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The Gold Bubble
The way investing works is that most of your success will result from answering the most critical questions correctly. As a gold investor, the most important question for me to answer is whether or not gold is a bubble. The accurate response to this question will determine whether I have 100% gains, or 50% losses. As you can see, this is not a question I want to take lightly.
All bubbles are not created equal- some bubbles are of the more mundane type, such as the bubble in home shopping stocks in the 1980's, and some are of the truly epic kind. The bubbles with the most profound effects on society are centered around one of the major asset classes (stocks, real estate, bonds, commodities). Bubbles in real estate wipe out latent capital on a large scale. Bubbles in bonds wipe out capital accumulation, period. Bubbles in gold, as you will see, come at the end of significant shifts in society.
Soros has called gold "the ultimate bubble." In many ways, he is absolutely correct. Gold rises and falls in accordance with public confidence. If and when gold achieves its spike move, it will be because people have lost confidence on a global scale. When people panic, they don't do it in an orderly fashion.
Real Estate
Real estate is an asset that is misunderstood because people as a whole don't understand the nature of inflation and leverage. There are two critical points to understand about real estate: 1) it is probably the best inflation hedge of all the asset classes, and 2) its value is derived in large part by leverage. Since real estate is a plain old inflation hedge, its rise follows a pretty steady trajectory. Another way of looking at real estate is to say there needs to be an outside catalyst (leverage) to bring housing out of trend. It was only when people put no money down (unlimited leverage) on their homes that real estate in the U.S. really took off. Leverage is everything in real estate.
At the tail end of the real estate bubble, home values in the U.S. rose nearly 100% when historical precedent suggested a rise of 10%. For real estate, this is a huge move; for stocks, not so huge. Remember, each asset class is different.
Stocks
Stocks are inflation hedges to an extent since companies will react relatively quickly to real inflationary pressures in the economy. If the cost of raw materials is rising, so will prices on the end goods companies sell. Most companies have a pretty narrow range in which they can sell their products; any price just a little too high or a little too low can prove to be devastating.
This natural inflation-adjusting mechanism that companies have is counterracted by the nature of the stock market itself. While price and value will tend to converge over time, in the short run, there can be huge discrepencies. One of the reasons stocks are more volatile than real estate is that the average holding period for stocks is not measured in years; in fact, it is often measure in minutes. Humans will always behave irrationally and turn legitimate stock movements based on improving fundamentals into bubbles.
Gold
Gold is not the inflation hedge most people think it is. Here is a data point that will give you some perspective. In 1869, gold traded at $162; in 1969, it traded at $35. How gold hedged inflation in any way over this period of a century is lost on me. It is a fact that stocks and real estate more closely tracked the rate of inflation.
Price movements in gold resemble price movements in stocks. Intense bear markets are followed by spectacular bull markets, which culminate in a spike move fueled by human emotion. The same 100% moves in real estate that would signal a bubble of massive proportions are normal moves in gold. While the price movement of gold in absolute terms is important, the price movement of gold expressed in relation to time is even more important. A 100% rise in 5 years means nothing, although a 100% move in 2 months means everything. Everyone invested in gold should be more focused on time.
Each asset class moves to its own rhythm. To say that gold is a bubble merely because it has risen 6x is just plain ignorant. Gold has always shown that it is an asset that lies dormant for decades, only to experience the biggest moves in the shortest amount of time. There is no reason for me to believe that "this time is different." Gold has yet to do anything but trend upwards in a classic bull market formation. If and when the trajectory of the rise steepens, that will be the time to start thinking about getting out.
Expected Returns is a blog focused on gold investing.
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Real estate in a Monopoly game setting is great...real life real estate pretty much sucks as its a boat anchor around your neck with lots of costs going in to maintain it. Rental property just plain sucks I did it for years and with repair bills from tenants who dont give a crap no matter how well you screen them. Unless youre lucky enough to get in before a big RE bubble sets in, I hate real estate as an investment. May as well buy boats which also drain the owner to a nub.
Real estate can be simple, profit making, with no work and no overhead. Here's a long term example.
250 acres of remote woodland purchased in 1963 for $10,000. Taxes in '63 were $400, in 2010 $1500. Value in 2010 $500,000. It gets better. Total dollars from Harvesting trees every ten years -- $110,000. Not to forget special tax rates on forest land.
Come on... buying and holding pretty much anything from 1963 til present would have made you a lot of money... Fender guitars, houses, gold, stocks, whatever. My dad bought American Express' initial IPO for $3 a share when it first came out, he bought 100 shares... decades later his $300 investment became worth around $250,000. It's all about timing.
And Uncle Fed was his silent partner that took his cut of $250,000 minus $300, after your dad paid income tax on that capital he saved to be invested.
The problem today is capital accumulation - your silent partner is a heavy load to carry and accumulating 'more' is penalized at every stage. All these costs must be calculated versus alternative markets/investments/taxes/ROI - and the 'big money' says its easier overseas (asia), as evidenced by the big money moving there. But Asian governments have quickly learned and adopted the 'capital gains' taxes in some countries. Still, there are some that have not yet adopted this tax.
That depends on whether one is discussing nominal dollars, or REAL (i.e., inflation-adjusted) dollars. And one does not have to go back to 1963 for the difference to matter --- the dollar has lost roughly 40% of its value just during the previous "low-inflation" decade (not that the grossly manipulated and distorted BLS figures will show that, however).
I'm not saying or implying that you do not know the difference yourself, but it never ceases to amaze me how many people simply do not take inflation ---- I should really say "currency depreciation" --- into account in their financial and monetary arrangements. This is, of course, expressly by the design of the oligarchs and powers-that-be: what they can't directly lie about, they simply ignore.
Gold is freedom and security while the global scuffle over a new world reserve currency is being decided.
We didn't just give away a third of our nukes to bully the rest of the world to continue to use the dollar.
+10 Spot f'king on!
People think gold is an inflation hedge for theoretical reasons. There is a finite amount of gold, and inflation is driven by the paper/electronic money supply. Therefore, when money supply goes up, we get inflation but each new 'dollar' commands proportionally less gold (as well as other assets). Simple and correct, but not the whole story.
Money has three uses: as a medium of exchange, a unit of account, and as a preserver of wealth. Gold is the ultimate money for the third use: the holder or preserver value and wealth. As such it operates in the background as a barometer of true fiat money value. If gold is going up in a paper currency (medium of exchange), then it's the paper that's is loosing value, not gold going up. Central banks try to deflect attention away from gold, but in the back room it is a key to international trade balance. Its importance is what causes the Fed to try to keep its price low. To do this they 'mine' new gold like there's no tomorrow. How to they 'mine' gold you ask? Simple, they create futures contracts, forwards contracst and other derivatives and options. This makes it look like there's A LOT more gold out there than there really is. More gold = more supply = lower price ... simple. This is called 'paper gold', and (frighteningly) there is more paper gold than real gold.
All this is an important tool for suppressing the price of gold. Actually, it allows for the trade imbalances to be settled in gold, without having to use real gold! This has gotten so outrageous, that each ounce of gold held by LBMA bullion banks, is sold at the face value of $1400/oz, 45 times over. That is, the LBMA bank can buy a real ounce of gold for $1400, and sell it 45 times for a total of $63,000. That is the real price of gold in the world. Jim Rickards calls this very surreptitious scheme the 'shadow gold standard'.
The perfect example of this is the Saudis. They have demanded partial payment in gold for every barrel of oil they sell. Such is the modern world, that at 2/1000ths of an ounce of gold per barrel, and 100 billion barrels of cummulative production, that's 6200 tons of gold, or almost the same amount as the USA has. If the Saudis had taken delivery of all this the price would have skyrocketed, so they have been paid in paper gold. Perhaps, the light just went on ?
All this is part and parcel of the USA keeping the dollar as the world's reserve (AKA Oil) currency. It has been a giant juggling act and the balls are about to hit the floor. The people who set this up, and operate it everyday always knew this day would come. But there was nothing they could do except try to keep the illusion going one more day. In fact, this whole scheme, as fraudulent as it seems from some points of view, is what has funded the world's growth over the last 65 years. It can be looked at as a giant Marshall Plan for the whole world. It worked very well for a very long time. For better or worse, its time is now up.
The scheme is such that, when the dollar goes all the world's fiat currencies will go with it. SDRs aren't any better than the dollar reserve system. The Euro lasted 8 years before hitting the wall, how long do you think the SDRs will last? And NOBODY wants the Chinese in charge of the world's financial system! There is absolutely no alternative to going back to a gold based system. It won't be a classic gold standard, it will be a 21st century computerized gold backed system. It's nothing to fear, its the transition that will be painful.
That this precise thing has happened many times in the past, is why gold is what it is. It is the money of last resort, and has been for thousands of years. And always for the exact same reasons. Gold is gold, because people are people.
In today's dollars the world's real assets total about $250T, give or take. Backing that at 40% (a traditional ratio) with all the world's gold gives a price of ... $48,600/oz. Hmmm. Isn't that pretty close to the so-called 'real price' above? In fact, prices about this size can be computed in many very conservative and logical ways.
So we're not in a gold bubble, we're in a dollar-reserve-currency bubble. If the Fed does it's job, expect the cumulative inflation to be about 2000% (40% of the 45:1 price expansion). If they don't manage it well ... well, they don't make numbers big enough.
I'm sure any minute now, somebody will walk up to you and offer $50K for your ounce of shiny yellow stuff....
50,000 what, FED Fiatsco's? What can you trade those for?
Immediately after you read this, here's what you need to do:
- Grab one of your shiny yellow coins
- Head to the nearest convenience store
- Grab a pack of gum and place said gum on counter
- Hand the shiny yellow coin to the cashier
- Rush back home
- Immediately report here what happened
God speed, son....
Haha! that was funny. I do enjoy it when the paper bugs inadvertently discredit themselves by negating their 'gold is in a bubble' argument with the ol' self-refuting 'try to spend your gold at the MalWart' chestnut.
Hey Trimmed Hedge, repeat after me: "You can't eat barbaric relics"
To all who responded before me: <wink, wink, nudge, nudge>
lol at the moron who wouldnt take a one Oz gold coin for a packet of gum.
if such numpties do actually exist we will need their genes removed from the pool moving forwards anyway..
Go to Europe, where they have 1000 euro notes, and try to buy a pack of gum with one of those.
Just for fun, try using your 1000 Euro note in Beijing, then try the gold coin.
You'll have much more luck with the gold.
As I said gold is not really a currency (although it has been in the past).
In the current system it operates as a preserver of wealth, not a way to buy gum.
As for the old saw "You can't eat gold", I have two points:
You can't eat quarters, or dollar bills either.
You do NOT want to live in a post-appocaclyptic world where gold cannot buy food.
Quite a few of my local shops would accept gold or silver. Perhaps you need to move to a place where stores are owned and operated by those who have brains.
Trimmed Hedge,
You just nailed it, as to WHY there is NO BUBBLE.
The sheeple 95%+, have NO clue what it is, what its worth,and why they SHOULD own it, and could care less..until the SHTF.
Then they will get doctorates really fast.
Right. Gotta chew the gum before you can get a bubble.
Pass it along.
Yeah, you could do that. You could also take 14 hundred dollar bills and buy the same pack of gum, which would be equally stupid. What's your point?
The author seems quite determined to call gold action a bubble. My own personal criteria for bubbledom is when I'm up to my neck in something and seemingly trip over it at every step. That worked for housing, the dot coms, pet rocks and chia pets. I'm certainly not tripping over piles of gold that the neighbors are storing in the yard, the government isn't offering me a tax credit to buy bullion and support the teetering gold market, nor is there more than 1% of national portfolios even remotely linked to gold.
But don't take my measly opinion for it, please read Debunking Talk About a Gold Bubble, which does a much more detailed job of sane thinking. Link is: http://investorcentric.blogs.nuwireinvestor.com/2010/05/debunking-talk-a...
Even worse than the capital markets, the Great Gold information/propaganda War is the most confusing and intense for the 'minds' of the livestock.
Edit: with that said, I would loove to see an intermediate top put in here to shake out weak hands.
Weak hands got shaken out long ago IMHO.
WHY is it different this time.
We are dead dik broke, no way to ever pay, and the worst is just beginning, and before, we did not have ANY power on earth to come close to our status.
China, India,Russia, all Pac Rims, are buying PM's hand over fist.
This has never happened in history,at least ours.
None of it.
Hello DosZap,
I think you could be right on your first point, you are most definitely right about all subsequent points.
Gold is not in a bubble, govt debt/currency is in a bubble. Do not mistake the symptom for the disease. When the bubble is popped ( default) gold will fall back from is highs, but the price will not even fall back to present levels until all the people the govt fucked out of their savings are dead (at least two generations). Or they seize the gold, again.
gold, emergency, silver, currency, house, live.
That's my portfolio
Wow, it seems as though every commenter here missed the point of the article. As I read it, the author has clearly stated that gold is NOT in a bubble at this time, contrary to what the MSM propaganda would have people believe, and that its only when it starts to rise parabolically in a short period of time that it will be in bubble territory. In short, as I read it the author is arguing the case that gold is currently in a stable bull market.
Yes. All you need to do is read the last paragraph to see what he concludes.
The last sentence is a little optimisitic in terms of the monetary system:
"If and when the trajectory of the rise steepens, that will be the time to start thinking about getting out."
So what was the right point to sell your gold in the Weimar hyperinflation? When the trajectory of the rise steepened?
With gold you have to look at the fundamentals and fiat monetary policies. You have to also consider the history of price suppression and the fact that you will likely have a "discontinuity" when you shift from price suppression to price discovery. Silver is on way to providing a demonstration. The rise will steepen indeed and may never come back.
Its really kind of a manic/depressive article...he seems to say gold is not in a bubble tecnically, but is also really kind of worthless. The timeline pricepoint nonsense is what gets me.
I think thats just the way to recognize when gold starts to get 'overvalued' (or more accurately, since gold is money, when everything else goes on sale) - when the price starts shooting up 100/day (eg when everything else is getting massively discounted) might be a good time to start looking for ways to put your money to use by using it to buy other massively discounted assets. But we're not there yet - nothing else is massively discounted at the moment.
A good friend recently bought a small home in Central East Coast Florida for $48,000. That same home sold in 2005 for $169,000. I would say that is a massive discount...not to say that it will not go lower in price. Good bargains are beginning to show up, especially in residential real estate.
those residential bargains are starting to appear here and there SW, but I'd be prepared to take a hit or two yet, depending on the location/deal.
Arable land not too too far away from urban centres, on the other hand, can be picked up quite *cheaply in some places these days, if you were so inclined.
*Note: Much, much DD req'd. And an affable personality won't hurt your chances either. All IMHO, natch.
I love to hold gold coins too, but I'm afraid I will have to call a top here.
Putting a dollar price on gold or silver means nothing. You have to look at the relationship between the metal and another thing of value: land, food, commodities, oil, whatever. The dollar price is only the trade price to allow a piece of metal to be "sold" so the seller can use the fiat scrip to buy something else. If the two parties can agree to trade metal for the other things, the dollar price has no meaning.
Gold is an inflation hedge in the sense that it is a stable store of value over time; the run-up in prices shows that the value of fiat is actually falling out from under gold. Unless the dollar suddenly becomes incredibly valuable, gold will not experience a boom-bust event. It will continue to be valuable as the dollar becomes less valuable.
What was the dollar price of gold during the Medici reign in Florence? It doesn't matter, because gold was used as money and fiat didn't exist, except maybe as receipts from goldsmiths. You'd have to look at what gold would buy directly. Yes, there was an inflationary depression back then as the Spanish fleets brought shiploads of gold and silver back from the new world and dumped it on the markets, crushing the value of gold and silver. That was a one-time event, however, and is not possible today because there is no large-scale supply of either metal.
How *dare* you speak ill of gold... How DARE YOU!!
Shame on you... SHAME. ON. YOU!!!
Now if you'll excuse me, I must go gaze lovingly at all my gold... GOLD... GOOOOLLLLDDD!!!
He who owns the most troys, wins.
On a long enough time line everyone loses.
Heard it since $500.
Another one that misses the run and is a'hoppin a'wishin and a'prayin.
Its just another RE shill. Translation , a paid liar.
Let's assume that gold is NOT in a bubble that is about to pop and that one has cash he wants to invest in gold. The key question is this: Are we (the U.S., the West, the World) on the verge of economic, political, and social collapse? If so, it would seem that the ONLY place to be is in physical gold (and silver, I would argue). Paper anything, from dollars to euros to brokerage account statements suggesting you own gold or silver through a stock in a mining company or through an ETF would seem to me to be worthless (true of all stocks, including oil stocks). However, if we are not on the verge of such a catastrophic civilizational collapse, it would seem that the easy-in/easy-out flexibility of "paper gold and silver" such as mining stocks and gold and silver ETFs would seem to me to be the better investment. Physical PMs are awfully difficult to handle on a large scale. So, what do you think? TEOTWAWKI or not?
If a million dollars in gold will fit in a couple large coffee cans,what is your idea of "large scale"?
As with all things, just hedge it. Hold as much physical as is practical for you, put the rest in paper.
IF not beaten down by central banks, Gold already went to orbits by now. Gold bubble will reach peak when current fiats are in crisis mode. Of course, all bubbles will burst at the end, when new fiats are accepted by people, Gold will exit quietly. We are far away from the end of Gold cycle.
"If and when the trajectory of the rise steepens, that will be the time to start thinking about getting out."
Really? As the trajectory steepens my money is on STAYING IN.
The author of the article, like so many before him, is just a general preparing to fight the last war. He obviously thinks we are just going to see 1980 Part II (an exponential price rise and blowoff top), But I think he is grossly mistaken, as the world financial and monetary situation is radically dissimilar to what it was in 1980. Sorry buddy, but THIS TIME IT'S DIFFERENT!
(Yes, sometimes, it really IS different this time!)
The collapse of the world's reserve currency dictates a collapse across the world. It has started and is yet to end. Global awareness will come, in the end.
http://dailyreckoning.com/investing-in-gold-ahead-of-the-chinese/#ixzz19Wjli4sC
The Mogambo Guru (TMG)
TGFTGMG - Thank God For The Great Mogambo Guru
It was his articles that I read 4+ years ago that started me on PMs - Great common sense with terrific sardonics. Long Live TMG!
I am following my very simple strategy. ALL of my savings go directly into Gold and Silver and will till the end of 2012. At that point I will trade them for property. I have no reason for this timing but from my gut instincts. And they have served me well to date as I sold my properties at the peak (forced upon me by divorce) and decided that Greenspan was really GreenSpam (as in spamming money).
Being in high tech I saw the mobile iPhone market a mile away and invested heavily in myself by learning the iOS toolkit and that has kept me employed. However, being an old guy (50+) and a musician I have decided that the toll on my hands has been enough and now have started a very low tech business... minting silver and next copper coins! I will have my first available the first of the year.
Anyway that is my story and I am sticking to it.
Have a great, healthy and prosperous new year.
My friends above have caught what the author did not:
Gold's role is changing to become (like in the old days, long ago) the best wealth preservation investment in town.
The "Gold is money" meme all depends on how you define money... I believe FOFOA has this right:
fofoa.blogspot.com
Hi DoChenRB
I don't follow the FOFOA blogspot - but read a little after your link. It seems he/she/they have a low opinion of silver and gold is the only way to go.
I follow the maxim of silver is the poor mans gold and will be more widely held and used, and have 90% of my PMs in Silver. Since you follow FOFOA, I wonder what your thoughts are on Gold v. Silver.
My only downside on silver is transportability - the more you hold, the harder to transport - otherwise, I prefer it to gold.
Best wishes for prosperity in the new year.