This page has been archived and commenting is disabled.
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.
»
- advertisements -
'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'
thaw out a caveman and he would say 'no shit'
And exactly how many exchanges involving anything gold have you seen?
Visit any small SE Asian country and watch how real estate transactions, or most other large business transactions, are settled...in gold!
...to the person that asked why the gov of China is encouraging it's people to buy gold/silver...add this: Any government that encourages it's citizens to buy gold is much more trustworthy than a government that does the opposite.
I'll bolster that:
http://www.buyassociation.co.uk/property/text/vietnam/buyassociation/buying-a-property-in-vietnam.html
Specifically,
"...other major difference in the buying process in Vietnam is that all transactions are carried out in pure gold. While this seems like a quirky and antiquated system, it means that any buyer in Vietnam needs to keep a very close eye on the cost of metals for the best time to buy, as the fluctuating markets could make your property suddenly much more expensive."
FWIW, I don't find such practice quirky or antiquated.
Regards
A+.....been investing for 40+ years and all that experience is a handicap when looking at what is going on today....a newly arrived extraterrestrial would be better equipped at analyzing what is happening right now.
This is probably the most intelligent investing advise I have ever seen. Thank You!
Cramer???
+1 Bread Loaf & Wheelbarrow Load of FRN's
If the cost of raw materials is rising, so will prices on the end goods companies sell.
Except.... that isn't what is happening now. Commodity prices are rising but companies can't pass them on to the consumer because consumers can't pay the increases. How does your simplistic model account for margin compression?
Look closely grasshopper..., prices on the rise everywhere.
My friend works with one of, if not THE largest food wholesalers in the region (they supply food to many hundreds of large and smallish supermarkets). Price increases are already pegged and will begin Jan 4, 2011. Expect from 4% to 8% price increases in food. This is FACT and of course such increases will be felt by the consumer in short order.
Totally agree. At the moment there's a sale on stuff I like to eat, which ends 1/1. I make a trip to the store every day and clean off the shelf. Whoever has to stock that shit probably thinks there's some nut on the loose.
lol... We keep about 40 large containers of coffee on hand at all times...and that is just one item.
One bedroom is a food store room. Shelves to the ceiling. Many dry goods we vacuum pack after purchase.
The governor of Florida said many years ago to stock up for hurricane season. We took his advice a few steps beyond. We are not hoarding, simply well prepared for hurricane season. :)
There's more than one way to pass through price increases. Pay close attention to packaging sizes and you'll notice many have gotten smaller. This is called a weigh-out. Many companies, such as General Mills, have been doing it for the better part of two years now.
You can also shrink the product itself. I hate to admit it, but we get McDonald's for the kiddies about two or three times a month...on our last trip I noticed the chicken nuggets were significantly thinner (~30%) than in the past.
Paying the same for less is no different than paying more for the same.
feeding your children McDonalds is the equivalent of mildly poisoning them.
Sending them to public school is the equivalent of mildly retarding them.
"Sending them to public school is the equivalent of mildly retarding them."
Damn, that's good shit right there ;-)
Catholic school bitches!
Yeah, then they can be retarded, bigoted and smug at the same time!
+10,000 Happy Meals
"You can also shrink the product itself. I hate to admit it, but we get McDonald's for the kiddies about two or three times a month...on our last trip I noticed the chicken nuggets were significantly thinner (~30%) than in the past."
Lordy, you know I've tried but you just can't shrink an ounce of gold.
Regards
Ben
That is a very good point. Another way companies pass on cost increases without raising prices is to reduce quality. I was shopping for a new coffee maker recently, and every one of them, no matter what the price point, was a complete piece of shit quality-wise compared to the one I was replacing. The plastic and glass were thinner on the new ones and so on.
precisely, you have to watch the product quantities to know what's really happening when prices change, or don't change, and with some products you have to watch the quality of the product as well. I noticed recently that ketchup appears to be getting watered down more...and the same size bag of ice melt cost $1.10 more this year than last.
These may be trivial things for some, but for me they matter. When the quantity of cereal in the box goes down and the price goes up it is troubling, because prices are sticky and rarely come back down once they've gone up. Once the trend is set it is never undone, sort of like bad legislation, once passed it's hell getting it repealed.
Products that can be "reformulated" to reduce costs will be, and for others the prices will simply keep going up.
Man, everybody notices this, but for some reason they can't take the next step in deciphering what that means for them. I overhear it at work all the time: "my goodness, the portions at Olive Garden seem so much smaller nowadays...". You say inflation and they look at you sideways. I don't know why this is lost on people.
I do...it's because people are stupid.
on Wed, 12/29/2010 - 15:43
#836473
I do...it's because people are stupid.
Trav7777,
I Love You Man!
How about some music? My new, new fav... try her out... http://www.youtube.com/watch?v=iWOyfLBYtuU&feature=related
Let me know whatchya thunk bout it?
Motorcycle, as we used to say.
Stupidity can be a base line for starting any conversation with the average person at the mall. Ask any one of them what "inflation" is and you'll invariably get the "increase in the cost of the shit I buy" slant on the definition. Start with stupid and work your way up. The slope is steep.
+1
i guess you can lump me into that group for even wondering...lol
Exactly... Prices are going up. Not to mention, does anyone thing margins will turn negative before prices are increased? Margins can only be squeezed so far.. It's just a matter of time before prices on the shelf reflect speculation in commodities and USD devaluation.
I suspect this article being penned by Bernanke.