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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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+ $1220 akak, Hulk and Rocky.
Haven't seen the Haters around in the past 36 hours or so.
I am seriously considering pulling the lever on the retirement accounts and converting, before I loose the damn things. The past two weeks have been stunning.
The haters are just noise at this point and they know it.They are akin to someone standing at the door of a burning theatre telling everyone to go back inside while flames are licking at the front row seats....
what do you folks think of leaving some 'national average' amount in a 401k/IRA so you'll some claim to a share of the new social order retirement program(s) that we'll be paying for anyway ... ?
or do we pull it and ...?
act swiftly if you do. it can take these folks unusual amounts of time to send you the proceeds on a closeout(30- 90 days) i did this in late 2007 (pulled it all) and missed buying in at very low ebb in the gold/silver mark at the time. good luck 2U!! rand
You paint well with words hulk.
I have a theory about that, meager though it may be. The trolls were banned. This brought on a site attack that shut ZH down for some time today. TPTB are going to do damage one way or another.
Signed: Paranoid Coon
To each his own RicktheDick, but at present I don't sell at any price.
Not with Sovereign's, states, banks and the financial system in the shape they are in...
I don't look at it in terms of $$$ at all. I look at it this way. If circumstances for whatever reason result in a day that I am hungry, I will trade an ounce of gold for a cow. If i am fortunate enough that a day never comes that I find myself hungry, I will give gold to my children, such that if the day ever comes that they are hungry, they can trade one ounce for a cow.
In other words, you would trade something of value for something of value that took real labor and capital to produce. The problem with fiat money (paper and electronic) is that it takes no effort to produce in unlimited quantities. Why would anyone trade something of value for something that is truly worthless?
FedBuster,
Exactly! If we are all wrong, and things go wonderfully for remainder of our lives, great, I get a paycheck, and have things I need. If things go poorly, I have transferred forward something that will keep me fed.
I am all about staying fed. I buy agricultrial futures in five gallon pails, sealed mylar bags with oxygen absorbers. When I feel more optimistic, I buy gold and silver for wealth preservation.
How much will you sell a named chicken for Rebel?
Do named chickens carry a premium, LOL!
Ever see a belgium blue?
Hulk,
Mrs. Rebel named the chickens, hence they will not be on the menu. Considering buying 2nd batch of chickens to remain naimless, and potential menu items should need arise.
Researching Belgium Blue's as we speak.
Belgium blues bigger than Hulk! They have about twice the muscle mass of a regular cow.
Hulk going to have to go on anabolic steroids....
Gold will go up until people have trust in the long-term viability of government. In other words, for a very long time.
The skepticism of the public toward gold is driven by a decades-long disinformation campaign by the financial elite and their paper-pushing minions that gold is "archaic", that it is a "dead asset" that doesn't earn interest, that "you can't eat it" (whatever THAT is supposed to mean!), that it is "not normal" in a world of paper investments, that it is a "volatile" and "high risk" investment (as opposed to risk-free equities and bonds?), and most frequently and perniciously of all, that owning gold is in the realm of "gun nuts", "conspiracy theorists" and "end-of-the-worlders". I have seen and heard these themes repeated countless times in the corporate-controlled media over the last 35 years.
Combine this with the profound ignorance of the general public on the subjects of monetary theory and history, courtesy of their government school miseducation, and is it any wonder that Joe Sixpack is skeptical of gold?
i've got to take the bait: as a gold believer, at certain times (typically the last half of inflationary and deflationary cycles, when equities do poorly), and an attentive reader of zero hedge and some similar websites, i have observed a fairly substantial subculture of "gun nuts, conspiracy theorists and end of the worlders" associated with zerohedge and gold ownership (more typically year in and year out rather than as an asset class to be used at times). a good deal of it, especially the survivalist stuff, seems overdrawn (didn't really come to that in the thirties, in the u.s. at least). however note that in other countries, not so much. and that essay by the argentinian architect (ferfal) gave me serious pause. as for the conspiracy theories, most of them seem, at least in part, likely. the elite truly do think we are fools.
Dear Akak. I am exceedingly slow and simple minded fellow, but i do learn even if at a glacial pace. So i like to see the simplicity of the conundrum.
I finally got it. We , the people are and have been at war with the banks for centuries. Its been a one sided war till now.
The key to winning is 2 fold. We must educate the public and avoid doing business with them.
Via utube and the internet, especially Zerohedge, that is happening.
I have never been much for borrowing anyway.
So as a people we must save, then buy or do lay away.
So whats needed is for some of you smart fellers to get together on a video thats even better than "Meltup".
Some time ago backburnernews did a utube vid that was hilarious and effective. It was called "Fred wakes the sheep" . A little xtra speed was added making the whole thing humorous. It worked well as it captured the attention.
If most fall in the category of sheep, then indeed the bulk of Zerohedge readers must be shepherds by default, who else is there?
Come on fellers i KNOW you can do more than trade and talk about it.
I ask you all, nay, i beg you PLEASE ACT!
This is a noble post. Persuasion is quite an art. When is comes to finding the key to unlock a person's world view that has been programmed into them since birth--it is quite a task. Not insurmountable--though you have to find the correct balance of emotion and logic. When people understand concepts like "fractal reserve" and "oligarchy" you have come a long way. The difficult part is ridding a mind of all the garbage that has been put in like "the dollar is backed by gold" and "republic" or "democracy". Most people simply do not care, the ones who do believe they live in a "republic" or "democracy" where the "dollar is backed by gold" or some other nonsense. If you read or post here, you are a rare example of someone who actually SOUGHT the truth. Most people do not instantly call BS when they are being fed information--and then seek to verify before they believe. They simply accept what the TV, newspaper or radio tells them with no verification. You have to remember that to awake the sheep--you have to un-indoctrinate them slowly by gradually sow seeds of doubt in the facade (why do the dems support the banks--why do the repubs spend so much etc etc), then begin with small information leads that they need to be encouraged to cross check (youtube:debt slave/money creation process). If you get this far, then you did good and awareness spreads. Then they may-MAY be ready to appreciate Zerohedge! Remember, you are competing against a vast media/political/commercial empire--so if it does not work, don't be surprised. Most important is patience patience patience.
The "public", God help us :
http://www.youtube.com/watch?v=Gk5aRIz17fk
The disconnect is the paper gold market and the physical gold market. Paper gold market will be more volatile. Easier to get in and out. Physical gold is a long term play, nobody is trading physical gold short or intermediate term.
Until paper gold gets exposed and blows up it will obviously effect gold prices and subject to price swings. I expect a decent pull back in which I'll add to my treasure chest.
nope, no gold bubble here. yet.
Gold up is about 400% and stocks are about flat for the past 10 years or so.
Over the past 12 months ( during the artificial recovery ) gold is mostly flat and many stocks including the bankrupt financial institutions are up 400%.
If there is a bubble its in the " rigged" general equity markets.
Funny how all the "mainstream" callers of a gold bubble today could not begin to see, and vociferously denied, the stock market bubbles of 1999 and 2007, and the real estate and housing bubble of several years ago as well.
"Why beholdest thou the mote that is in thy brother's eye, but considerest not the beam in thine own?"