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Gold: Assumptions vs Reality
One of the hardest things to do as an investor is to think through investments without presuming anything. The data will tell a story and paint a picture for you that you can then interpret. Most people shun this obvious approach to investing and instead choose to invert the process by allowing their assumptions to cloud their analysis. This is simply not a sophisticated approach to investing.
A combination of history and quantitative data analysis will give you a perspective that 95% of investors do not have. For example, most people alive today have not lived through the gold exchange standard, and therefore have no clue how it functions. To most, it is a peculiarity of our ancestors; a relic of the past; and a product of a crude economic system. They cannot imagine the possibility of gold playing a role in the global monetary system. Their knowledge of history is small, and so is their sense of economic possibilities.
It is presumptuous to assume that gold will not eventually play a role in the international monetary system since it happened before in history. It is also presumptuous to assume sovereign nations will not default since sovereign defaults are prevalent throughout history. Most of the anti-gold arguments are based on assumptions that simply aren't true. Here are a few.
Jewelry Demand?
It is incredibly difficult to argue with someone who pulls the "jewelry demand" card on you. Why? The jewelry demand argument is so false that its defenders are invariably a special breed of stubborn. You can never win these kind of arguments.
Now as investors, let's test the assumption that there is some kind of relationship between jewelry demand and gold prices. As you can see below, if there is a relationship, it is a negative one.
If you invested based solely on an assumed relationship between gold and jewelry demand, you would have lost money 9 out of the past 10 years. While the data suggest we should change our assumptions, most people won't. This is the irrationality of human nature at play that allows a minority of investors to profit.
Investment Demand, Anyone?
The real demand is coming from institutional investors, retail investors, and governments. Chinese, Russian, and Indian central banks have recently become major buyers. This is a positive trend for gold since these governments hold so small a percentage of their reserves in the form of gold. Since the dollar dominates foreign reserves, diversification into gold equivalent to dumping dollars.
Retail investors have also begun to protect themselves from spendthrift governments. Objectively speaking, retail investment is a far better indicator of gold prices than jewelry demand.
Marginal Demand, Human Irrationality, and Gold
A fundamental tenet of economics is that humans act rationally. Why I have no clue. Nothing in my experience has shown that people act rationally and to their best interest at all times.
Understanding human irrationality is central to understanding the future price movements of gold. For example, are people more likely to buy gold at $250 dollars after 20 years of being the most hated asset in the world or at $2500 dollars? You don't see lines around the block at gold shops at bottoms; they are an indicator of tops. This is a reflection of both gold's unique marginal demand characteristics and the nature of bubbles in general.
The marginal demand aspects of gold run contrary to those of most other assets. Generally speaking, a rise in price results in a decline in demand. For gold, a rise in prices results generally in an increase in demand. This is its natural state. Add to the mix human irrationality and the panic buying that is bound to come and you start to understand that the monster moves in gold are still ahead.
Financial experts are telling us the gold trade is crowded. Ironically, gold will become a crowded trade only when the "gold bubble" experts start buying. Not to be flippant, but this is one of the top 3 indicators I'm looking for to signal a top in gold. Fortunately, the gold bubble experts are still out in force expounding on the threats of deflation- an argument so riddled with holes that it should not be taken seriously. Making linear comparisons between fixed exchange and floating exchange systems is like comparing apples and oranges: It makes no sense and it is bound to result in flawed conclusions.
We should all try to test our assumptions against facts. That most investors don't is great news for gold bulls. We are on the precipice of a major move in gold that will make all blind assumptions concerning gold look foolish.
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So the range could be anywhere from one number to double that. Good estimate. Makes sense to me.
Although, how was the price 600 in 2008, when the cost of labor and everything else was MORE expensive than it is now?
I mean, since the production cost is 850 now (and had to be higher before the deflation).
Gold miners must love losing money. They mine gold for the good of goldbugs like you.
Nice red herring of so-called "deflation", and falling input and labor costs.
Too bad it bears no relation to reality. Which, if you had any knowledge of the topic upon which you were discussing so authoritatively, would be obvious and well known to you.
"Fortunately, the gold bubble experts are still out in force expounding on the threats of deflation- an argument so riddled with holes that it should not be taken seriously."
This gave me pause. 1) Deflation is a threat, a very real one. This is not your typical inventory recession, this is a balance sheet recession, and deleveraging is deflationary. With the Fed pumping money into the system (assuming QE 2.0), we can avoid the death spiral and grind down slowly, but inflation is far off into the future. To suggest that the deflation argument should not be taken seriously is a dangerous undertaking. 2) Gold can do quite well in a deflationary environment (it is at it's best during a crisis, and deflation=rolling crisis), so while I am clearly in the deflation camp, don't lump all of us in with the gold haters.
The argument you make is why you can print all the dollars you want and not have inflation. There aren't enough dollars to buy assets at current values, and there never was. Asset prices were only driven up by consumer credit.
You could print a lot more money before inflation exists.
Deflation is coming because people cannot afford assets at current prices.
All of this is irrelevant to the gold debate, EXCEPT that most that hold gold expect hyperinflation. This is incorrect.
You could monetize ALL of the debt in the United States, and it would make the currency 1/6 of its value.
Gold is up 5X its value, which seems to suggest that most debt with be monetized. If this happens, gold would be fairly valued at 1500, hardly the call to 50000 that is so popular on this site.
Because the Fed can print any number of dollars at essentially zero cost, this is in some sense equivalent to saying that all dollars that can be printed have been printed. That is, there have been infinite dollars printed, and there is fundamentally no difference between banks holding them at the Treasury and the Fed not yet printing them and officially "releasing" them to the money supply.
Said alternatively, dollars that don't move are the same as dollars that don't exist. This is why the Fed can print this many dollars and have no inflation for now. Once the dollars start moving (this may take years since everyone's pretty much a debtor and a creditor so holding dollars makes sense since nobody knows who gets the haircut, how much, and when), the risk of a dramatic increase in inflation increases substantially. This of course assumes the Fed does not perform any kind of sterilization, etc.
http://www.sitkapacific.com/files/Sitka_Pacific_Capital_Management_May_2...
The long bond is rallying alongside gold. What does that signify?
It signifies that investors are moving down Exter's Pyramid to the bottom, where real money lays in wait.
http://2.bp.blogspot.com/_cvdgPlEKW9k/SqRnntuJ1KI/AAAAAAAAArQ/H7uQrGQFhM...
Once they realize the futility of long bonds, they'll move into gold...if there is any by that point.
I am Chumbawamba.
Actually, the top 1% of people hold 90% of the wealth.
I am Johnny Bravo.
LOL
No the top 1 percent "pretend" to hold 90% of the wealth till they get it taken away from their ass.
Just out of curiousity, how much do you get paid per hour? Do they offer OT at this time of the night? I'd like in to this trolling business too you know.
What about USD as de facto one world currency after destruction of the Euro?
Imagine the PIGS, the Pound, and the new Franc all with a soft peg to the dollar.
Behold the USD revival
Correlation does not presuppose causation. Or maybe it does?
People are scared and confused.
Get used to it.
Gold supply peaked in 2000...for only the ZILLIONTH FUCKING TIME.
Is nearly everybody ignorant of Peak theory? Or what? The rise in price is consistent with a commodity whose production supply is falling.
""The rise in price is consistent with a commodity whose production supply is falling.""
Perhaps that is the case, what does it matter? There is about thirty years worth of production overhang on the market. That is what makes it a worthy metal for money while platinum group metals are not.
Even so, glod is at a very high purchasing power in all softs and most industrial metals. Do a few charts on $GOLD divided by anything that you can come up with. These predictions are assuming that the whirld economic system is going to fall apart in the worst way.
May I give an example:
A very good amateur telescope of 1962 cost $USD650, or at 50 dollars on the real market, 13 ounces. 13 OZ is now USD 15,600. The techology of now will get you something that has hundreds of times the light gathering power of that era.
Try any industrially produced good of that era (gold was suppressed in real price then) as compared to what a gold ounce will buy now.
The most laughable comparison is in the price of long term storage food. If you truly think that TSHTF and metal will be the currency, try out what it costs right here- right now for your year's worth of long term storage food.
Costco had a deal on their so-called one year supply of five year plus storage food. I woul d write that down to 300 days at best, but it was USD800 delivered. At that time it was around eight tenths of an ounce of what spot was--coin price being considerably higher.
If you truly believe that all is going to hell and gold is your last hope for storing value then do not spend an ounce for a year's worth of food per person. BTW, this is fairly hgh quality food, and nothing like the short term crap of Y2k peddlers.
Fodd priced in gold is at an all time low as are many other commodites.
Your choice. If you think that everything will fall into place for you to become king of the 'hood, then go for Mr. Shiny.
If you find that just about any real goods are phenomenally cheap now in gold, then act upon that.
If gold were in fact reclaiming its integral position within the world monetary system, one would expect gold to be increasing in purchasing power after having had both its price and its value suppressed for the last several decades, isn't that so?
I remember the gold "bubble callers" of just a few years ago, such as Jon Nadler, going almost apoplectic when gold crossed the $600 level. Today, that is around its average cost of production. If gold is "overvalued", then so is silver, and so is platinum, and so is palladium, and a number of other metals as well. In fact, the concurrent rise of those other metals in roughly the same proportion to gold tells me that either ALL of them are in bubbles, or NONE of them are.
The rise in price of any commodity is consistent with INCREASED DEMAND.
Supply doesn't really affect price as much as demand does. I'm sure that gold's supply hasn't been reduced by 80% over ten years, which would justify the 5X increase.
No, no... it's a result of increased demand.
Therein lies your problem: gold as a commodity.
Note definition #2. Currencies are included. Gold as a currency is what is affecting the "price". Fiat currencies can be printed at will -- gold cannot.
Case closed.
1. A physical substance, such as food, grains, and metals
So gold isn't a metal?
which is interchangeable with another product of the same type, and which investors buy or sell
It's interchangable with silver, platinum, palladium and investors buy and sell it
usually through futures contracts. The price of the commodity is subject to supply and demand.
Yep, traded via futures contracts, subject to supply and demand
More generally, a product which trades on a commodity exchange; this would also include foreign currencies and financial instruments and indexes.
You mean the COMEX, right?:
All you proved with your article is that CURRENCIES are commodities, and not that commodities can't be used as currency.
Your definition proves my point to a T. Gold is a commodity.
If I trade you 500 barrels of oil, I am using oil as a currency, correct? And yet oil is still a commodity.
Currencies ARE commodities. Jesus flipping ....$&*%*(#
Like I said, case closed. You are too stupid to argue with.
Utterly and obviously.
He has made that abundantly clear elsewhere in this thead as well.
But I am sending the link to this thread to some of my friends in the mining industry, as an example of the wonderful job our schools and universities are doing of teaching critical thinking, and of the profound ignorance regarding gold, and mining in general, out there among the public. Our troll here has provided me with a textbook example of cluelessness and arrogant ignorance.
I was going to explain marginal utility compared to other metals e.g. silver, copper, but ah, fark it...
You'd think we'd know better by now than to cast pearls before swine, dnarby.
Or gold before trolls.
http://mises.org/daily/4527
How does your Peak Gold Theory tie into there not being a correlation between the amount of gold and the price of gold?
Note: I'm not fishing for a snarky reply, nor am I disputing your comment, nor am I trying to be argumentative. I am trying to become better educated. Thank you in advance for your reasoned reply.
Bingo! So many people miss this point. The amount of money in the economy is the right amount. Prices adjust.
I can probably not argue with your Peak Gold hypothesis, Trav, but such an argument cannot fully account for the price increase of gold by 400% over the last 9 years, given the enormous stock-to-flow ratio of gold compared to any other commodity. I don't doubt that the apparent peaking of gold production has had some influence on gold's price appreciation over the last decade, and will have a greater role over the same in the years to come, but it surely cannot account for all or most of the increase in the price of gold since 2001.
As an aside, it is also curious to note gold's relative noncorrelation with the rise and fall of interest rates over the last decade as well.
Trav is a one-trick pony. Bring up any topic and he'll scream "PEAK THEORY!!" until blue in the face. And he's right...until the next large source is discovered.
We've reached the peak extraction of various resources that are attainable with our current technology. I have no doubt that we'll be bogged down in the muck and mire of the aftermath of a century of gluttonous consumption and inflation of fiat currency, but eventually we'll get over it and technology will catch up.
In the meantime, a nice dark ages in which everyone can ponder their failings and hopefully not repeat the same mistakes of the previous incarnation of civilization.
Yes, I know, that's a joke, because we are, after all, human :)
I am Chumbawamba.
Peak theory is bullshit. Gold hit its peak in 2000, because there was nobody willing to extract it at 250 an ounce.
At 1250 an ounce, it is more profitable for people to extract, and supply will increase as a result.
"...At 1250 an ounce, it is more profitable for people to extract, and supply will increase as a result."
Heh, ya maybe, ten years from now.
Right. It takes multiple years to set up gold production.
So who was setting up gold production multiple years ago when the price was at 250, or 500, if the supposed production costs were 850?
Oh wait, the production costs aren't 850. They're 400, at the most.
But yes, if gold stays high, production would increase.
A good indicator of future price action would be whether people are setting up mining operations at 1250 an ounce now.
If it was going to 50000, like some suggest, people would be setting up production at any price, right? (at least up to 40k an ounce)
And yet, that isn't happening, is it?
...Assuming everything else costs the same, yes.
But it won't.
If you knew even the first thing about gold mining (an industry within which I have worked, by the way), you would realize just how embarrassingly ignorant, not to mention idiotic, that comment actually was.
Hint: it has to do with ore grade vs. price.
One mine, one ore type, one country, one company, at present energy costs.
Change any of those factors and you change the extraction price.
http://www.mineweb.net/mineweb/view/mineweb/en/page72558?oid=90337&sn=De...
"...at present energy costs."
Ya took the werds right offa mah keyboard.
You'll love this little item:
For Gold Investors Who Want It 'To Go'http://online.wsj.com/article/SB1000142405274870422730457532722232408814...
That would be 400 U.S. dollars approximately. Not the 850 some *cough* other people seem to be suggesting.
Read the goddam comment you stupid shit.
Energy has been decreasing in price.
Labor has been decreasing in price.
Everything has been decreasing in price.
How do production costs differ other places then? Wouldn't the mine with 850 dollar costs just move to where production costs were cheaper?
.
Oh my God! ROFLMAO!
Hey Joe, yeah, it's getting too expensive to mine here in Quebec --- let's just move the mine to Colombia, and cut our costs in half!"
SCREAMING laughing here!
So they can't produce at a different mine?
Nothing I said implied anything about moving the mine.
Yes, I'll just move all my shit, get the govt permits, and dig another hole, which should be online in about 15years.
You do love to speak from utter ignorance.
"Cash cost" is a rather narrowly-defined term that does not take into account all actual costs of mining gold such as taxes, royalties, debt service, and a number of others which invariably raise that figure modestly to significantly (again, depending on the particular mine and operator).
So what does cash cost account for? Is "interest on a loan" NOT a cash cost? Is labor NOT a cash costs? Are royalties NOT a cash cost?
unfuckingbelievable, these people.
All you do is say that I'm ignorant, and never fail to prove that I'm wrong.
Why don't you provide a verifiable statistic about the mining price like your friend there instead of making up some more stuff?
450 AUD = 400ish US dollars. THAT is why they could afford to sell it for 600 an ounce in 2008.
Your 850 number is flat out tripe.
.
You are so intent on screaming down everyone and everything regarding gold, and literally swarming and inundating the thread with your rabid gold-hating trolling, that you seem unable to even digest the logical information presented to you, as undeserving as you are of any consideration anyway.
What is it about the production cost varying at EVERY mine that you do not understand? Each location, each operation is unique --- there is NO one production cost, whether in time or place!
What logical information?
Like I said, people didn't set up mining production in the last year. The costs couldn't be 850 because the price was less than that a year ago.
People wouldn't mine for free.
.
It is useless to try to rationally debate with somebody who believes they know all there is to know on a subject, when they are actually almost completely clueless.
But just to indulge you one last time, yes, sometimes mines DO operate, or continue ramping up to intial production, even when the production costs might temporarily exceed their estimated cash costs!
Do you have any fucking idea how LONG it takes to put a mine into production, and how INCREDIBLY capital intensive most mining operations actually are? Mines are often started TEN YEARS or more nowadays before initial production ---- in fact, I just visited one that has been over 15 years in startup! Do you REALLY think the operators are going to shut down and mothball an operating mine, or even a startup operation, just because spot prices temporarily drop, or costs temporarily rise above the profit line?
Shit, I worked at a mine that has operated at a technical loss for a THIRD of its years of operation! With a vast investment and significant shutdown and mothballing costs, it is actually not that common for mines to shut down and then startup at a later date. Only the most extreme and prolonged drop in metal prices. or rise in costs, would justify such a course of action, and virtually every operator is loathe to shut down a mine before the end of its potential productive life except under the most extreme circumstances.
You have never, to my recollection, posted a link to anything pertinent. Your arguments are pulled out of some dark, stinking place seldom visited.
JB's head went "to visit" there some time ago and has never returned.