Are we in a Gold Bubble

19 April 2006 | Jim Verdolini

[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.

[Mike Darancette]

Are we in a Bullion Bubble?

Wouldn't be the first time.

[nickcarraway]

I'm not a fan of fiat money, but I'm not sure it makes sense to tie our currancy to a particular metal. Are the productivity gains of technology etc., really outweighed by the availability of a certain metal?

[nickcarraway]

$1 invested in gold in 1802, was worth $11 in 1997. (See chart by Wharton professor Jeremy Siegel)

[Jim Verdolini]

Gold in the 1800's maintained its value and only rose slowly because it was the basis for all the money in the country. Remember the two metals debate and William Jennings Bryans 'Cross of Gold' speach? Big swings in value only occur when gold is valued in paper money and not serving as the basis for that paper money.

[Fury]

If things go really south and people stop taking paper money, then barter and hard money become vastly more valuable. One might not be able to buy gas for paper or might need so much of it that the paper becomes pretty worthless. In those cases your 2006 silver dollar might buy you a tank of gas when $100,000 in paper money might not

This sounds good in theory, but I wonder in reality how well it works. Then of course, you have folks who have mortgages - they will pay off a mortgage in say, year 2001 dollars with 2006 or later dollars, except that inflation is in check, provided they are still working.

Seems to me that the price has been run up due to current world events, speculation, and perhaps concern about our debt. In any event, I remember reading the posting of a Freeper ~ 1 year ago who stated that if things went bad and the country collapsed, he was well enough armed that he would just take what he needed from his neighbors - probably not the best tactic.

[Labyrinthos]

I understand that completely, which is why I didn't characterize the 1833 - 1973 price stagnation as a "bubble." When did we come off the gold standard?

[Southack]

"Put another way...folk will always take gold and silver."

No, they won't always take it.

They didn't take it when Hurricane Katrina blew New Orleans away last year. Instead, people there traded beer, cigarettes, and ammo. No one took gold. No one.

And as someone who physically panned for gold as a youngster, I can tell you firsthand that you can't just take your ore to the local supermarket to exchange for food.

In fact, try this: go stand on a busy street corner and attempt to sell or trade a pure gold watch.

You'll be shunned by all who pass by.

Gold is an ugly yellow metal that has value only to a few million hucksters...in the real world it means nothing.

Try paying for your supper at a restaurant with gold bullion and you'll see firsthand that gold is disdained by society.

What people want in times of civilization is cash money; in times of chaos: ammo and beer.

[SAJ]

All NYMEX margins can be seen right here.

Be advised of two things: 1) the footnotes ARE important when calculating margin requirement, and 2) the NYMEX website is, as such things go, utterly abysmal.

Good trading to you!

[Southack]

"My guess is a lot of the new wealth of China is being stored in gold..."

If so then the collective IQ of China must be very low. The Chinese Yuan is deliberately undervalued...buying and storing gold with an undervalued currency is very, very poor advice.

You want to buy assets with overvalued currencies, not with undervalued ones. Then when the currencies eventually level off, the assets are worth more to those who once had overvalued currencies and less to those who once had undervalued money.

[zek157]

Think Germany 1922-23, Bolivia in 1983, Peru in the 80's or Iraq. A million Iraqui dinares are worth $900.

When the real value of currency is inflated to worthlessness gold should retain its purchasing power.

[Jim Verdolini]

Gold and Silver are down today, a good bit down. I still would prefer the stuff at $500 for another six months.

[Jim Verdolini]

"They didn't take it when Hurricane Katrina blew New Orleans away last year. Instead, people there traded beer, cigarettes, and ammo. No one took gold. No one."

Do you have any proof of that? I know holders of bullion rode out the fall of the mark very comfortably indeed.

"In fact, try this: go stand on a busy street corner and attempt to sell or trade a pure gold watch.You'll be shunned by all who pass by."

Because everyone thinks the watch is a fake, not real, a sham. Take that same watch to a jeweler and you would get thousands.

[getsoutalive]

Are the productivity gains of technology etc., really outweighed by the availability of a certain metal?

Not really sure what you are asking. But according to Alan Greenspan, a medium of exchange (money) should be durable, fungible, divisible, rare and easily portable. The problem with paper money is that the ones in charge of the printing press have NEVER been able to resist the temptation to print. This violates the rare requirement.

Even before the closing of the gold window in the early 70's, when each dollar printed was supposedly backed by a quantity of gold, the press had run too far. That is why France began to exchange their dollars for gold and why the US was worried about emptying the vaults. Nixon closed the window because they had already inflated the currency and were in danger of losing all gold reserves.

It is less about gold itself and more about not being able to trust politicians to restrain themselves. Imagine that.

[Southack]

"Because everyone thinks the watch is a fake, not real, a sham."

And that's what people think whenever you try to sell them gold on the street. Or in restaurants. Or after a hurricane (e.g. Katrina).

The first thought is that it is fake.

That's why gold is such a poor trading facilitator, especially in chaotic regions/times. You can *barely* sell/trade gold to a few dealers in good times, much less to ordinary people in bad times.

On the other hand, people in New Orleans after Katrina easily traded cigarettes, beer, and ammo. Your first thought when being offered those items is not "it's fake" but rather "I want it."

...Always better to have something that someone else wants.

[Labyrinthos]

Think Germany 1922-23, Bolivia in 1983, Peru in the 80's or Iraq. A million Iraqui dinares are worth $900. When the real value of currency is inflated to worthlessness gold should retain its purchasing power.

I understand what you are saying, but I think you are living in a fantasy world. Unlike Nazi Germany, Bolivia, Peru, and Iraq, we have a strong and time-tested Federal Reserve and monetary system that has prevented the situation that you have described, perhaps in part, because our monetary system is no longer tied to gold. Also, where do you think you are going to be able to spend your gold? Walmart? Most of the people who work in retail sales these days, can't even make change without the help of a computer chip even though our base 10 monetary system is about as simple as one can get. I can see the situation now:

Cashier: "One roll of toilet paper, a carton of Marlboro's, and a case of 000 Buckshot, that will be $21,212.43.

Purchaser: "Do you take gold coins?"

Cashier: "Huh?"

Also, doesn't Federal Law currently prohibit the use of gold as currency?

[Southack]

"Think Germany 1922-23, Bolivia in 1983, Peru in the 80's or Iraq. A million Iraqui dinares are worth $900."

You are kidding, right?! I mean, you do know that most Americans are buried to their eyelids in debt, yes?!

If the above happened to the U.S. Dollar, every home owner in America would be paying off their Jumbo Mortgages.

Think about it; go sell your pack of cigarettes for $1,000,000.00 and then you get to pay off your home mortgage note.

Wheelbarrow of cash to buy a loaf of bread? Suddenly you bake a loaf of bread, sell it, and pay off your car loan.

Oh yeah, Americans would just **hate** that scenario...

...rolls eyes...

< /sarcasm >

[Labyrinthos]

Because everyone thinks the watch is a fake, not real, a sham. Take that same watch to a jeweler and you would get thousands.

You're also living in a fantasy world. Rather than using gold to directly pay for goods and services during a time of chaos and/or hyper inflation, you're suggesting (I think) that we go to jewlers and gold dealers and convert our personal gold stash to dollars. What do you think will happen to the price of gold when there are more sellers trying to cash in than there are sellers willing to buy?

[Labyrinthos]

...I mean "people willing to buy."

[MadIvan]

I spoke to the best monetary expert I know, my father. The answer is no - gold historically rises when the dollar is expected to be weaker. Given the present imbalances in global trade, a weaker dollar is to be expected, and thus a rise in gold prices.

Regards, Ivan

[MadIvan]

By the way, what needs to occur for the dollar to right itself is as follows -

1. The yuan must be allowed to float - it is presently undervalued against the dollar and other major western currencies.

2. The yen should rise - the Bank of Japan does need to be discouraged from doing anything to stop this.

3. The euro should also rise marginally - the same advice for the ECB applies to the euro.

Regards, Ivan