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Gold Bubble?: A Brief Look at Historical Bubbles
Taken from Expected Returns Blog
As gold climbs to new highs, you will get a real-time lesson in why most people make very little if any money investing. Gold is the most obvious bull market of our generation and the public still refuses to participate in force because of nominal prices. This is baffling, but I'm not complaining since this widespread inability to pull the trigger on gold has allowed me to accumulate at relatively cheap prices.
False collective beliefs ultimately drive bubbles to insane levels. Fundamentals don't propel bubbles; pure, raw emotions do. As such, bubbles exhibit unique characteristics that reflect the emotion of investors. When even the most risk averse person capitulates and buys, that's when you know we're in a bubble.
Gold is a different story. Most people can't even give you an elementary explanation of gold's historic monetary role. To wit, gold is misunderstood. Many fall into the trap of claiming gold has no intrinsic value because it is not subject to classic discounted cash flow analysis. This is just plain nonsense. Gold is a store of value. Gold is a currency. Gold is a hedge against government stupidity; it is the default currency when governments mismanage their finances.
People need to understand that each individual asset class is unique. An overextended price move in one market may be a normal cyclical move in another market. That's why it's important to understand the historic behavior of any market before jumping to any conclusions based purely on price.
That being said, I briefly examine the price characteristics of stocks and housing respectively before examining the gold market. Each of these markets is unique, and we must allow the data to draw a conclusion for us, not our preconceived notions.
The Nasdaq Bubble
The Nasdaq bubble is a great example of the truism that most bubbles are initially founded on fundamentals. The internet really was a gamechanger. Productivity really did rise tremendously. But when .coms without profits or viable business models (Pets.com anyone?) started garnering multi-million dollar valuations, the Nasdaq became a bubble. People officially lost their minds.
Study enough charts of stock bubbles and you will see a pattern. First comes the slow and steady rise in prices based on fundamentals. This is the bull market stage. Then comes the massive greed-driven spike that trumps previous price movements in one fell swoop. This is the bubble stage.
In the case of the Nasdaq, it took 10 years to go from 400 to 2500 and all of 7 months to double from 2500 to 5000. By the time the Nasdaq reached 4000, it was "obvious" we were seeing a bubble.
The U.S. Housing Bubble
The fundamental underpinnings of the housing bull market were as follows: 1) People need a place to live 2) There's a limited supply of land but an exponentially growing population 3) Home prices never go down nationally.
Each market has its own unique character. If you have ever actually looked at housing data in the U.S. going back a century, you would know that home prices simply track inflation. The whole home appreciation phenomenon was, for the most part, an illusion. That is, until recently, when homes suddenly became an "investment" to trade in and out of like stocks.
I've created the following chart showing inflation adjusted median home prices for the past 30+ years. Note that for about 20 years, inflation adjusted median home prices didn't budge. Then starting at the turn of the century, home prices effectively doubled. Bubble anyone?
The Gold Bubble?
People invariably believe gold is a bubble because it's "expensive." But I must counter by asking: according to what historical metrics? As you saw from the examples above, each market trades to its own rhythm. While an inflation adjusted doubling of home prices is evidence of a bubble, it would be normal price action for stocks.
So what about gold?
The best comparison to today's market I can make is the 1971-1980 gold bull market. The $850 peak gold price was very temporary. The majority of the bull market was priced in the sub-$300 dollar range. It was only when the public got involved- as evidenced by the lines around the block at gold shops- that gold started to bubble over. The public-driven gold frenzy in 1980 is clear from the charts.
Have we seen anything remotely resembling the 268% annual rise in gold prices in 1980? Far from it. Gold is up 23% in the past 2 years! Gold shares are still below their nominal all-time highs! This sure doesn't look like a bubble to me.
I must be missing something here. Gold tupperware parties are not evidence of a bubble. Why? Because the foolish public is selling. Cash for gold advertisements? Again, the public is selling. So many people miss this very important distinction that it baffles me. Yes there is some public excitement over gold, but it is mostly on the sell side.
I don't even have to talk about the fundamentals of gold to dismiss gold bubble arguments. On a pure price basis, gold can't be regarded as a bubble any more than wheat or oil can at current valuations. So why is there still so much skepticism? I have no idea. But I can assure you that this skepticism will fuel the price of gold higher.
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Who's going to be left in those 100m households with any money left to buy gold ?
If this is the end of the current monetary system, will the owner of the next monetary system allow you to convert your gold into their new system's currency ? & at what exchange rate ?
Would your current fiat money go further buying supplies needed for the future now ? ie. which will inflate faster, food, shelter, or gold ?
All questions that weigh on pulling the trigger on $1250 per oz
Would your current fiat money go further buying supplies needed for the future now ? ie. which will inflate faster, food, shelter, or gold ?
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I'm really puzzled by the people who think-that because you have Gold--you couldn't possibly have secured food and "other" provisions--go figure that one--
Apples and oranges.
If we CHART gold from a currency point of view it will look like a bubble.
If we detrend Gold using real inflation, it will look like the opposite. It is all a matter of who will stand.
The dollar will not go to zero-it will not be allowed to go to zero--
How will Governments stop it from going to zero?
They'll buy Gold--in the open market--in a panic-to stop it from happening-they will strengthen and save currency's by weighting them with Gold-
They weakened them by taking the Gold weighting out--they'll strengthen them by buying Gold and weighting them up-
A collapse could happen very suddenly-in one or more majors-so a CB panic to buy Gold-will squeeze the Commercial shorts and this is when you'll get the spike-to sell a "bit" to them---jmo
With what money would they buy that gold?
Plus, consider the multiples of hollow-valued money.
They cannot buy gold with debt.
ummmm-
Bonds backed by "you" and whatever assets your country has--same as it is now--same as its always been--
What is "anyone" buying Gold with today?
Debt--f
Anyone desiring to use gold for purchasing items may use it as long as there is an accepting party. Done! It's a currency.
I am on the Faber plan of buying some physical gold and silver once a month. I sleep much easier.
Gold is not and never has been in a bubble, even in 1980.
It is the USD that's a bubble, it is the obligation of the Federal Reserve Bank.
At the risk of repeating myself:
A gold bubble? That would be terrific, thank you. Please let me know when we have the following in place:
A $250K/$500K capital gains tax exemption on gold (as opposed to taxing all capital gains in gold at the higher short-term tax rate, regardless of how long it's been held).
A "President's Working Group on Gold Markets" to support the gold market in the event of sudden sell-offs.
A tax deduction for interest on margin debt used to buy gold.
A "Federal National Gold Association" and "Government National Gold Association" who use taxpayer money to purchase margin debt used to buy gold.
Thousands of government boondoggles at the federal, state, county, and city level to promote "The American Dream of Gold Ownership".
It should be possible to buy physical gold, or to go long on gold futures, on 0% margin. There should be thousands more government programs to "help people keep their gold" and prevent repossession of physical gold when buyers default on their payments.
A "National Association of Goldsters" whose sole purpose in life is to chant "They're not making any more gold", "Gold never goes down", and "Buy gold now or be priced out forever". This NAG should be one of the most powerful lobbies in America, and their members should be quoted by the media as though they (1) are disinterested parties and (2) know a fucking thing about economics, or, for that matter, anything else.
Individual retirement plans and pensions invested wholly in gold, so that supporting the price of gold becomes a matter of national security. Any hint of a gold price crash should lead to congressional hearings and SEC investigations. Anyone who shorts gold futures should be decried as "un-American" and a cowardly leech who profits off others' misfortunes and deserves to be destroyed by short squeezes. Most importantly, anyone who complains that gold is overpriced should be derided as a "bitter fiater" who missed the rally and, furthermore, can't get laid.
Good one, doc!
It is largely such brilliantly intelligent, witty and justifiably biting comments such as this one that make visiting ZeroHedge worthwhile.
I bow to you, DrWells!
My humble thanks akak. I'm just glad to be able to contribute, in however small a way, to such a useful site.
All the *talk* about a gold bubble is troublesome. Referencing a bubble is an attempt to time the markets. While hindsight is always 20/20 ... investors must be concerned with the future. In the debate about the existence of a gold bubble, one must seperate the idea of a market crash from the idea of a sovereign crash.
Thailand's current crisis is a micro event in the geo-political sphere.
The United State of America's revolution in 1776 is a macro event in that same space.
Conclusion: Governments shape investment opportunities. Investment is no longer a layman's term for understanding individual gain, but instead has become a standard by which one can appreciate limited resources being divided among an ever-growing population base. Under this new lexicon, investments are expected to convey an assurance that the individual will be entitled to their share of the pie.
That expectation is fundamentally flawed. At the heart of an investment theory is it's underlying risks ... while a complete lack of risk may be the ideal investment opportunity, it is also a fraud.
Gold is in a bubble? What happens when the President signs an executive order confiscating all the gold in the country and Congress makes it illegal to own? (USA, 1930's)
Gold is in a bubble? What happens when all governments disintegrate amid widespread protests? (think Thailand on a major scale)
The question shouldn't be "is gold in a bubble?" rather one should be asking themselves, is our government capable of navigating the difficult circumstances of the future? If you accept the idea that the USG will remain the sovereign, then the methodology of taxation and the medium of exchange will continue to be determined by that government.
At this point in time, it doesn't appear that the USG will fail. Leaving in place the Federal Reserve System and their banknotes that satisfy taxation, ergo creating the necessity of the medium of exchange to be in dollars.
If you want to measure your place within that structure, you can quantify all assets and future income in dollar terms. The debate about a gold bubble isn't a debate about the "value" of gold, but instead an attempt to time the market value of gold ... and trying to time markets isn't investing, it's gambling.
http://www.goldensextant.com/Gold%26Deflation.html
"Do I agree with Keynes that our fiat dollar, the Federal Reserve Note, is the end of monetary history? If yes, then I should pay no attention to that chorus of suits now speaking in tongues, and I should stay away from gold. I belong in my broker’s investment du jour.
Do I think it merely possible that our fiat dollar will someday collapse? If yes, then I should own gold. How much? As much as I can comfortably rationalize, perhaps using some sort of calculation of the gravity of the harm -- i.e., financial wipeout -- discounted by my sense of the probability of its occurrence.
Do I think it inevitable that our fiat dollar will suffer the fate of all paper currencies throughout history? If yes, then I am a gold bug, and it is my dollar exposure, not my gold “investment,” that I must rationalize."
I used to prefer the 'full faith and credit' of the United States over a piece of metal. Not anymore. Our government has more faith than credit and you can't tarnish a gold coin.
Yet another indication of no gold bubble:
When Sears and Kmart set up a kiosk to SELL gold/silver you may safely assume that we are approaching the bubble stage.
Here is an article apropos to the topic:
What Gold Bubble?http://www.usfunds.com/investor-resources/frank-talk/?i=2751
It is worth a look for the graph alone.
And TD or Marla get their first Pulitzer.
We'll all know the bubble is here when you see "Gold for Cash" signs instead of "Cash for Gold."
Succinctly put, well done.
Yep. See my comment about Sears below.
Housing or the NASDAQ never had huge short positions against them. Anyone who thinks this is a bubble now, just wait, especially in the silver market. When there is finally a short squeeze and precious metals etf's start hemorrhaging what metals they do have, if any; that is when the feeding frenzy can start.
Silver is going to explode more than rodium did....
I have been pounding the table on this one for a while...
... sell your jewerly old lady and take a VACATION!
That is a sign of a gold bubble?
I know only one person who owns gold and I turned him on to it. NO ONE else owns it... but alot of people ask about it. These people laughed when they first heard about my idea (~$400), then stopped laughing when it hit $800, now are sure that it is at a top but still own only maybe their 14k wedding ring.
21k only bitches...
Plus, ever done the math on GLD? 1000 tonnes times 32000 (ounces per ton) equals 32 million ounces. There are over 100 million households in the US so the average household holding og GLD is about 3 or 4 shares. You can be sure that GLD will be very popular when the public actually gets involved and that will be a disaster for them.
The real hedge is guns and bullets. Gold will be useless in a real revolution. Gold is for "polite" people. In a revolution with a gun I get both food and gold!
And you have to live with yourself. Karma has a way of finding all of us.
To defend country, family ,self and liberty, yes. To use a weapon for personal gain is to invest in greater loss. Its a form of suicide.
Most of us on the Gold Team are armed. One Team member wrote a few days ago that there is something like a 90% correlation among gold owners also being gun owners.
On reflection, since there are so many gun owners in the USA (80 million?), and maybe 2% who own physical, non-jewelry gold, the main conclusion I would draw is that gold owners also want to PROTECT their assets.
Next time Bravo & Co. show up, we should see if they are gun owners... LOL.
I am OK with the gold (silver, etc.) that I have. I want more ammo. Next up is some more food storage and a way to purify water.
I suggest the Berkey purfiers... also Honeyville Grains.... they sell rice, beans, corn and wheat... plus 5 gallon buckets and oxygen absorbers to keep them all fresh... rice and beans will keep 5 years or more if done this way. Honeyville will ship any amount for I think it was $5 per order. Great deal.
Good luck.
Thanks for posting.
beprepared.com was reccomended to me. I have not purchased from them yet.
You guys, not that long ago Gold was an ordinary currency in the USA, there were gold coins in circulation until 1933! No reason we couldn't do that again.
Now that we're off the gold standard, gold is a monetary reserve. I like to think of it as a proxy for the value of assets: a kind of asset money, real object for real object. It's still symbolic (you can't eat it), but all money is symbolic, a fungible placeholder for value.
If all the world's assets are about $400T, and there are 160,000 tonnes of gold, the real price of gold is about $77,000/oz. That would be a good place to start in a new gold backed global currency.
Gold was in an anti-bubble / depression / hole during the 90s. First it must return to its 5000 year historic value, then it may go into a bubble.
Well said ER,
Now bring on the trolls...
Where can I see the 30 years chart on gold?
Here 'tis, but it is NOT adjusted for inflation, just nominal dollars. This chart is to 2009.
http://www.chartingstocks.net/wp-content/uploads/2009/02/gold_30_year_ch...
A more pertinent chart is here, a beauty:
http://www.usfunds.com/media/images/frank-talk-images/jan-jun2010/GoldPerfBullMkts-042110.gif
Wow , RR that chart really highlights the difference betwixt a bull and bear market
...or better yet, the 40 year chart ,since it was $35.00 in 1970.
I think the problem/ question most people have who are skeptical (and I'll admit it, I am one - let the abuse begin now) is that if you label gold a "currency" does that mean by default you anticipate a return to a commodity-based currency by the US and other governments around the world? If shifting global monetary policy is the only real source of long-term sustainable demand, then that's tantamount to a basic risk-arb trade is it not? If governments don't abandon the current fiat system what will that mean?
If you are a buyer of gold here, then where do you sell it? $2500/ ounce, $5000/ ounce? Everything has it's price and so you have to have some basic financial analysis to support a price projection. Otherwise it's purely arbitrary is it not?
You sell it as you need it for living expenses if you run out of cash. I keep enough dollars in my bank account for normal living expenses plus a couple grand in savings for unplanned expenses (ie.. a root canal). If I decide to buy a house or a new car I will need to sell some gold/silver. When I have a couple extra grand I buy. I don't worry about the spot price. When the financial system collapses, which I feel is inevitable, precious metals will sky rocket. At that point I will stop buying because I will no longer be able to afford to. At that point I may sell to pay off my student loans/ buy a house or pay off a mortgage / buy land etc. Or I may need to sell regularly if I've lost my income, which is likely. Basically only sell if you have to or it's obvious (like buy a house with cash instead of renting). At this point I even reccomend taking a loan from your 401K and buy gold and silver if you can afford to make the payments. You do not want to be in stocks and bonds when the system collapses.
I reccomend a sliver "trade bag" in addition to coins/bullion.
IN TODAY'S WORLD, gold is the safest form of currency and storage of value. I don't know for how long (and I'm afraid that for a long while). I don't know what will be a good selling price. Could be $2000 or $7000. In my opinion (and I'm neither an economist nor do I have ANY training in finance), an asset has to
be understood within time and space parameters. History helps, always. My job as an investor is to stay abreast of changing socio-historical circumstances, no?
It would be impossible to set gold as a currency, in a straight way, before a true political, social and (of course) economic disintegration.
There is not enough gold to back currencies at their current value, although their values are built under the inherent assumption that there is...
I think that projecting a value for a currency, based on a precious metal, under the current circunstances is a near impossible.
It would be better for most nations to riot in organized and planned way, in order to achieve what is needed, instead of falling into pure, wild savagery, having no objectives.
In the USA case it would mean ending the FED as the first step. Not by Gov’t (which would only create a new organism), but by the people’s hands.
The population is not a good biz anymore. People are getting too expensive for the Estate, while not so profitable. Think on that...
And the ooold banckrupty state of Governments are FINALLY becoming visible, as they can`t roll their holes forever.
Those guys leading our Countries are very VERY sick beings, and they are only at their own side.
One way or another, things will be horrendous soon, at our choice, or worse later if we let this continue.
Citizen dodn't need gov't parasites. Let the fat cats have all their devalued paper and let the people own the value, the land, the resources and the power.
They are not going to hand it over. Mobilize.
Bozu, i hear ya, but most dont get it till they suffer.
How much gold would be enough? How would "pricing" be determined -- assuming you mean in fiat currency?
The gold that is still under the Government possession is not even known. Many countries still have reserves in dollars as if it was backed by gold (so if dollar collapses their reserves will also be devalued).
However, Dollar is "Legal Tender" and not backed by any precious metals. Think of Ponzi or Bernie.
While that would mean we would need to print 500.000 dollars bills to get back to gold standard, all those values are merely relative. What ultimately defines the price of anything is an agreement between the supplier and the buyer, under each circumstance and not necessarily it's nominal value, or even intrinsic value.
The question is that even if we could, which we don't, we wouldn't get "enough gold" to back it at the current value, but instead, the acquisitive power of the money would depreciate to reflect a gold-re-standardized money.
So, all the gold in the world can buy the Americas, Asia, Europe? It can pay for all the houses, industries, salaries?
What can pay for it? What is economy? It is exchange of values and goods. A currency is merely an instrument to allow it, and as so, it should be established in a way that keeps its ability to track of the ultimate acquisitive power of the system itself, as a whole.
Here you see how far the world went from that. None of those crises are a sudden event. Each crisis in this "story" was and is a symptom of what is under the currency system. What if in twilight zone, you awake and no money exists? People still work, farm, create goods and services, but the exchange doesn`t involve currency. How about that? You can print a fake dollar bill, but you can`t print a fake bag of corn or a fake automobile.
Also I`ll not be surprised when we see many scandals involving precious metals, and particularly gold.
It is pretty clear to me, that there was no "mistakes" made by presidents or economic teams. On the contrary it was a well orchestrated operation. If anyone who seek to self-educate about this, can understand the gravity of all that was made since Nixon (or... since ever) it is very reasonable to assume that those guys, ruling the machine from inside cabinets, knew what they were doing. They will always pose as every single "crisis" was an unpredictable event. They create a new commission, new regulations and do pseudo investigations, and everybody keeps babbling about it as I'm doing here, while no real action is taken.
I do not take it as a given that the US and other governments will return to a commodity-based currency, much as I would love to see that happen (well, actually I would prefer that money be freed from its bonds with government altogether, but that is a another subject entirely). What needs to be recognized is that gold is, and has ALWAYS been, money, even if at present it is not the means of exchange. Its market behaves much more like a currency than that of a commodity such as corn or copper, and the simple fact that central banks have always held it, and continue to do so, gives the lie to the argument that it has ever been truly demonetized.
I think it is impossible at this point to try to debate an exit strategy for gold ---- even the phrasing of that thought belies a speculative, trading-oriented mindset that is inappropriate to the situation. Does one have a firm "exit strategy" for one's savings account?
I cannot envisage selling any gold, short of for emergency needs, until such time as I see our governments and financial leaders turning away from the unsustainable and fiscally self-destructive road that they are careening down today. When we begin to see some evidence that financial and monetary responsibility and prudence are returning to our societies, THEN it would be appropriate to begin thinking about selling or trading gold. Unless of course gold is reintroduced into the worldwide monetary system, in which case you would simply be holding money.
What you are saying akak is that you will trade your gold when you know you will get it back on the same terms.
I wasn't precisely saying that, but that is a good corollary to what I was in fact trying to say.
akak,
I do not see any way our, or anyone's currency can ever go back to a PM based system.
Too much currency, not enough PM's.
Only way remotely to do it , is to revalue the PM's to rates that stagger the mind, adjusted for currency in circulation.
Sad thing is this IMHO, would set the system at least on a semi solid footing.
But, no way, they are going to revalue Gld to $60k oz., and let individuals hold.
Funny, the Gangbankstas can make money simply making entrys, while prudent investors taking a risk, would get bent over.
How would you like to hold billions, and make 3% on it, and not loan it, because you lose money.........you don't, and their not.
There you go again, being all reasonable and stuff. So far your posts have been bullet-proof. Here is some light afternoon reading for ya:
Torrid Demand for K-rands and U.S. $20s
Thanks Rocky once again!
Good guy, Patrick Heller --- I met him several times in the 1980s, always struck me as a decent, humble, straight-talking man. He is very, very knowledgeable and eloquent on the subject of gold and monetary history, as indeed anyone with a decent background and interest in numismatics has to be. In fact, it was my own introduction to numismatics in the 1970s, and reading the many heated letters to the editor of CoinWorld in those years, that introduced me to, and taught me about, the subject of gold as money and the gold standard.