Guest Post: Gold Bubble? What Bubble?

Tyler Durden's picture

Submitted by Toby Connor of Gold Scents

We continue to hear pundits describe
gold as a bubble. Certainly it will turn into a bubble before this is
all over but we are hardly in the bubble stage yet. In order for a
bubble to form you need the public to come into an asset class. The
public is pretty dim and it can take 15-20 years before they "catch
on". It took 18 before they noticed the tech bubble.

Once they do start to "get it" we will
have about a year to a year and a half as gold enters the parabolic
stage before the bubble pops. See the Nasdaq chart below from late 98
to March of 2000.

At gold's top, half of your neighbors will be buying gold (not selling like they are doing now).

At the top there will be lines outside the the local coin dealer waiting for the next shipment of gold to come in.

At the top 7 of 10 billboards you see driving down the highway will have something to do with precious metals.

At the top the guy standing next to you
in the grocery store will tell you how many thousands of dollars he
made last month off his gold coins.

At the top everyone will have become
convinced the dollar is toilet paper and will only continue to decline
until it has become worthless.

At the top the population will believe
that we have to go back on a gold standard. By the way, a gold standard
never stopped any country from debasing its currency. In ancient Rome
they clipped some of the gold out of the coins. Roosevelt confiscated
and arbitrarily revalued gold in the 30's. A gold standard will not
prevent a government from trying to get something for nothing by
debasing the currency.

At the top stocks will be universally
hated and gold universally loved. In reality, stocks will at that time,
represent true value. Much more so than a shiny metal with virtually no
industrial uses.

At the top smart money will eventually
come to their senses and realize that true value (profitable companies
making the necessities for life on Earth) are being given away for
pennies on the dollar to purchase a shiny metal that really has no
intrinsic value.

Here is a chart of the Nasdaq followed by a chart of gold. You tell me, does gold look like a bubble yet?

Of course not!

I
think we might be getting close to the Nasdaq 1998 level, but gold is
hardly in the runaway parabolic stage where it rallies over 100% in a
year. Not to mention that none of the other signs I noted above are
even remotely present yet.

But
no one needs to worry about a bubble just yet. We need to have at least
one more serious correction similar to what happened in `08 or in tech
stocks in 1998 to wash out bullish sentiment before we can start the
final parabolic run into a true bubble top.

If
I had to guess I would say that will occur during the next liquidation
event which should be due in mid to late 2012 as the stock market
collapses down into the third leg of the secular bear market.


That
should mark the next four year cycle low and possibly the nominal
bottom for the secular bear market in stocks that began in March of
2000. I expect the selling pressure at that climactic event will also
drag gold down into the correction that should separate the second
phase (what gold has been in since early '06) from the third and final
bubble stage. Gold will quickly recover, like it did from the last
selling climax, and when it does this is when we will see the public
begin to panic into gold.

Then and only then can we start talking about a bubble.

At
the moment I think we are about to enter the second leg of an ongoing
C-wave advance that began in September of last year. I'm expecting this
leg to take gold to the $1400-$1500 level before experiencing a major
D-wave correction.

I'll
be monitoring the advance on a daily basis to keep subscribers
appraised of where gold is in its intermediate cycle. When I think we
are getting close to the top of the C-wave I'll warn subscribers to
take profits and exit the precious metals market so as not to get
caught in a D-wave correction.

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thesapein's picture

and that's not even assuming a squeeze on what is papered over...

DeeDeeTwo's picture

Well, the guy conveniently ignores the fact that Fox and ESPN have been running slick "buy gold" horror show commercials for AT LEAST one year. These are classic Last Greatest Mook Fleecers not seen since the last Gold Bubble in 1979, baby.

What gold bugs are in complete denial about... is that the value of gold depends entirely on the same mass psychology as fiat money = Faith. $$$ Rhondium >> $$$ Gold, but no one is hoarding Rhondium.

In modern times fiat money has never been "replaced" by gold... but rather the STRONGEST currency and gold co-exist. In the biggest crisis of the 20th century = the ruins of post WW II Europe... gold was exchanged for USD. That kept millions of refugees alive. That's how my family survived. But gold was not used directly as a "currency".

 

thesapein's picture

You really believe that the value of a natural resource is based on faith? The value of gold is no different than the value of food, wood, oil, iron, etc. based on how useful the resources are for the crafty critters called humans who sometimes forget that symbols for these things cannot replace the actual things.

You're just confused about what is real and what is symbolic, kind of like a gamer who forgets the importance of real food.

stev3e's picture

You really believe gold is a commodity of the same nature as food, wood, oil and iron?

That takes some faith.

chumbawamba's picture

In your haste to debunk gold, and in this author's haste to write another stupid "gold is not in a bubble" article in which he repeats the cannard, "Gold is not an industrial metal", you both fail to bring yourselves into the 20th century, let alone the 21st.

I ask again: how would you be leaving a comment on a server over high-speed data networks from your desktop computer/laptop/smartphone if gold is not an industrial metal?  If you took the milligrams of gold that are in your electronic devices out they would like grind to a halt within minutes/hours/days.

Notwithstanding the fact that this article is stupid anyway because everything it describes as for when gold will be "in a bubble" will never come about.  By the time the economy collapses and the dollar hyperinflates, there will be no gold available.  So those lines stretching around the corner at the gold coin shop will not materialize.  Instead you'll see bread and soup lines stretching around the corner (and far off into the distance).

I am Chumbawamba.

Oracle of Kypseli's picture

DD2,

Yes! Gold does go up because of hype also. However, it follows the depreciation of fiat currency. If the dollar looses half its value, gold will normally double. However because of the hype and fear, gold will overshoot. Isn't that good for those who do hold it?

Gold is also a medium of exchange into other commodities or even paper money for the immediate needs. Don't nock it. Buy some, if not a lot. Insurance maybe?

Gold preserves wealth it does not make you wealthy. No one will take rhodium or even unobtainium even if it was the most valuable metal on earth. Gold is what you use when society breaks down or about to break down and people loose faith in paper currency.

And yes my family has lived through two devaluations to zero in Europe. Gold saved them.

Cheers mate

 

perchprism's picture

"Rhondium >> $$$ Gold, but no one is hoarding Rhondium."

 

No one is hoarding "Rhondium" because there's no such thing.

http://www.google.com/search?sourceid=navclient&ie=UTF-8&rlz=1T4GWYE_enUS255US256&q=rhondium

 

 

Geoff-UK's picture

DeeDeeToo:  Faith?  Hmm...well, I DO have faith that gold has scarcity. 

Arius's picture

this is a stupid question perhaps, but cant China produce gold on the cheap?  like everything else....you know what i mean? since the labor is so cheap over there and all that....thanks!

Nihilarian's picture

How much labor does it take to print trillions of dollar bills?

goldfreak's picture

we can have our 100 dollar bills printed in China and that would lower our costs too, right? Might not this lead to a collapse of the dollar?

 

brilliant question Arius.

 

it costs 500-600 to mine one ounce of gold on average

thesapein's picture

Oh, that's an excellent question, I think.

We need a new measure maybe. How do we value the costs of mining gold? In terms of gold? Wow, maybe this question is why nothing can be considered pure money because pure money has no rate unto itself.

What is the true cost of producing gold? Anyone?

 

ColonelCooper's picture

Well, apparently, in Afghanistan, gold is lying all over the ground, and can be obtained very cheaply.  The answer to the question is how much gold lies in the ground in China?  I don't have the first freakin' clue.  If they have a ton of it, they'll mine it out with slave labor.

My instinct (total effing guess) is that China has little at best known or easily accessible reserves.  If they did, they would be using slave labor to get it, and not taking delivery of tungsten, and building office buildings nobody can afford to move into.

jeff montanye's picture

in 2007 china surpassed south africa as the country that mined the most gold.  south africa had held the "title" since 1905.  china produced 276 metric tons of gold in 2007.  the top producers after south africa are australia, the u.s., peru, russia and canada.  marginal cost varies with the mine and generally ranges from $200 to $850.

thesapein's picture

That fits what I've been reading and hearing about China now being the largest producer of gold. What I'm surprised to hear is that their mining cost are around the same as ours, not because of labor but just new methods of extraction. So even all of these brand new mines are using the same old methods? I guess the mining industry has been hindered by the suppression of metal prices, maybe?

Boxed Merlot's picture

What I find to be fascinating about the "cost" of gold "production" is the sovereign authority governing its extraction tends charge exactly the amount equal for it's continuing to operate. Hence, if infrastructure, workforce and investment capital are all present, then egregious regulations will be enforced to create a heavier financial burden for the extractor. If on the other hand, labor needs to be imported and your mine location is in a remote jungle plateau, geopolitical sovereign authorities are generally easier to satisfy. This is nothing more than to say gold is the standard.  

 

Here’s another observation. As the earth’s population increases, additional money is needed to allow an orderly transfer of goods and services.  We all suffer, by the way, when some greedy, selfish human buries the hoard he/she accumulated and never trusted anyone enough to say where before death, causing it to be taken out of circulation.  It’s kind of like when a wise person dies and never gets an opportunity to teach the lessons learned.   

 

akak's picture

"We all suffer, by the way, when some greedy, selfish human buries the hoard he/she accumulated and never trusted anyone enough to say where before death, causing it to be taken out of circulation."

If it were not for the consistently rapacious nature of governments to expropriate the wealth of their citizens through onerous taxation, confiscation, currency debasement and self-destructive warfare, there would never be any need for anyone to even consider burying their wealth in the ground in the first place.  You are attacking the symptom here, not the disease.

Boxed Merlot's picture

I will agree.  Sometimes symptomatic relief is all one can hope for. But you are correct, nonetheless. The cancer is lack of trust at the core. I only point it out on the surface, you correctly apply it to the macro-view.

tmosley's picture

Labor in China is not cheap.  On average, it is about $5000 a year.  Labor in Africa is much cheaper, and you don't see any "cheap" gold coming out of there.

Mining gold is a capital intensive process.  The Chinese have adopted capital friendly policies.  Their gold supplies are highly limited, however, and their hunger for gold FAR exceeds their in-ground supply (by some 200 tons per year), with thier in ground supply set to start seriously drying up over the next five to ten years.

Anton LaVey's picture

They are already "producing Gold on the cheap", as you say.

China is one of the biggest producer of Gold in the world. And the Chinese government buys close to 100% of domestic production, for a price that is, I am sure, way below the prices quoted by the LBMA and the COMEX.

The rest of the chinese Gold production is, as far as I know, sold to chinese citizens, with perhaps a very small fraction sold on the International markets. All of these operations use the official/international prices.

The chinese gov also buys Gold on international markets, but always on the "dips", and always in small quantities, so that the price of Gold does not go up too much.

Careless Whisper's picture

I'll be monitoring the advance on a daily basis to keep subscribers appraised

subscribers? to this trash? are you kidding me?


Renfield's picture

Well, I don't think he understands why many (most?) of us (now, not 'at the top') are buying gold and have for lo these last several years.

It's not about 'flipping' it and 'getting out at the top' with mucho fiat in hand - at least, not for me. It's about losing all confidence in the fiat system, altogether. Being convinced that our current currency system is on its last legs, and that the next one won't be pure fiat. It's about having some WEALTH that isn't 'confidence' based with the 'full faith and credit' of any moron government, and WEALTH that doesn't put you & your children into debt for life in the attempt of gaining it (eg, mortgage). REAL not promised wealth.

However - I think he's right about bubbles, bubble tops, and gold's possible trajectory in 'bubble' terms.

But I think he doesn't see (or at least doesn't mention in this article) that there is a larger perspective in play here.

Me, I'll treat gold like it's at the beginning of a bubble, when and only when I can have some form of REAL evidence that this fiat currency has any longevity to it; that there is any benefit for me, a peasant, in holding fiat at all; or that this fiat regime will at all outlast the top of the gold bubble that he outlines. JMHO

zen0's picture

So less than 1% of the people of the world have physical gold, but the global powers that be will be unable to provide the 99% who have no gold a medium of exchange to conduct daily transactions.

 

That's  plausible.

tmosley's picture

Gold will be readily available when it is properly priced and not a second before.

AVP's picture

Short and to the point, nice!

stev3e's picture

Good question:

So less than 1% of the people of the world have physical gold, but the global powers that be will be unable to provide the 99% who have no gold a medium of exchange to conduct daily transactions?

Poor answer:

Gold will be readily available when it is properly priced and not a second before.

drwells's picture

I'm afraid I don't see this ending anywhere nearly as neatly as the Nasdaq bubble, or any most other bubble this country has had.

http://www.goldensextant.com/SavingtheSystem.html#anchor125744

"With respect to the form the denouement will take, much has been written within the gold community on the subject of whether we face hyperinflation or deflationary depression as the prelude to monetary collapse. Both sides of the debate appear to accept the premise that whatever may transpire will bear a linear relationship to what now exists. The disagreement centers on the direction the line will go. But today's markets are fully linked by derivatives and technology, and they are patrolled by wolf packs of large, leveraged speculators not noted for their patient outlook. So it seems likely that the terminal monetary crisis will unfold on virtually an instantaneous and discontinuous basis, once the fog of statistical deceit and false market cues begins to lift and a clear trend either way becomes evident. We are not likely to enjoy the luxury of observing either a deflation or an inflation unfold in the fullness of time, but rather, just as Mises foretold, a final and total catastrophe of our fiat monetary system."

IOW, you're not going to sell because you see the Morts lined up outside the gold shop. More likely you're going to be trying to get across the border (if you haven't already) because Morts are out marching in the streets shooting and looting.

A while back someone on here said it was idiotic to imagine a kind of half-collapse that made goldbugs rich and yet didn't end in blood. I didn't want to believe it at first, but it's making more and more sense given that the fools in charge of this ship have it aimed straight at the iceberg and not only fail to see the need to change course, but are shoveling in coal just as fast as they can.

 

Boxed Merlot's picture

I’ve been thinking some about another poster’s comments regarding simultaneous inflationary and deflationary signals that actually make historical sense.  As was recently mentioned, luxuries and those goods and services that attend them, have and will experience deflationary pressure while those goods and services needed for day to day substantive life will be placed in a category of higher value, therefore, higher price.

 

As for a philosophy of buying, it makes sense to me that purchasing these particular goods, services and/or an ownership position in an entity purveying a substantive life affording experience will be mammon well spent/invested.

 

Disclosure: Boxed Merlot      

 

stev3e's picture

If you really believe what you're saying - why own gold?  In the scenario you describe, it would seem best to buy productive farm land and invest time making solid relationships with your surrounding land owning neighbors.  Otherwise, you'll eventually find yourself dead.

Boxed Merlot's picture

Why own gold? How about owning deeded mineral rights with proven reserves in a (more or less) stable, infrastructured and up until very recently pretty law abiding nation? No taxes to be paid on the property and records that confirm the deposit's existance, the downside is?

akak's picture

Your suggestion is not a moot one by any means, but as for other forms of real estate, there are many, many variables that can affect the value of such a holding ---- taxes, regulations, funding for development, accessibility, etc., as well as future changes in all those variables to consider as well.  Such an investment could be a good one, but is even less liquid than the average lot or home, and is simply no substitute for the simplicity and high liquidity of gold (or silver, or platinum).

ColonelCooper's picture

+1. 

Another ZH'er once posted,  "You don't sell gold.  You spend it."

Bubble??  Maybe.  I don't buy it to get rich in the first place anyway.

DoChenRollingBearing's picture

Renfield, drwells, colonel,

My gold will go to my kid (or grandkid(s) someday God willing) or else exported out of here if things start looking REAL BAD.  I'm NOT selling it, unless under dire situations.

The big question, once I have given away my gold away is:

Do I stay and fight, or do I leave for Peru?

...

Yes, this week I will buy a bit more, just like I have for decades...

Renfield's picture

Me too, DoChen

Our gold is our 'inheritance', 'rainy day fund', 'capital', you get the idea.

My husband works hard at his job for fiat to pay bills, put bread on the table. He provides for us...my little FX work is for our SAVINGS, and that's in gold. If we lose our little trading account and that small amount of fiat, then I will work a job (for much less fiat) again, so we can ditch that fiat right away for our REAL savings. This is the bit that so many people around me don't seem to understand. It's for the LONG TERM. It has precious little to do with 'bubble' and it's not a 'flip' to some greater fool. :-)

Slowly, as our governments flush more and more fiat bailing out worthless parasites and ignoring large-scale fraud, I see friends and family beginning to understand. This currency system is not set up to benefit them; it's basically our insolvent governments promising that we will get (less) goods & services for these bits of paper. It's all about confidence in the government. I have none, and I see those who are much more mainstream than I starting to figure it out.

It's funny being on the ground, in the working underclass, rather than up in the economist/analysis ivory tower. In some ways, being so sheltered, they are the last to get the news. We'll see how long government fiat/promises last - I bet gold lasts longer. I'll also bet we see some thriving black markets, not just for gold, before much longer.

PS: Respect to you, buying gold for 'decades'. Congrats. We've only been buying since early 2007. Pre-2006 I was just a happy little sheep. :-)

DoChenRollingBearing's picture

+ $1250 Renfield.

Just keep buying, even if only a little bit at a time, and you will be better off than urban/suburban 99% when TSHTF.

Might want to get a gun or two w/ 500 rounds each while you still can, you know just sayin'...

And if TS does not HTF, you lose little.

Stay nimble, it sounds to me like your family will be OK under almost any scenario.

cossack55's picture

Actually, DCRB, I would recommend at least 1,000 rds per long gun and 500 per handgun as bare minimums.  If it gets to that point, and even before if new fascist laws are passed, ammo will have ever increasing values and a good trade partner for gold.  Yes, nimbleness is next to g*dliness and situational awareness is ZH.

Renfield's picture

DoChen and Cossack

Thank you for the gun advice! Alas, I live in Australia, land of bloated property prices (thanx China), good people, and few guns. We used to be gun-owners...

The likeliest one I could get would be a shotgun or rife, like Canadians. My husband used to shoot roos, but I've never fired a weapon in my life.

We are going to buy a shotgun when we move to the country...hopefully in a year or two. I am often in awe of the gun discussions here on Zero Hedge. I DO want to get a shotgun, but I think I might have to rely on him to fire it...until I get in a year or two good practice in the back yard with some tins anyway.

Let's just say I'm praying for the Great Unwind to happen a bit slower here (so far so good) and thanking the Gods of China. :-)

Geoff-UK's picture

I wouldn't recommend a shotgun.  No ability to reach out farther than 20 yards, and perhaps most importantly, the ammunition takes up way more space than rifles or pistols.  Pistols have the benefit of you being armed without people knowing it.  But you don't want to be without capacity for distance shooting (if you move to country) and ability to hit several targets quickly (semi rifle)...so...

The best thing to buy would be a semi-automatic rifle akin to an M14 sold by Springfield Armory.  Unfortunately, that'd be a pretty illegal purchase Down Under.  It'd be immoral for me to advocate you break the law and buy one illegally.

I advocate you break the law and buy one illegally.  Or two.

living on the edge's picture

I agree there is no bubble yet. I know very few people even buying gold right now. One observation is people are at least listening to you if you suggest they buy gold. This wasn't the case 6-months ago.

Arius's picture

Dave Ramsey the financial advisor in Fox was asked yesterday by a listener about gold.  He replied saying gold is just a commodity no value whatsoever, the biggest bubble.  he himself as a sophisticated investor (as he humbly called himself) did not own any gold at all...the only thing was his gold watch and the watch had better value than the gold according to him.

SO, if you put such an opinion of a sophisticated investor together with the 5 trillion just discovered in Tora Bora you wonder why would anyone would waste his precious dollars in some barbaric relic....yeah well...people never learn....

sskid's picture

A sophisticated investor that only invests in mutual funds, should stick to his broken record advice to stay out of debt.  

technovelist's picture

Dave Ramsey knows nothing about gold. He is useful for those who didn't know that debt could be a problem, but his level of sophistication in economics is otherwise on a par with George Bush's.

RiffRaff's picture

Same species, different animal: I was driving through Virginia a couple of weeks ago, and some outfit called "The Mutual Fund Store" was hosting some infomercial type investment show. 

One caller asked about gold, and the host responded that he didn't like it, as gold had had a big run over the last 10 years, and investing in gold would be "buying at the top".  The very next caller asked about getting into bonds, and the host pointed him to some fund that "Has gone up 8 times in the last 10 years", or something.  I pulled a Jon Stewart style double take, pointing my finger at the radio - "But... but... you JUST said you didn't want... to buy...  at the... the top..." (trailing off)."

These clowns get paid either way, I guess, so what's their impetus to change?  Where are the customers' yachts, indeed.

 

goldfreak's picture

ah Arius you little troll, you pretended to ask an innocent question first now we see your trollness.

 

Ramsey said in early 2008 that the economy would be fine! on his show. And what's your point? Just one opinion of a clown on FOX?

Arius's picture

hey amigo - my point is that we are "at the end of the beginning"....no announcements of trillions found in Afganistan, opinions of experts etc. will change that....the rest is up to everyone you either in the train or left in the station....holding paper duck tape...the real duck tape is on the train...

Cheeky Bastard's picture

No; but it might be in the beginning stages of one.

Note the following:

GOFO ends week -16% [periods avg w-t-d], GOFO-LIBOR still negative. Cash-commodity swap rates decline following rise in gold

Daily clearing LPMCL avg. up a staggering 35.33% [ounces cleared], $-value up 38.6%

Last time LPMCL cleared more than 24M--->OCT-08. This is the largest m-o-m increase in both the $-value and ounces cleared in the history of LBMA/LMPCL

Largest $-value cleared in LPMCL history; European, Indian and Chinese demand might have been a big contrib [in light of debt problems] in demand surge in May.

June data should be equally, if not more, interesting. 

 

George the baby crusher's picture

Looks like gold purchases are trying to keep up with debt creation.