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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.
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From Expected-Return:
I'll "get out" and "into" a farm and/or real estate, NOT PAPER
Oh, oh, I know! There is a difference between greenbacks and dollars! Also, $35 wasn't the real price on international markets in 1969, but rather the government fixed price that was causing gold to flow out of the treasury to foreign powers! Also, 1869 was right at the end of the civil war! Also, point picking is stupid, because you can pick any points to "prove" whatever you want to say! Also, gold preserves purchasing power! These, combined with a thousand other alsos, show that you didn't really think about this very much, but rather picked a convenient time scale as if to pretend that your thesis was sound.
"Soros has called gold "the ultimate bubble."
And at the same time purchased MASSIVE quanities because of the danger.
There are NO signs of a Gold Bubble, none.
This time, it is different.This time the entire planets countries are all tied/chained together, and as never before, are basically all sinking with the ship.
Only 2-3 countries are not in this death spiral.(but when the others go down, they will be caught in the Vortex.
Our Founders were brilliant,(but we failed to rein in the PTB) they told us to "AVOID ENTANGLEMENTS IN FOREIGN AFFAIRS".
What have the Bankstas done?, and the Globalists?, chained us all together, so we like slaves, will be pushed of the ship, and drown enmasse.
An "ultimate bubble", for me anyway, would be a bubble that will not and can not be burst. Otherwise, it would hardly be "ultimate".
Actually the planet earth is the ultimate bubble. At some point the earth will collapse. Quick! Abandon the earth! Before it's too late!
Bare minimum, I think the gold price can't collapse below today's prices for 100 years. Well unless there's a plague that wipes out half the population, and that still probably wouldn't do it.
will this plague of your wipe out the Bernak and the Goldman Sack?
Panic attack time for me.
Zero hedge types are already preparing for the worst.
Fiat burning for heat, not yet - but on the horizon.
Gold in that scenario makes a lot of sense.
Store of value.
Oil stocks, and lead also.
It's not always about returns although we all need them, but sometimes it is more about survival.
To choose two price points in time, with one of those two being artificially fixed, is not a valid example of how gold is not a historical inflation hedge.
"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."
For anyone to state that, overall, gold is NOT and has NOT been a good inflation hedge, would be to imply that the value of gold has been decreasing over time. That is, however, patently NOT the case. If the author here wants to cherry-pick highly selective and atypical dates and prices to make his very weak case, then he just puts himself into the same pathetic realm of anti-gold blowhards as Jon Nadler and Karl Denninger.
In 1869 whatever was the $ in $162, they weren't Federal Reserve Notes. Comparing apples with oranges. The Fed did have gold at one point apparently, the capital of the original shareholders.
I suppose it's good that ZeroHedge posts a 'diverse' range of views but alot of this gold stuff is rubbish.
I refuse to comment on how utterly stupid this article is...
+1. and I refuse to reply to your refusal to comment.
Both gold and silver are fairly finite resources; production will not be able to meet demand as the fiat debasement continues on an incremental basis. Gold will be a bubble when all currencies are stable; i.e when the world's debt problems have been solved.
Don't hold your breath.
Gold will be a bubble when all currencies are stable; i.e when the world's debt problems have been solved.
Unless currencies are somehow tied to settlement securities, debt will never be solved. 100 claims on every ounce at the LBMA leaves a settlement quandry.
Exactly...if you use the $ as the yard stick, gold looks to be bubbly...if you use crude oil, then you get a different picture.
Personally, my preference is silver miners...just bought more of one miner today.
"in 1869, gold traded at $162"
The Civil War, hello. It took 15 years for the gold prices to level out again. (1861-1876). That's when the U.S. dollar was up and coming. The Civil War aint nothing compared to the global fiat collapse, american empire collapse, and peak oil energy crisis that's coming.
Yes, the author was REALLY desperate, and grasping at straws, to even bring up the temporary and artificial price of gold during the US Civil War. Nobody outside of the United States experienced any price increase in gold at that time --- that price was not a reflection in the change in value of gold, but the rapid depreciation in the newly fiat US DOLLAR!
The author of this article is an ignorant boob.
Exactly right...and he did not mention that Lincoln issued 'greenbacks' (unbacked fiat currency) during the Civil War. Had the North lost the Civil War the greenbacks issued by Lincoln would have been as worthless as Confederate money and bonds.
Those holding gold, whether in the North or South, avoided the risk of holding the 'wrong currency'.
I'd be willing to wager that even a confederate dollar would have bought you something decent immediately following the civil war; a silver one, that is...
This author, like most Americans, is demonstrating his profound historical ignorance, or at least a gross bias towards the present and the recent past by making this absurd statement.
Actually, just when has gold "always" shown that it "lies dormant for decades"? Exactly twice in ALL of human history: 1) During the period of 1934-1971, when its price was fixed by the decree of the US government, and 2) during the period of the early 1980s to 2001, with strong evidence that THIS "dormant" period was induced if not solely the result of central bank and Western government surreptitious price suppression.
In fact, for thousands of years, the value of gold was fairly stable, and it was neither in a "bear" or "bull" market in any real sense, as it was MONEY. To extrapolate and make blanket statements regarding gold given a very limited period during which governments and their central banks waged war, both open and covert, against gold is the height of blinkered and fundamentally meaningless analysis.
Yes. Oversimplistic analysis annoys me more than anything else. It instills confidence in all the ignorant people out there, leading them to make continuously bad decisions negatively effecting everyone.
How many times in history has the paper of a nation state become worthless? The dollar is headed in that direction. Hussein wants to redistribute wealth like Mugabe which will only speed up the house of cards falling. The Ben Bernank wants to make sure the banksters get theirs. Gold may be in a bubble but when paper becomes worthless - gold will be worth something.
Totaly blinkered.
At least you didn't bring up "gold doesn't have any yield" BS that CNBC repeats every hour. If "yield" is all that matters, then a house shouldn't be worth more than 80-100x monthly rent (no matter where it is), and of course monthly rent is based on a market that requires people have income.
Gold doesn't require insurance, property taxes, utilities, and major repairs. It doesn't go into negative cash flow, unlike an empty rental property.
If you baseline prices from 100 years ago to today based on the gold price, you'll see that in the long run, stocks beat inflation by 2.5% a year. Not great, but that included several decades of negative returns. Real estate, on the other hand, beat inflation by .5% on average, compounded. For something with low liquidity and a 6% commission to sell, not really a good "investment".
I hate to rain on this parade but the gold price in 1869 was about $24/oz. This was also at a time when huge quantities of gold were pouring out of mines in California and Nevada.
Ref: http://upload.wikimedia.org/wikipedia/commons/b/be/Gold_Price_in_Dollar_...
i completely agree. this is exactly what i was going to say.
http://en.wikipedia.org/wiki/California_Gold_Rush
...nevermind the productivity gains over these same years as it relates to gold mining, which also serves to bring down the price (like computers or any other hard asset).
Heehee. To expand on this point....If gold is indeed so worthless....why the Gold Rush at all?
Or central banks holding it.
Yes - and you have to actually correct for inflation to get a consistent measure. What was $20 worth back then in terms of purchasing power? Not to mention that labor was cheaper, ore was easier to get to, etc. Regarding the price in the 30s - the price was fixed.
If you're going to make comparisons, you have to compare apples to apples.
Additionally, Gold "behaves like a stock" only to the extent that stocks are currently being manipulated up and PMs are being manipulated down.
I call bullshit on this whole premise.
Yup. Calling something with a fixed price a historical trade just made the author look foolish.
And in 1869 OR 1969, anyone suggesting printing billions of dollars in order to inflate stock indexes and buy our own bonds would have been taken out back and executed.
Wrong! They would have been committed and placed in a straght jacket -- after being laughed at. On the other hand the Boyz are probably kicking themselves for not thinking of this years ago.
Section 19 of the Coinage Act of 1792 - "And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of the fine gold or fine silver therein contained, or shall be of less weight or value than the same out to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offenses, shall be deemed guilty of felony, and shall suffer death."
Ahhh, the good 'ole days!
quick - send Blythe back in time to save those cretins from their blindness!!!!
I dont 'trade' gold, its definitely a long term hedge against an imploding fiat currency, not a hedge against 'inflation'. At least thats how I look at it.
I see your timelines of what gold was 'worth' in fiat currency at different timelines but Its irrelevant discussing what gold may or may not be compared to a fiat currency which will soon be worth nothing. In all past instances, you didnt have maniacs printing billions for a very short term cushion of 1 day in the markets, the currency was stable and there was no mad monetizing actions.
Back in your '69 example, it would hae been considered insane in those times to print even a few billion to buy our own debt. All the paradigms are so inside out and shifted history can not even be applied to anything today.
This author misses the same thing almost all people writing on gold miss in my mind. Let me throw this idea to you, my friends here at ZH. In my thinking gold is actually a universal reserve currency that anyone can get there hands on. I've read about Zimbabwe and Brazil where you can use American dollars to buy stuff. In America we don't have other useful currencies floating around. But we do have lots and lots and lots of silver, gold and PM's in general. Look online. You can buy most anything you want in different sizes and quantities. Plus, gold is translatable into every other language on earth. I can trade with a guy in China or Arabia or Uganda with an ounce of gold. I may not speak their language but I pull a gold coin out and we are talking and trading. I can also never get cheated with this currency because it always has worth everywhere. The payment is in the coin (or bullion) itself.
So, you may buy gold to trade, profit or make some sort of income off of it. Good luck to you, really! You are in a different situation and you have to pay more attention to the daily and quarterly ups and downs. However, I buy PM's because they give me my own reserve currency and an insurance policy against the potential stupidity of my government and the Fed. Now, what other commodity or product can do that?!? This is what this author and virtually all others miss.
Sound reasoning apart from one flaw. Change the phrase to read "potential stupidity of ..." to "blatant corruption of ..... my government and Fed. Now, which other entities can do that (fuck our economy and currency)?" That is what the author and virtually all others miss!
Well, said, but implied in what I wrote. Power always leads to corruption and we have limited defenses against it. PM's are one of them in a fiat currency world. That's why FDR tried to confiscate them.
Yep, as I see it, metals are still the best way to protest the degradation of our (not so) beloved FRNs. Screw getting rich, just let me keep what I've worked for.
And there's the key page the author is off. Epic Fail insurance. Period.
Agreed. I for the life of me can't figure out why Gold matters but it does. It is not a hedge, it is a substitute for fiat currency for what ever reason. I guess there has to be some medium of exchange that can't be instantly created out of thin air in order to keep us off the barter system
You answered your own question. Gold matters because it's hard to obtain, doesn't degrade and cannot be created. It's the perfect store of wealth and medium of exchange.
Paper is easy to obtain, easy to create, easy to destroy. It only works as a store of wealth when people believe.
That belief in paper is seeing the very first real cracks in the foundation. Those cracks can cause a slow or a very fast collapse. Because people are so stupid, I'm betting on slow but preparing for fast.
If you read a detailed analysis of the Weimar Germany monetary hyper inflation you will find that few if any people complained about the extrodinary inflation...people simply demanded more and more inflated marks...and the government complied by printing more and more. Few if any average Germans took the time to analyze what was happening to their currency...they were too busy working and running to stores to unload their earnings before they became even more worthless.
Most people do not have a clue about hyper inflation. It is a totally different beast than the low digit inflation that most central banks target.
When hyper inflation in marks began other Europeans flocked to Germany to take advantage of the situation ie; cheap ski holidays, vacations, etc. Soon the German lodges, resorts/hotels, restaurants were raising prices daily and they were no longer a bargain to foreigners...or Germans.
I suspect the same would happen here or anywhere that hyper inflation struck. Human nature is the one thing that is stable, not currencies. People will simply demand 'more currency', and they will get it.
Those holding physical PMs will be shielded from most of the madness. When a new currency is issued and after a time it is deemed stable then some PMs can be converted to that currency...if need be.
I began buying physical bullion shortly after Nixon closed the gold window...even prior to that I was buying numismatic gold. I never doubted that our totally fiat currency would collapse...I simply did not know when. I admit that it has taken longer than I anticipated.
Most people do not have a clue about hyper inflation
To be honest, I don't think you do either.
Can you tell me the biggest difference between United States debt and Weimer Republic debt, and how hyperinflation factors in that difference? At the same time, perhaps you could explain why England and Japan have been able to print away their budget deficits, but Weimar Germany and Zimbabwe couldn't. Why did the Weimar mark collapse but the Yen and Pound haven't, even though the percentage of the budget that was printed is commensurate?
When hyper inflation in marks began other Europeans flocked to Germany to take advantage of the situation ie; cheap ski holidays, vacations, etc. Soon the German lodges, resorts/hotels, restaurants were raising prices daily and they were no longer a bargain to foreigners...or Germans........I suspect the same would happen here or anywhere that hyper inflation struck.
Did you book a holiday in Zimbabwe?
And just who is claiming (aside, apparently, from you) that Japan and the UK have "printed away" their deficits? Just what is that supposed to mean, "printed away", anyway? Don't you really mean "printed away so far"?
When I say print away, I do not mean the debt vanishes.
I simply mean that Japan, England and the US have been able to handle budget deficits through the printing press/QE, whereas Weimar Germany lost control of their currency when they attempted the same. In fact, the deficits of Weimar were no more alarming than what we see today in our own economies. So why are England, Japan and the US able to enact quantitative easing/printing money and our currencies are - for the most part - unchanged, while the Weimar mark went into the ditch?
So many people like to throw around apocalyptic words like hyperinflation, without having the slightest clue of what truly happened in Weimar or Zimbabwe and how those scenarios are vastly different than the US scenario.
Just because the US enacts quantitative easing programs that tally into the trillions, does not mean that hyperinflation is in the cards. If hyperinflation was solely a function of currency supply verses currency demand, we would have already been toast.
There must be something else....
That's because hyperinflation is not solely a function of currency supply verses currency demand. This supposes a quantity theory of money, which is erroneous. The real determinant is the quality or 'moneyness' of the securities which the issuing bank holds to match its liability.
Thus far the UST is still 'money good' as are JGB's & British Gilts.
I'll make this real quick, since this thread is now buried deep in the ZH memory books and I doubt no one will read it.
1. Hyperinflation is a FX phenomenon, meaning that it is rooted in the currency markets and is sparked by speculators. It is NOT rooted at the printing press. As I said before, if it was, we'd already be toast.
2. The biggest difference between Zimbabwe or Weimar and the United States is that our debt is denominated in our own currency - theirs wasn't. We can issue bonds and we can buy our own bonds to fund our operations and pay our debts that are denominated in US dollars, not the Yuan or Yen or whatever. The US does not need to enter the FX market to pay our debts. Conversely, the debt of Zimbabwe and Weimar were denominated in foreign currencies, forcing their debt to be hinged to the international currency markets. When this happens, currency speculators can drive the currency into the ditch, forcing those countries to print endless amounts of currency just to pay the increase in interest that profit-driven speculators call for.
Everyone thinks hyperinflation is a printing press problem, and sure, it is, but only subsequently and peripherally. It is a problem rooted in FX markets and having debt denominated in foreign currencies, thereby subjecting a country (unlike us) to the whims of speculators.
There are other issues, as well, but since no one is likely reading this, I'll just go rub oatmeal and butter all over myself, as I do every morning.
RNR
The printing press did cause the Weimar hyperinflation. There is one infallible signal that will flag the US has it too.
When the US suddenly finds itself with a trade surplus, the media will be jumping up and down proclaiming what a miracle the US economy is, the greatest, the most robust etc - but on that day the US economy is doomed.
The Fed know this and have already initiated capital controls to try and limit dollar inflows. Whether they succeed is another matter.
I read it; now that you are all battered-up turn the oven to 'broil' and hop in.