Gold!
Posted on 04/19/2006 11:08:46 AM PDT by Jim Verdolini
Are we in a Bullion Bubble? Gold and silver are rocketing to new highs. Look at the trend:
Monday Gold was over $604 and silver $13.33. By the end of the day Gold was $618. Tuesday it was Gold $620 and Silver $13.55. This Morning Gold $624.90 and Silver $14.16. Right now Gold is $632.70 and Silver $14.54!
I have read that there are two major things, in addition to oil prices, causing the rise. For Gold it has to do with a rumor that China plans to convert a small bit of their dollar reserves to Gold. For silver, there is a rumor that the metal will be traded differently and more vigorously. If China was to convert only 3% of their dollar reserves to gold, that would be the entire worlds production for a year!
I bought my wife a small gold crucifix last month. The chain supporting it was so frail that it broke in less than 2 weeks. I replaced it with a more serious chain and the store gave me a $20 credit on the flimsy old chain that weighs about nothing.
The "$850 gold" episode is immutably linked the the "$50 silver" episode which creamed the Hunt Bros. In that episode, the Hunts were leveraged to the hilt (big mistake) and the COMEX changed the margin requirements...which, by the way, the COMEX just did on silver a few days ago. The change in margin req'mnets by the COMEX forced the Hunts to liquidate large amounts of silver and a price waterfall ensued. All I am really pointing out is that these things that happened "long ago" are very hazy in peoples' memories and there's a lot of shall we say "folk tales" surrounding them.
I've been pounding the table on silver since sub-$6 and it's rare I don't get a "Hunt Bros" comment. But really, it's fundamentally based. Silver can NOT be pulled out of the ground, environmentally permitted, refined, molded into ingots, checked into COMEX warehouses, etc etc for $6. Can't be done. $6 is flat out intrisically less money than it costs to get the stupid stuff to where someone can see it and hold it...or use it...or hoard it. I mean, that's 2 stinking lattes, or whatever. Same story w/$260 gold. It would be as if I was selling a house that could be rented for 2x the (fully amortized, not fantasy) mortgage payment or would cost 2x to re-create. It is a fundamental pricing imbalance awaiting only an awakening market to extinguish and correct. Now....can all that stuff be done (wrt pulling Ag/Au out of the ground) at Ag = $14.6 and Au = $640. I don't know. I don't think it's grossly, horribly overpriced.
NOW, however, there is clearly an entirely new mechanism taking over the precious metals markets, and it appears to be adding to whatever has driven the prices up to their already high points. It has elements of being a frenzy, for sure. But geez, how much money has been created in the poast few years in real estate...? Nobody complained when their houses tripled in value.
I have a good summary of the Hunt story, but I don't have a link, only a three page piece of blather...which is nevertheless worth reading. I will try to fetch the link & post here.
I have a good friend who's father bought 10,000 oz of silver at around $18 during the Hunt fiasco. His mistake was in not selling when he mad a killing. Instead he rode out the crash..he ended up with 10,000 oz of silver in his basement for decades. All gone now.
Hunt story link: Longish, but pretty much worth reading.
http://www.buyandhold.com/bh/en/education/history/2000/hunt_bros.html
That was a lot of dough back then; and there are plenty of similar stories from that era. I was not active in the market at that time.
Very very very few folks were able to unload their silver anything near $50. The buyers were simply overwhelmed and stopped buying. One of the reasons why PM fans like myself think there is far less downside in the POG/POS is that the buying appears to be secular, broadbased, worldwide, etc etc, vs generated by one weirdo and all the folks who wanted to try to ride on that one weirdos' coattails.
From the end of February, 1975 through September, 1975, gold fell from about $185 to about $129 -- a loss of about 30% -- and by September, 1976, the price bottomed out at about $104 -- a loss of almost 45% off the 1975 high.
In February, 1983, gold topped out at about $510, but seven months later, gold was in the $365 range for a loss of nearly 29%, and by February, 1985, gold was down to about $285 for a total loss during that period of about 44%.
From 1833 until 1971, the price of gold grew 97.6% or a mere .71% a year, and while not a bubble, gold failed miserbly to keep pace with inflation or equity investments.
Would you like me to keep going?
“The legal tender quality [of money] is only valuable for the purposes of dishonesty.”
- Salmon Chase, Chief Justice of the Supreme Court, former Secretary of the Treasury
In February, 1983, gold topped out at about $510, but seven months later, gold was in the $365 range for a loss of nearly 29%, and by February, 1985, gold was down to about $285 for a total loss during that period of about 44%.
The peaks in 1975 and 1983 were part of the overall 1981 peak bubble price of $850/oz as you can see from the chart below.
From 1833 until 1971, the price of gold grew 97.6% or a mere .71% a year, and while not a bubble, gold failed miserbly to keep pace with inflation or equity investments.
From 1833 until 1971 the price of Gold was set by law and backed the Dollar. It did not trade as an investment and cannot be compared to equity investments. In 1971, Richard Nixon closed the Gold Window and removed the Dollar from the Gold Standard.
Would you like me to keep going?
Please do. What other "many, many" times in history has Gold been in a bubble?
This is NOT the case on NYMEX, sadly. NYMEX is lagging badly in e-tech, so badly in fact that they just signed a deal with CME, none other, to put the NYMEX e-contracts on CME's Globex.
pandemic bird flu, mumps, aids, terrorists, placenta chomper Tom Cruise, Katie Holmes, AL GORE, Howard Dean....
"We'll never see the end of fiat money. That's wishful thinking."
FIAT has only been around since 1971. Real money (PM) has been around for 000's of years. Are you going to restate or stick with your nonsense statement.
"Nope, we are watching the slow death of fiat money. Short term, sure its probably run too far too fast, but expect 4 digits in the gold price in the not too distant future."
$1000 Au by 2012
"That's right. We don't make nothin' no more!!"
Yawn, the gdp number includes the money made on importing goods and selling them at a substantial mark up. Hence the Wal-Mart model. It has nothing to do with what we manufacture anymore. C'mon, you are smarter than that young man.
Currencies were inflating.
Gold is a hedge, not an investment. It's a storehouse of value that has remained relatively consistent. If currencies are looking weak, you take a 15% position or so to offset the decline. When the dollar starts to look strong, you sell your gold and go back to the currencies.
Substantial mark up? You're joking? WalMart made 6% before taxes on their sales. Less than 4% after taxes. Let me guess, public school math?
It has nothing to do with what we manufacture anymore. C'mon, you are smarter than that young man.
Let me guess, you think China's $1.8 trillion GDP means they're beating America and our $13 trillion GDP?
So when gold dropped to 30% of its peak price, you could buy more than 3 times the amount of goods with the inflated dollar? That's funny!!
It's a storehouse of value that has remained relatively consistent.
Right. $850 down to $250. Consistent.
You asked "Insurance bet against what?"
Answer: Wild, rampaging Weimar inflation. Collapse of credit markets. Personal disasters like bankruptcy, seizure of assets, etc.
I hope none of this ever happens to me or to you but . . .
In the meantime, my metals have appreciated about 6 or 7 X since I bought them. The numismatic value of the coins has soared in the last couple of years. And each day lately I've grinned when I checked the spot.
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