9/2/2011 3:32 PM ET|
Popping the gold bubble theory
What the gold bears don't seem to realize is that, despite its big gains, the gold market can't be a bubble when almost everyone seems to think it’s overpriced.
By now, everyone understands that the stock market mania that culminated in the dot-com lunacy was a bubble. Although a not-insignificant number of us were able to identify it as such at the time, the vast majority of people in positions of power in the financial industry were fooled, as were the masses.
Likewise the housing bubble, which was even more obvious. In hindsight, the diagnosis is crystal clear, but those who were espousing that view in the moment were regarded with skepticism (if not scorn).
This is one of the characteristics of an actual bubble. Almost by definition, only a small group spots a bubble in real time and isn't seduced by the siren song. If you think about it, that makes some sense, because part of what drives the creation and growth of bubbles is the belief that you are not in one. Instead of being suspect, parabolic price appreciation gets rationalized away with statements like, "new economy," "this time, it's different" or "housing prices never go down."
Conversely, a widespread belief that steep price appreciation is unsustainable is a good sign that you are not in the midst of a bubble, since it is an argument against joining the action. Whereas during a bubble all you hear -- in the media, at parties or even from the bagger at the grocery store -- are the reasons you should jump in before it's too late.
The reason I bring all this up is because inane commentary about the gold market being a bubble continues almost daily, even despite last week's sharp correction. (Read last week's column on the correction, "Gold's fall: Slip or the start of slide?"
These arguments ought to be enough to convince reasonable people there's no such bubble. But perhaps it is even more compelling to look at who is trying to "warn" us about gold.
I have not said much on this topic, because the idea of a gold bubble now is so inaccurate it's not really worth a response (which doesn't mean it won't become a bubble -- it probably will). But it recently occurred to me that virtually no one who recognized the tech-stock and/or real-estate bubble now says that gold is a bubble. In fact, almost all of us who identified those bubbles long before they burst actually own gold, and have for quite a while.
It is really only the people who missed the previous two who now think gold is a bubble. They were painfully wrong in the past, so now they are determined to spot the "next" one.
In addition, of course, I suspect that none of them own any gold themselves. So not only did they go 0-for-2 on the prior bubbles, they have also missed out on as much as 600% of appreciation had they bought gold, either physically or through investments like the exchange-traded fund SPDR Gold Shares (GLD, news). That is a recipe for bias if I have ever seen one.
I really don't understand why the media hasn't figured out that connection and at least scratched its collective head enough to ask: Why is it that the people who have been so wrong in the past think gold is a bubble, and that the people who have been right think it isn't? But such is the nature of bull markets.
As one of my smart commodity trading friends remarked long ago, with gold you can be contrary and with the trend. Granted, gold is nowhere near the contrarian idea that it has been in the past; rather, it is starting to go mainstream. But that is also something that happens in bull markets.
I suspect that before this is all over, the number of anti-gold critiques will go down, instead of being a feature of one paper or another once a week at a minimum.
When doves fly
If anyone needed another reason to own gold, it was provided by comments from Charles Evans on Aug. 30. At the last meeting of the Federal Open Market Committee, the Federal Reserve governor said that he "wanted to do more" easing.
Evans suggested that the Fed might consider keeping interest rates low until unemployment fell to "a certain level, maybe 7.5%, maybe 7%," or until "inflation became tremendously unacceptable." In other words, he thinks the Fed should target unemployment, inflation or both. (For what it's worth, his views were buttressed later that day, when last month's FOMC minutes revealed that committee members had in fact discussed those very subjects.)
As for any concerns about rising prices, he also stated, "Inflationary pressures are not nearly as strong as a lot of people think." Lastly, he noted, "I really don't need to see a lot more data to understand that we haven't achieved escape velocity. We need to do better." Personally, I think he meant to say "more," not "better."
At the time of publication, Bill Fleckenstein owned gold and gold-related stocks.
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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No,TheBadger007,the big con is still believing that the United States can actually pay off its debt or create GOOD paying jobs in the future.It isn't about clinging to a rock for a happy and fulfilled life as you say;it's about protecting your wealth.Why is its so hard for people like you to understand the generational consequenes of shipping all of our manufacturing jobs to Asia?The division of labor has been supplanted with the incessant meddling of Central Banks around the world.It will not work in the end.
Not only are things in the United States not getting better,but they are going to get much,much worse.The U.S. has the widest wealth disparity between rich and poor in the developed world! We truly are a Banana Republic with nukes.
And what does it say about an economy that for three years now has had trillions of dollars injected into it and ZIRP(near zero interest rate policy)and still NO job growth.What does it say about an economy that requires QE1,QE2 and soon QE3.......What does it say about our economy when the government has no problem cutting a check for a trillion dollars to the Pentagon with money it does not have,yet plans to cut into medicare,medicaid and social security,all of which are paid for with taxpayer money!
Without the needle(bailouts,stimulus) the heroin addict(banks) dies.Of course,the media will tell you that we just need to give the addict another hit,that he'll eventually cure himself.What utter nonsense!Eventually that hot dose will push ALL paper currencies over the cliff.Count on it.Bubble,schmubble.The real bubble is USTreasury bonds.
By the way,since 2008,the Fed has tripled the amount of dollars in circulation.It took 230 years to create $800 billion in circulating currency.The Fed's balance sheet is now $2.75 trillion!And this does not include the trillions handed out to insolvent foreign banks including Deutsche Bank or Societe Generale.
An economic collapse of historic proportion is coming and ANYBODY who does not have at least some gold and silver is going to lose EVERYTHING when normalcy bias crashes on the rocks of the greatest depression.I,mean,how stupid can people really be?Gold and silver have been in a bull market for ten years now,and yet these same stooges continue to endure the decimation of their paper assets,retirement plans,stock and bond holdings,savings via inflation.Malinvestment,high frequency trading,fraudulent derivatives,COMEX manipulation,the continuing housing market meltdown and erosion of our manufacturing base don't seem to be a concern at all to most people.It's sad,really.
I simply do not understand the aversion to precious metals investing.Why wouldn't more people want to participate?
The problems of the West cannot be fixed.And as long as there are 2.5 billion people on the other side of the world willing to work for free,corporations will continue to move jobs there,the Fed will continue to monetize our debt and inflate the currency supply thus driving up prices, and the dollar will continue to lose value.Gold and silver will only be revalued when the current monetary system with the USDollar as the world's reserve currency dies.Then and only then will there be a correction.
THINK FOR YOURSELF PEOPLE,MY GOD!
In 1933, you could buy a 2 bedroom 1200 Square foot home for $2,500 in Oakland California and gold was at $35.00 per ounce. Today that home sells for $165,000.00. The home costs 66 times today than it did in 1933. In 1933, an Electrician made $1.00 per hour or $40.00 per week. Today an Electrician makes $68.00 per hour in wages and benefits. If you relate Gold's Value to the Cost of living and wages you could gather, at 65 times what it was worth in 1933 would be reasonable $35.00 X 65 = $2,275.00 per ounce.
For years, Gold's Value was artificially kept low because it could be mined as a bi-product of copper and other mining operations for around $240.00 per ounce. This was "Easy Gold" without any real value being added for it's rarity. With only 10 billion ounces of gold currently held by people in Jewelry, Coins and Bullion, that is less than 1.5 ounces of gold, per person, on the planet. Real Net worth used to be in held Land and commodities such as Gold, Silver, diamonds and other gems. Supply and demand will keep the value high if other forms of investment, like Stocks , Bonds, Real-estate and savings account interest rates stay low. If we are entering a "Japan like contraction" and the dollar declines on the world market, then Gold, Silver and other commodities like OIL, copper, zinc etc. will continue to rise. No crystal ball here, just a little reason why the bubble may not be a bubble.
Part 2...Silver was $1.29 per ounce since 1892 until 1964 when it was allowed to float. It is a commodity that is used up and needs new fresh supplies. Using the same multiplier on Silver of 65, today silver would be reasonable at $80.00 per ounce.
Gold is riding high right now due to just 1 major reason:
Major buyers such as government central banks and large hedge funds are buying up gold as insurance in an uncertain economy. Central banks of countries like China, India, Japan, and South Korea, are purchasing mulit-billion dollars worth of gold, and the reason is because they no longer trust investments in foreign currency as a means to preserve wealth, investments such as US debt in the form of treasuries, or the Euro for that matter.
And there you have it, the big players in the global market are gobbling up gold like hot cakes, which is the driving force behind the massive appreciation in the price of gold (simple supply and demand). This is still a bubble, but not one in the traditional sense, as this is driven mainly by sovereign entities rather than private companies. In a sense, Fleckenstein is right that the gold bubble won't pop like the tech bubble or the real estate bubble, but that's simply because the biggest buyers, which are sovereign governments, are not simply going to sell their stash for profits, as regular investors would. If the US economy ever stabilizes, these central banks will stop purchasing gold, and start buying morw US treasuries again. This will cause a dip in gold prices, but not a massive drop, because the central banks will most likely liquidate a small part of their gold holdings, but still maintain a sizable chunk of gold as a hedge against rising inflation and the next economic disaster. So basically, Fleckenstein is right about the direction of gold, but not for the reasons he thinks.
Average Joe American I knew it would come to this. Possessing gold is now un-american!? Because some of us have refused to participate in the Ponzi scheme foisted on us by Keynes loving elites, we are now the evil hoarders of what you same people have been calling worthless for a generation. You say you can't eat it, fuel your car with it, spend it down at the Dairy Queen, etc., etc., etc. You said it was a bubble at $450, $700, $900, $1100, $1500, and now $1900.
You have called me a fool for years! And now you have the gall to call me UNAMERICAN!!!???
You sirs are the fools! You sirs are the ones who lap up the spoon fed lies the elites are dealing. You will soon get your comeuppance when your dollar based wealth evaporates in front of your eyes.
I'm sure when the dollar and all your beloved index funds collapse to near zero, you'll be the first to call for the government to confiscate this thing you say has no value. Like Charlton Heston said....from my cold dead hands.
Wow, who would have thought that BF's simple article pondering whether gold was in a bubble or not would draw such spurn, hatred, and anger? You would have thought he was trying to argue that the South really won the American Civil War or something - Simply amazing.
Let me first address a few of the hypocracies that several posters have made here.
1. That gold has no inherent value as it can not be eaten, worn, drank or whatever basic need you choose to focus on. Its all BS unless you are trying to say that only tangible barter items, serving a human basic need, have any inherent value.In which case you are really arguing tha the entire concept of trade, and money itself is irrelevant. Human culture and our modern technological world was built on trade using some sort of money as the trade medium. So, I guess you better head for the hills, bar the door, and be on the look-out for the enemy. Which brings us to the second point.
2. That in cases of disaster or economic failure - guns and violence will rule. I suggest you may have watched one too many Mad Max type movies. Or perhaps you are just a criminal or thug who doesn't have the guts to do it now, because there is society, laws, and police to stop you. Something for you to think about - do you really want to go hide in the woods or on a mountain, seeing every stranger that comes up the path as an enemy to kill? That's no life - its just an animalistic existance. If there is any hope for society after such a disaster, it will require a society of caring and trusting individuals using some sort of medium of exchange, which brings us to my third point.
3. Gold is the one instrument of exchange that has repeatedly withstood the test of history. Come hell or highwater, war or famine, fire or draught - societies have always gone to gold to trade their way to a higher level of civilization. And, while a barrel of oil, bushel of wheat, and a bolt of cotton will no doubt have value in a post apocalyptic world - it will most probably be gold that serves as the main basis of external trade.
4. Finally, gold's ultimate appeal is to those who merely wish to save securely. Banks may fail, stocks may crash, and governments may default, but gold is something REAL that will remain long after the other stuff has faded into the past.... Every see Roman stock cert? how about a Babylonian land deed? okay what about an amphora of oil from Corinth? Yet, gold coins from all these formerly great nations still exist today.
These bubbles are all alike. A few years ago, it was the DotCom bubble. With Gold, there are four different components.
1) Ownership in REAL GOLD - in your hands
2) Ownership via PAPER - good luck may God Bless.
3) When the bubble pops, Gold will go down. Those with REAL GOLD, at least have something tangible in their hands. Those with PAPER, noda...nothing....zip....
4) After the pop, those with REAL GOLD have a couple of worries
a) actually using to purchase items needed
b) keeping it because other people will want to steal it.
I thought about this article some more, and realized one simple thing. All this bubble/no-bubble debate comes about from one simple question, which is:
How do you justify the price of _________? (Think about how this applied to the housing bubble, the dot com bubble, and to gold. Conversely, think about how it applies to a solid company's stock like Apple).
Bill Fleckenstein missed this point entirely. A bubble is defined by something that is selling for far above it's real value. So, Bill needs to discuss the price of gold. What does he think the real value of gold is? Why is it worth at least $1900 per oz? How high does he think it wil go? At what price will he sell his gold holdings? What economic circumstances will cause him to sell his gold?
This would get to the heart of the issue, but he side-stepped this entirely. In the end, it all comes down to price.
I guess since a few folks are gracing me with references to my earlier open letter to Mr. Fleckenstein (sorry I misselled your name earlier), that I should respond in kind and further elaborate on the point of my comments.
Anyways, I’ll try to get it all in one shot, and mainly in response to Jeremy the number guy. I don’t care if people in general buy gold. Although the typical American isn’t really buying gold, they are SELLING their grandmas family heirlooms to get by. The problem is WHY certain people/institutions are buying gold.
In the historical and general sense there’s nothing at all wrong with people buying gold. Gold has great intrinsic and practical value, namely for its use in industrial and commercial applications (e.g., electronics, medical, and consumer goods). That leads to another wholly unpleasant dilemma. People like me that are looking at getting engaged will have to pay three times more for their rings than just 2 years ago, due largely to the increase in value of gold and diamonds (also skyrocketing as an investment/hedge). But hey, while I’m grimacing mightily at what that perfect OMG ring is going to cost me, love is blind and won’t wait, right?
Getting to the problem of why? When the mega and institutional investors (like my favorite people in the world-hedge fund creeps) get involved and see gold as a golden opportunity (don’t go there), they use all sort of tactics to “fuel” speculation and investment activity. They understand that a smaller supply and increased uncertainty over the economy will create even larger margins of profit. Will they actually go so far as to undermine efforts to revive the economy? Your guess is as good as mine, but I wouldn’t put it past them. When gold keeps going up and at some point starts to fall, it’s going to be kind of like the domino effect. Except when these dominos start falling, it will likely be fast and furious as the investors will try to outguess each other and sell-out, which again, benefits the lucky super rich. For the average guy, you might make a few bucks. If that makes you feel all cozy inside, well alright then.
The sad thing is that gold is in a bubble of sorts, but not the kind that will simply burst for the same reasons as the housing crisis. And that bubble will expand for as long as the economy does poorly. This is much simpler to explain, namely the fact that everyone realizes and understands better what is causing the rise in precious metals values. There was no reasonable rationale explanation why housing went through the proverbial roof. And there was a wholesale and mammoth sized lot of “flimsy” mortgage backed securities that eventually caved in on itself.
All in all, I agree with many of the points that folks have made on this board, just not all of them.
Thanks for listening this and thus far, and have a nice day!
Bubbles are allowed to happen because the majority of investors are followers (and don't do research). Bubbles pop because followers are always caught enmass in the selloff. Gold is going up-up-up because governments (India, China, Saudi Arabia, etc.) are buying --- what happens when they stop buying quantities?
Here is the point of view of one common man.If the world monetary system tanks,and everything goes south then gold is not monetized, it becomes a question what is
the intrinsic value.I will tell you from my perspective that if you come down my road
talking kugerands this and maple leafs that,I will trade you some LEAD FOR YOUR
GOLD.I can breed my chickens and hogs and eat them.You learned elitist can try
and take them from me or choke on your gold...and by the way,from what I've read
Soros dumped his positions months ago..and he is what you learned gentleman
refer to as smart money . Gold is a good hedge against inflation but I don't see
that type of inflation to justify the recent move in gold.It is fear based and when people
realize it ain't the end of the world AGAIN,well let's just say I wouldn't want to be downhill
of that unless I was short.Bill is probably working both sides of the trade so he stays even
till he is sure it has busted out.Then he'll close his long trade and short the **** out of it.
I'm sure Bill would love to see gold double in price.It will have twice as far to fall when
he shorts it because that's his game...and to Mr. Detroit,I don't plan on buying any gold.
I buy lead,much cheaper and more effective for what's coming...if it all goes to hell
my money is on Bubba because that's his game......until then I'll just straddle the trade
like your old hero Bill would (does)..........
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