Gold bubble?

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mihaibarsan's picture
mihaibarsan
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Gold bubble?

What makes gold so reliable as currency?

Does it really have so much intrinsic value as to be used instead of money?

How much of the gold price is value and how much is vested confidence?

Doesn't seem much more different to me than the housing --> people buying it in order to invest or protect assets

strabes's picture
strabes
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Re: Gold bubble?

question 1 - the fact that it can't be abused by government like the debt money we have now because it has a finite supply, or at least a very limited slow growth supply

question 2 -  yes, because of the confidence in it (though there have been better systems and some people are saying we should avoid a gold system today since it would still be controlled by the Rothschilds

question 3 - same thing...the value is driven by the confidence...the confidence is driven by the value

question 4 - gold is constant.  the supply of housing is manipulatable, the quality of housing is variable, etc.

 

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Bill MacGregor
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Re: Gold bubble?

Dear Strabes

Would it be possible for the existence of exchange traded funds in gold bullion, as are seen on the London Stock Exchange, to bring an over investment of cash equivalence against physical reserves, thereby artificially boosting price?

Thanks

Bill

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Re: Gold bubble?

The sentiment measures for the PM markets, gold in particular, were 94% Bullish last week. The last time we saw 94% bullish gold sentiment was at the high of $1000+/oz (almost broke that high today). Whatever the fundamentals are for valuing gold are pretty insignificant in the short term, given the fact that so many people are bullish on gold right now. Expect a significant decline based on human nature alone. It should be a good buying opportunity for the longer term ride.

Though the idea of a longer term gold bubble might be invalidated by the rumor that the Fed will cap the price of gold if inflation comes roaring back. I hope they don't resort to that, but it looks like they will do just about anything to prevent people from preserving their wealth or saving their money. 

Sorry for the negativity, 

Jeff 

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Re: Gold bubble?

Gold ETFs are increasing their holdings of gold bullion, as this Jan. 20th MarketWatch article indicates.

NEW YORK - Gold held by exchange-traded funds reached a record level in
2008, as investors bought the metal as a safe haven against economic
troubles, the World Gold Council said Tuesday in a report. At 1,190
tons, ETF gold holdings are now higher than central bank holdings in
Switzerland, the fifth last official gold holder in the world.
Investors bought ETFs representing 96 tons of gold in the fourth
quarter, following the purchase of an unprecedented 145 tons in the
previous quarter, the WGC said.

However, the effect of ETF buying on price is not necessarily
'artificial.' When any scarce item is subject to higher demand, its
price goes up to clear the market.

The distinction between gold and housing is that 99 percent of the global population believed that house prices would rise forever,
and were not capable of falling. If gold rises to $2,000 an ounce, and
99 percent of people believe it will go to $5,000 an ounce, then I will
sell it.

In 2005-6, I made six figures from a couple of bear raids on silver.
I am more than happy to trade precious metals from either side.
Precious metals absolutely sucked as an investment for 21 years, from
1980 to 2001. However, the current government panic is favorable for
gold, because the dollar needs to be drastically devalued in order to
reduce the debt load in real terms. After the dollar devaluation
occurs, gold will not be particuarly attractive as an investment.

The thing to watch for is 'gold mania.' I saw gold mania in Jan.
1980, and we aren't there yet. When 'everybody' believes in gold the
way they used to believe in real estate, it will be time to head for
the exit.

strabes's picture
strabes
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Re: Gold bubble?
Bill wrote:

Would it be possible for the existence of exchange traded funds in gold bullion, as are seen on the London Stock Exchange, to bring an over investment of cash equivalence against physical reserves, thereby artificially boosting price?

I would think in a pure gold standard that debt instruments based on gold, like ETFs (they generate massive liabilities...a demand for payment) would not be allowed.  Fundamentally an ETF is just a simple derivative...its value is derived from the underlying asset.  I'm no monetary expert but I don't think that could be allowed under a gold standard.

machinehead's picture
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Re: Gold bubble?

Under the former U.S. gold standard, in which gold was fixed at
$35.00 an ounce, there was no incentive for a gold ETF. If gold were
priced at $35.00 an ounce today, tomorrow, next month and next year,
one would only be giving up interest by owning gold instead of
short-term interest-paying debt.

On the other hand, gold mining
stocks DID exist under the U.S. gold standard. Homestake is legendary
example of a stock which rose by nearly an order of magnitude during
the 1930s.

Gold, which bears no interest, is a near-perfect
circulating money. We don't expect the coins in our pocket to bear
interest, because we're going to spend them soon. Gold as an
'investment' only makes sense in the inverted, Alice in Wonderland
world of fiat currencies. If fiat currencies were abolished, no one
would consider gold an investment.

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Re: Gold bubble?


Hello mihaibarsan:

Q=What makes gold so reliable as currency?

A=There were only 20 lifeboats on the Titanic. There are only about 140,000 tonnes of gold above ground. Ben Bernanke is NOT an alchemist and can't turn lead, or anything else into gold, 2%+/- per year is the most they can increase its mining. 

 

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Re: Gold bubble?

Q=Does it really have so much intrinsic value as to be used instead of money?

A=Intrinsic to me is buying some assett, like a piece of land, for say 46k and being able to immediatly sell it for 152k, and Marsh and I can make, or later say that it had an intrinsic value of 106k (less a butload of CG tax for not wanting to hang onto it in a bubble market.) Intrinsic value to be used instead of money - I don't get. Money to me is purchased, vis a vis labor, the sale of an assett or the sale of one currency for another. Chris explains that gold is a currency, not an assett. 

 

Q=How much of the gold price is value and how much is vested confidence?

A= Sorry, I'm not certain I understand what is being asked.

 

Observation=Doesn't seem much more different to me than the housing --> people buying it in order to invest or protect assets

My Observation=Last time gold ran up the run up lasted for what 2 days?!?!  Having said that I think this game could have several outcomes, and I want to clarify, I'm not trying to light up the bubble warning annunciator light, I'm not saying, "It will be different this time.":

 

  • Personally, I'm not convinced gold goes up, I look at it more like it takes more dollars to buy things as our dollar and most other currencies get debased
  • It think the more of anything they make the less value it holds and when it comes to making money I see a lot of hockey sticks
  • That said I don't look at the charts as much as I look at what Soros says, this is a period of wealth destruction, I think I don't quite agree, could it be a period of perception destruction? Are we insolvent and just don't know it yet. Happened at Enron,happened with millions of homeowners, think it is happening with many of the banks now and I think it will happen with countries. Every street sign I see says insolvent on it.
  • I don't think this is a credit crisis, I don't think that this is a housing crisis, I think it is a solvency crisis. When someone puts down that they make 200k and they make 50k and or their loan resets and or they can't tap their HELOC their insolvency becomes apparent, their perceived wealth disappears when they loose "their" MacMansion
  • I also question the paper Comex market. A lot of gold isn't owned, it is leased. I seriously doubt there is enough physical gold to cover the paper that is traded. Which of course, for me begs the question to be asked, if one bank or one currency or one market tanks and there is a run on gold will investors try to take delivery?
Chris says that he believes they will avoid a total devaluation/debasement and re-denomination, at least that is what I think he was getting at on the PBS show? I pray he is correct. That said, I have played this through in my mind 9 ways to Sunday. I don't see how there is any escaping some 11+++ trillion of debt, and another 53++ trillion of obligations.
 
Hope I'm wrong, very, very, very wrong! 

 

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Re: Gold bubble?
machinehead wrote:

The thing to watch for is 'gold mania.' I saw gold mania in Jan.
1980, and we aren't there yet. When 'everybody' believes in gold the
way they used to believe in real estate, it will be time to head for
the exit.

I agree completely.  I wonder how far away we are from that.  I'm already seeing articles lately claiming that gold is the next bubble.  I'm also curious about why bullion is outperforming the mining stocks.  Historically that hasn't been a good sign for bullion:

Quote:

In fact, the gap between gold mining shares and bullion
prices carries an implicit warning about the prospect for gold prices,
say analysts at RBC Capital Markets.

 
"Historically, when stocks begin to underperform gold, that's a sign
that gold is running out of steam," said Ray Hanson, a technical
analyst at RBC.
 
Source: Marketwatch
 
Any thoughts?

 

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Re: Gold bubble?

I'm really not well-versed enough in market dynamics to chime in here, but I would think any historical market relationship between gold stocks and bullion would be a moot point right now.

We aren't in a normal market condition, and by all the information and insight here have chosen to value collectively on this site, we aren't going to return to a "normal" market, so is it any use in trying to predict gold price behavior based on it's performance under past conditions?

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Re: Gold bubble?

I knew I had seen a discussion about a gold bubble somewhere.  I just found it in the book "America's Bubble Economy", c2006, by Devid Wiedemer, Robert Wiedemer, Cindy Spitzer and Eric Janszen (of itulip.com), pgs. 144-154.  They even have a section titled "Timing the Gold Bubble" on p. 149. 

Their thinking is similar to that of machinehead: yes, gold will bubble big-time, but ride it while you can.  They seem to think the gold bubble will last several "easily 10" years, until the other asset bubbles finish crashing and the credit and capital markets again stabilize and begin to rebuild.  When other assets start looking attractive again, that's when they say it will be time to consider jumping off the gold bandwagon.

I've read other sources that said that gold (PM?) cycles tend to be long-lasting (years at a time)...

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Re: Gold bubble?

I don't think gold is necessarily in a bubble right now.

What is a bubble?  A bubble is when people are purchasing something solely for the purpose of speculation (no intention to hold it long term - rather to buy now in order to sell later for a profit) because they believe the value of it will go up more than the value of the dollar.  I have purchased gold becuase I see it as a store of value because the government can't counterfit and debase it.  Other commodities, like Oil, are also a store of value except they aren't accepted as money.  But gold, I can directly spend it or exchange it for dollars so I can go spend the dollars.

In my opinion, the US dollar is no longer a storage of wealth or labor.  Not since Bernanke's printing press has been running overtime since September 2008. It's been running since before 1971 but now the "easy button" is stuck in print mode.

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Re: Gold bubble?

Granted, this is just one economist's opinion. But the credit, or should I say, the lack of credit really makes me question the bubble issue. I remember in the dot Com era people taking out second mortgages to invest in dot com stocks. I remember in the housing market the first buyers came to our door with a 20% down payment. Wow. As I was signing the contract we noticed this was an 80/20 financing and it took me several minutes to understand that we were in a new paradime and 80/20 was no money down 100% financing.

What I'm saying is I think gold is now going up because some investors might move their money from say the Zloty to the USD http://www.fxware.com/forex-currency/fx_chart.asp?f=USD&t=PLN&d=p&l=en and a small percentage may so no, I'm buying gold or silver instead. Right now I think the USD just appears to be the least ugly date. IMHO I think that will be changing.

 Stage three – Easy Credit

Increasing prices are not enough for a bubble. Every financial crisis needs rocket fuel and there is only one thing that this rocket burns - cheap credit. Without it, there can be no speculation. Without it, the consequences of the displacement peter out and the sector returns to normal.When a bubble starts, the market is invaded by outsiders. Without cheap credit, the outsiders can’t join in.

Cheap credit is the entrance ticket for outsiders. For example, gas prices have risen sharply in recent years. However, banks aren’t giving out loans so that people can store gas in their garages in the hope that the price will double in three months. The banks, however, are prepared to give loans to people with poor credit to hold condos in the hope that they can be quickly flipped.

The rise in easy credit is also often associated with financial innovation. Often, a new type of financial instrument is developed that miss-prices risk. Indeed, easy credit and financial innovation is a dangerous cocktail. The South-Sea Bubble started life as new-fangled legal innovation called the limited liability joint stock company. In 1929, stock prices were propelled into the stratosphere with the help of margin calls. Housing prices today accelerated as interest-only mortgages emerged as a viable means for financing overpriced real estate purchases.

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Re: Gold bubble?
mihaibarsan wrote:

What makes gold so reliable as currency?

Does it really have so much intrinsic value as to be used instead of money?

How much of the gold price is value and how much is vested confidence?

Doesn't seem much more different to me than the housing --> people buying it in order to invest or protect assets

 

I can highly recommend that you read the book "A Short  History of Financial Euphoria" . It's written by John Kenneth Galbraith and describes some of the various bubbles of the past. I was particularly stunned by the tulip mania in Netherlands.

Let me quote from the  intro of the book about these euphoric episodes and you make the judgment if gold is similar to this or not.

Quote:

 To summarize:The euphoric episode is protected and sustained by the will of those who are involved, in order to justify the circumstances that are making them rich. And it is equally protected by the will to ignore,exorcise, or condemn those who express doubts.

 

Now I'm not saying there is a gold bubble. But I've seen and heard so many people say it can only go up (a lot). That it's foolish not to invest and own gold and so on..

It certainly has the potential for a big bubble.

Be aware of the dangers investing and act accordingly.

 

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Re: Gold bubble?

Today Adam Hamilton has an article posted at SafeHaven, regarding the undervalued HUI/gold ratio.

http://www.safehaven.com/article-12648.htm

In
the 1990s, before the HUI gold stock index became popular, analyst Jay
Koeppel did a similar analysis using the ratio of the Barron's Gold
Mining Index to the price of gold. His analysis went back to the 1970s.
Koeppel found a strong correlation between extremes in the GMI/gold
ratio and subsequent mean reversion -- meaning that undervalued gold
stocks tended to outperform, while overvalued gold stocks
underperformed.

Koeppel did not draw any conclusions about the
future direction of gold prices from his GMI/gold ratio. He was only
seeking to trade gold stocks, not gold itself. Nevertheless, in a model
which he published in Stocks and Commodities, a rising gold price was one of the filters, along with an attractive GMI/gold ratio, to buy gold stocks.

Currently
-- as Hamilton's article points out -- the price of gold is rising, and
the HUI is rising even faster percentagewise over the last four months.
jageanangel's citation of 94 percent bullish sentiment is not to be
taken lightly. Extreme sentiment is one of the criteria that I have
successfully used for shorting PMs in the past. However, in a secular
bull market, sentiment can remain excessively bullish for quite a
while.

As always, it's a judgment call as to which factor will
prevail. I would expect some resistance at the $1,000 round number, and
94 percent bullish sentiment points to the same thing. But given the
secular backdrop of unprecedented government panic and monetization of
deficits, I still expect the tidal wave of fiat currency to propel gold
to a record in dollar terms, blowing away sentiment, central bank
selling, naked shorting, and anything else which tries to stand in the
way of the highballing golden freight train.

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Re: Gold bubble?

machinehead,

Thanks for the link to the article.  Very enlightening indeed.

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Re: Gold bubble?
mihaibarsan wrote:

What makes gold so reliable as currency?

Does it really have so much intrinsic value as to be used instead of money?

How much of the gold price is value and how much is vested confidence?

Doesn't seem much more different to me than the housing --> people buying it in order to invest or protect assets

 

If you actually have some bars of gold at home, you can always sell them to a goldsmith. I don't see many other guarantees gold can be exchanged for anything, but at least there are the goldsmiths.

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Farmer Brown
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Re: Gold bubble?

woupistek wrote:

mihaibarsan wrote:

What makes gold so reliable as currency?

Does it really have so much intrinsic value as to be used instead of money?

How much of the gold price is value and how much is vested confidence?

Doesn't seem much more different to me than the housing --> people buying it in order to invest or protect assets

 

If
you actually have some bars of gold at home, you can always sell them
to a goldsmith. I don't see many other guarantees gold can be exchanged
for anything, but at least there are the goldsmiths.

 

If the government makes gold illegal, then it would be difficult to exchange it for anything. 

Absent of that, gold will always be tradeable in exchange for fiat money, which you can then use to trade for "stuff".  I agree gold is almost useless in a fiat-money world that does not continually expand above the rate of economic growth.  Unfortunately, that is not the world we live in, so in the meantime, gold is generally a good place to store your money.  You can sell a little bit when you need to in exchange for those paper things, and then go shopping.  

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Re: Gold bubble?

One of the benefits I see of precious metals, specifically gold and silver, is their wide-spread acceptance as money across countries and cultures for over 5,000 years - they have withstood the test of time.  The fiat currency experiment is less than 40 years old (i.e. - when Nixon closed the gold window) and looks to be falling off a cliff. 

Precious metals are a limited natural resource whereas fiat currency can be created out of thin air.

Another thing I like about precious metals that they seem to have the ability to retain purchasing power through both crises and over long periods of time (that is, on average - they have their bull/bear cycles like everything else)

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Re: Gold bubble?

My computer got hung up and copied the same message many times.  My apolgies to everyone for the inconvenience.

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Re: Gold bubble?

uh...your computer needs valium.

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pleaseremoveme
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Re: Gold bubble?

I think you made your point, darrah! ;-)

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mihaibarsan
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Re: Gold bubble?

Thanks everybody. Interesting points.

I can't bring myself to buy gold, knowing about a time when gold was nationalised = confiscated in return for devalued money. Can happen anytime, maybe even in the US.

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Re: Gold bubble?

question 1 - the fact that it can't be abused by government like the debt money we have now because it has a finite supply, or at least a very limited slow growth supply -except for the fact that our government creates no money.

question 2 -  yes, because of the confidence in it (though there have been better systems and some people are saying we should avoid a gold system today since it would still be controlled by the Rothschilds - I'm all for a gold standard if you can answer these three questions.

Where are we going to get the gold?

How much gold are we going to need for it to be a medium of exchange.

How are you going to put it into circulation?

question 3 - same thing...the value is driven by the confidence...the confidence is driven by the value I personally believe that it doesn't matter what our money is made out of but what it does.

question 4 - gold is constant.  the supply of housing is manipulatable, the quality of housing is variable, etc. If the supply of gold is constant, how would we get enough gold to follow an increase in population?

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Re: Gold bubble?

Watch the Byron Dale interview on viewtube regarding the gold standard.

 

part 1:

part 2:

part 3:

 

 

Byron is brilliant in explaining things in a way that makes
it a lot easier to understand. It's much like Chris Martenson. Complex
problems explained in a down to earth manner.

I highly recommend wathing his other interviews on the youtube channel: http://www.youtube.com/user/TheByronDaleChannel

 

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Re: Gold bubble?

Here is a great article on precious metal bubbles. 

Top Ten Signs of a Precious Metals Bubble by Peter Schiff.

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Re: Gold bubble?

I found this thread looking for thoughts on assessing when the precious metals markets turn into speculative bubbles. I note that this thread is from Februrary, 2009. From there to here (the very end of November, 2009), gold is up 25%, silver is up 40%, and gold mining shares are up 50% (or so, see the chart: http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximize... ). I don't think it's in the dangerous speculative phase now, but I'm at a loss to figure out exactly how to tell.

I like the Schiff article on how to notice if there's a gold bubble. I was sure there was one back in Jan/09, due to the Superbowl ads for the mail order gold buyer rip off company (forget the name, MC Hammer was a shill for them). But nearly a year later, gold and silver are still going strong. I entered my first PM stock position about four months ago when it was obvious that the MC Hammer effect was coming to nothing.

So, what do /you/ look for when trying to spot (or time) a bubble? (My next indicator is when there's at least two cable TV shows about gold mining, similiar to "Flip this House.")

Note, I've been against PM's as a reasonable investment alternative since forever. Gold and silver are fine at storing value, but I'm under the impression that they generally suck for returns (except for right now, which is why I'm in them).

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