt. Clinton, Rubin, and Summers were masters of CPI adjustments. The current crop of politicians have recently discovered that if they once again
modify how CPI is calculated, they can save some money down the road and cut into the debt. So it was written....so it shall be done.
All or part of the gold in Fort Knox has probably already been leased or sold to European nations. I'd wager the odds at 0% that it's anything else. The only question is how much gold
has been sold or leased or promised. Some it may have been swapped for estimated future production still in the ground. But as long as it's still in our possession, that 9 tenths
possession rule applies.
roadrunner >>
Nominal gains affect your capital gains tax liability, which is taxed on nominal gains, not inflation adjusted gains, and do not represent your purchasing power. Zimbabwe had tremendous nominal gains as a result of hyperinflation, yet they were no richer and actually poorer as a result. No matter what inflation figures you choose to use, the fact is gold has barely outperformed the standard basket of basic commodities from the CRB BLS Spot Index by 1.5x since 1971. In that sense, gold has lived up to it's historical role as a store of value, just at it is often said an ounce of gold has been able to purchase a fine men's suit throught history and not the monetary panacea some make it out to be.