Skip to comments.Gold Never Has Been (And Never Will Be) In A Bubble
Posted on 10/30/2010 10:19:58 PM PDT by blam
Gold Never Has Been (And Never Will Be) In A Bubble
By Nathan Lewis
10/30/10 Binghamton, New York Most serious gold investors follow a basic principle: that gold is stable in value. Changes in the gold price represent changes in the currency being compared to gold, while gold itself is essentially inert.
This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that gold is money.
From this we can see immediately, that if gold doesnt change in value at least not very much then it can never be in a bubble. There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.
Lets take a look at some of the great gold bull markets of the last hundred years:
* From 1920 to 1923, the price of gold in German marks rose from 160/oz. to 48 trillion/oz.
* From 1945 to 1950, the price of gold in Japanese yen rose from 140/oz. to 12,600/oz.
* From 1948 to 1967, the price of gold in Brazilian cruzeiros went from 648/oz. to 94,500/oz.
* From 1970 to 1980, the price of gold in US dollars went from 35/oz. to 850/oz.
* From 1982 to 1990, the price of gold in Mexican pesos went from 8,000/oz. to 1,025,000/oz.
* From 1989 to 2000, the price of gold in Russian rubles went from 1,600/oz. to 8,120,000/oz.
Each of these situations was an episode of paper currency depreciation. Today is no different. The rising dollar/euro/yen gold price is simply a reflection of the Keynesian easy money policies popular around the world today.
We can also see that, if gold remains stable in value, then the supply/demand considerations that affect industrial commodities do not affect gold, which is a monetary commodity. This is why gold is used as money. If its value was affected by industrial supply/demand factors, we would not be able to use it as money.
Thus, jewelry demand or peak gold, or any other such factor, has little meaningful effect on golds value. Day-to-day money flows will affect the price at which currencies trade vs. gold, but this ultimately affects the currency in question, not gold.
None of these historical gold bull markets resulted from jewelry demand or mining supply.
Any attempt to attach a valuation to gold is mostly a waste of time. Concepts like the inflation-adjusted gold price or the gold/oil ratio, or a ratio of outstanding debt or currency to a quantity of gold bullion, are a distraction. An item that doesnt change value is never cheap or dear. Thats what gold is money means.
The price of gold may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money.
Gold is money. Always has been. Probably always will be. This time its different? I dont think so.
Should be such a simple concept. Not for most though.
Explain, then, the collapse of gold prices following the 1980 or so peak. It could be had for around $250.00/oz in 2000, I believe. Was this deflation? No, it wasn’t. It was a combination of loss of demand, due to economic fears easing, and increase in supply due to central banks selling.
Gold is a traditional safe haven in times of economic trouble. We’re in a time of economic trouble. Such times do not last forever, and neither does an elevated price for gold. It’s not a good longterm holding.
Cherry-pick the window in time to demonstrate how poor of an investment gold is, like certain fans of Ben Bernanke and the Federal Reserve are wont to do, and you get one impression. That impression isn’t untrue, it’s just misleading due to painting an incomplete picture.
Cherry-pick another window in time to demonstrate how great of an investment gold is, like certain champions of investing in precious metals are wont to do, and you get another impression. That impression isn’t untrue either, it’s just misleading, again due to painting an incomplete picture.
From 3500 BC to 2650 BC the price of gold rose from 7 rocks/oz to 35 clay tablets/oz
From 2650 BC to 1500 BC the price of gold rose from 35 clay bricks w/straw to 3500 sphinxes [Hebrews took it all]
From 1500 BC to 850 BC the price of gold rose from 3500 golden calves/oz to 7,000 babyls/oz
From 850 BC to 300 BC the price of gold rose from 7,000
Hams/oz to 14,000 olives/oz
From 300 BC to 300 AD the price of gold rose from 14,000 helmets/oz to 36,000 Gaulic wenches/oz
Hard to accept the idea of “gold as USA money.”
Seems more like a speculative investment.
(1) USA gold prices increased 24 times.
(2) USA oil prices increased only 11 times.
(3) USA Consumer Price Index increased only 2.12 times.
And, as noted by another post, USA gold prices collapsed after 1980, but there was no corresponding USA deflation.
Might be a semantic quibble, but I wouldn’t qualify flight to safety as speculative. Certainly a speculative element capitalizing on the trend, but the trend itself wasn’t.
The artificial, fixed price in place since the Depression was clearly too low in the eyes of a domestic market prevented from buying and holding it. Never did it return to that level.
Maybe a buying opportunity combined with a nearly concurrent economic upheaval just snowballed. Sort of going through the same thing now, although the medium term economic outlook is pretty bad by any standard. Even in light of that, gold seems peaky at the current level to me.
I don’t have the nerve to buy any at this level, certainly. I doubt I’m alone, so barring some major shock, I’m doubting the aggressive upward projections as wishful thinking by people who hold precious metals, and hawking the sale of it by people who want more money.
But you have to be a complete nincompoop to not be concerned about any investment that becomes a fad. The best principal to follow is, if the kid that parks your car is buying something (or even talking about it) it's time to sell.
I agree with your point concerning the government controlled price of gold.
The 24-fold increase is clearly a political distortion, not a financial one.
I tried to find the 1970 “market rate” for gold jewelry, but nothing relevant popped up.
Despite my comments, if I had any discretionary funds at the moment, I would buy gold on every dip.
The macro economic picture is utterly shocking to my eye.
The Fed is destroying our currency - we have trillions of dollars in unfunded liabilities - American voters in both parties show a higher and higher tolerance for wealth destroying socialism - and millions of new USA citizens vote massively for Democrats and lack the job skills and education to contribute meaningfully to the tax base.
I've been a student of business and politics for almost 50 years.
For the first time in my life I don't see how America can grow, innovate, or legislate its way out of this mess.
The US dollar was a hyper roller coaster ride in the 1980's. Ran way up in value from 1980 to 1986 and then collapsed. Probably best not to judge gold with dollars in that period. Gold had run up in value and then the price came down when the US dollar when on its hyper roller coaster ride. When the dollar later collapsed around 1986, gold partially recovered, but the loss in dollars from the roller coaster was a done deal by 1986. Gold in dollars was fairly stable between 1988 and 2000.
Read Martin Armstrong’s latest as he compares the past with current events...
It’s not about paper money per se but how governments always debase their currency when debt gets out of control and/or overreach for socialist goals. Gold records the event. Happens all the time throughout history and damn if it’s not happening again.
One thing articles like this tell me: there are people who have—
—or leave unstated for various reasons
that Demand pushes up prices, and
that Demand can be artificially induced.
Yes, the actual value of gold is pretty stable. The price fluctuates, not only with the inflation/deflation of currencies used to purchase it, but with the demand of people outbidding each other in an effort to own it. Such people believe it to be undervalued in currency and are willing to bid higher and higher sums for what is mainly useful (other than as a store of “value”) as a form of decoration.
Like tulips, perhaps.
Absolutely. Since it's hard goods, it can never be in a bubble.
Just like tulip bulbs.
Just like silver.
I have to disagree with his assertion that the run from $35 to $850 was not a bubble, and it was similar to the other instances mentioned. Those were true hyperinflation, post-war in some cases and post-bank-collapse in others. We had inflation in the U.S. in the 1970s but it wasn't hyperinflation like in the other cases. We used our paper money as money, not as firewood; we continued to pay mortgages rather than pay them off because it was cheaper than buying another stamp; etc.
And while that $35 starting point was artificially low, so some of the rise (to $200 or so?) was gold catching up to its "real" inflation-adjusted value, we certainly had bubble behavior at the end: gold necklaces being snatched in broad daylight, for example. Only gold and silver crashed in dollar terms after their very spikey tops; real estate for example was a better store of value from 1980-2000.
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The events of which you speak were anomaly of such short duration that they are not even a blip on the long term curve.
The author is correct, your argument is not sound
But, that's not to say that there is a bubble in gold prices. It always takes time (too long for those who take a bath) to discover if a rising price is just a bubble.
Why, because it's disadvantageous to those who are encouraging people to buy gold? It's just as real as judging gold by the weak currency that preceded it.
Look, it's a safe haven, I don't dispute that. I own precious metals myself, but I'm not going to get so caught up in the matter that I lose my *** when it inevitably starts back down again, as it has again and again. It's bought during times of economic upheaval and sold in times of prosperity. That's the driver of the currency strengthening as well. It does not serve any argument about a looming hyperinflation.
We have not even come anywhere near hyperinflation, ever, in the history of this country, unless you want to delve into the very uncertain currencies present during the Revolution (have an ancestor whose Rev. pension application details his trials when his pay in Continental money had depreciated to worthlessness) or during the latter stages of the Civil War with Confederate money doing likewise (ancestors who lived through and endured that as well).
If you want to buy and hold gold by all means do so. I've told you that it's not an historically good thing to buy and hold long term, and even your own graphs show you that. But, it's your money. Have at it. Me, I'll hold it until the trend is clearly downward, I bought in early enough to afford that luxury and still have a very nice return. Certainly didn't get in at $250 or whatever as so many here brag, more like twice that in the wake of 9/11. It's been good to me but it's delusion to think it always will be.
... but this time it's different, right? This isn't a blip and it's not a bubble?
Please show this long term curve that demonstrates the correctness of the author's argument, then. I'm interested in learning something new.
When the tie was broken, the price in US$$ varied but the peak was of very short duration
I have looked but can't find the chart dating from 1793 that illlustrates the point well. There is also a chart for hundreds of years that is pretty much flat and the spike is barely noticeable. This one shows the very short duration of the spike as well
Not at all. That time period actually illustrates the volatility of the US dollar. It is the dollars volatility that corrupts the price of gold in dollars during that time period. But if you want to use a time period where the dollar doubled in value and then dropped half that value again all within 5 to 6 years, fine. But some might think you are illustrating the authors point. Gold rose in dollars during the Jimmy Carter years. Seems like a reasonable response to me. Then it fell and slightly recovered when the dollar went on its hyper roller coaster ride. Then from 1988 to 2000, gold was fairly stable. Starting rising again in dollars after the dot com crash, 911 and the War in Iraq and Af/Pak. Now we are setting absolute high gold records after the Financial Sector collapse in 2008. Followed of course by the Mortgage Crisis and now the potential currency and trade wars. All seems like reasonable behavior to me.
Good catch. Thanks.
True - but what if the Chinese decide to artificially prop up the dollar...
I’ll let the charting wizards do it, but overlaying the 10 years prior to now, and the 10 years prior to the 1980s peak (it was a bubble), with the present and the peak adjusted to the same level, on a logarithmic scale, will make it clear that our current steady rise is nothing like the brief 1980 spike.
Here's the 5-year runup to 1980 (note that the peak in 1980 was well above the end of this chart):
So, after years of trading in a range where peaks were double the minimums, gold quadrupled in a year (then lost most of that quadrupling to return to something above the prior range). Currently, we have seen a tripling in 5 years, but smoothly occurring over that period. In any year, the increase has been at most 50% gain.
This makes the current period look like the gradual runup we saw in 76-79, when gold tripled. I'm not convinced that this means that history will repeat, but it seems far less likely that we are currently in a bubble, than at the point before a bubble even starts to build.
When gold has quadrupled in a year, I'll be ready to accept that it may drop by half or more, but we're nowhere near that.
My most likely scenario is that gold rises to $4000 sometime in the next 3-5 years, and drops back to a stable market price of about $2500.
Or maybe we have hyperinflation, and the price of gold in dollars becomes meaningless. Or we may have restored fiscal sanity in 2012, and gold settles out where it is. Or maybe it drops to below $1000, and I buy more after picking my jaw up off the floor (because the foreclosure mess and entitlement obligations still point to serious inflation).
To put the 1979 bubble in perspective:
In August of 78, Gold broke through the $200 barrier after years of trading in the $100-200 range. (Paper bugs were worrying that it was a bubble).
By September of the next year (1979), gold doubled its record, hitting $400 (one-third of that gain coming in the final two weeks of the period).
In the following 15 weeks, gold doubled AGAIN (with half of that rise in the last two weeks of the period).
THAT, my friends, might be an indication of a bubble.
Note that the price stabilized in the $300-400 range for years to follow (with ample opportunity to sell at over $500, so unless people bought in the final month (after gold had more than doubled an all-time high in a year), they enjoyed ample gains.
I'll leave it to others to overlay these, but it's pretty clear that the past pattern is not being repeated presently.
I got these from a very handy charting site:
Today's price is 5.7 times the price back then, so if history repeats, you can expect gold to peak at $4869 in July of 2011, be at $3360 a year later in July 2012, and bottom at $1635 in 2016, before it begins another climb.