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TMFAleph1 (95.13)

Definitive Proof Gold is a Bubble

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May 07, 2012 – Comments (46) | RELATED TICKERS: GLD , SLV , BRK-B

The Real Returns Report, May 7, 2012

46 Comments – Post Your Own

#1) On May 07, 2012 at 4:10 PM, JaysRage (89.42) wrote:

The Swiss central bank several month ago stated publicly that they were not going to allow their currency to float higher because of the monetary policies of other nations, so they began their own stated policy of deflating the Swiss Franc.   

While gold may very well be in a bubble, I see no reason why your article provides anything substance to the analysis by comparing gold to a currency that is known to be deflated in value by the stated policies of its own central bank.   

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#2) On May 07, 2012 at 4:24 PM, TMFAleph1 (95.13) wrote:

@JaysRage

I think you misunderstand the nature and casue of the Swiss central bank's action. The reason they set a ceiling on the franc relative to the euro is that their currency was overheating to the point that it was hurting their economy, which is small and highly open. That is radically different from a money printing exercise which does, indeed, debase the currency.

Because of its status as a safe haven, the Swiss Franc was becoming overpriced, and the Swiss central bank acted to limit that overpricing. That observation doesn't weaken, it strengthens the gold bubble argument, because gold is running well above its inflation-adjusted average price in a currency that is arguably overpriced. In fact, that the Swiss central bank, which is an extremely conservative organization, chose to implement this policy is itself evidence that the franc was overpiced.

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#3) On May 07, 2012 at 4:36 PM, TMFAleph1 (95.13) wrote:

Furthermore, if you look at the inflation-adjusted price and return series in Swiss francs, you'll find that gold was running well ahead of historical averages long before the Swiss National Bank began announcing measures against the strong franc in August 2011.

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#4) On May 07, 2012 at 6:20 PM, SlowThought (62.31) wrote:

Your argument holds if you believe that gold is a store of value, that value is measurable in a consistent way. This is (in my opinion) an assumption that has been widely adopted just because it allows economists to do math. There are economists who believe differently, that believe "value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment." And they mean "man", not "Man". Men (and women) are individuals, buying and selling gold for their own reasons. Those still holding gold are likely to continue to do so, and so I do not see them being talked out of it with a strong Swiss franc, by quibbling over the relative strength of various fiat currencies. I see very little chance of this "bubble" bursting, but there are still many possibilities on the horizon that could make gold popular again.

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#5) On May 07, 2012 at 7:03 PM, TMFAleph1 (95.13) wrote:

@SlowThought

I absolutely agree that gold's value is not intrinsic and that its price is the expression of investors' subjective preferences. However, these preferences are hardly immutable: With regard to gold, there is certaintly a core community of investors that is unlikely to be dissuaded from selling their asset; however, I think the preferences of the overwhelming majority of people who own gold in their investment portfolios today are much more volatile.

As far as the bubble bursting, I don't see it either because we have not seen witnessed sort of frenzied demand that characterizes the end stage of a bubble and precedes a crash(except, to a limited degree, in the run-up $1,900.) However, other scenarios are possible -- a slow, downward drift in prices or stagnation in nominal prices over a multi-decade period during which inflation brings real prices back into line.

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#6) On May 07, 2012 at 7:12 PM, SlowThought (62.31) wrote:

A slow downward drift punctuated by upward spikes prompted by reckless govenment policies could be a series of profit opportunites!

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#7) On May 07, 2012 at 7:16 PM, TMFAleph1 (95.13) wrote:

Yes -- if you are proficient at that game, in which any edge is hard-fought. Personally, I don't feel like I have any sort of advantage in that arena.

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#8) On May 07, 2012 at 7:20 PM, Frankydontfailme (27.30) wrote:

"Because of its status as a safe haven, the Swiss Franc was becoming overpriced, and the Swiss central bank acted to limit that overpricing."

I don't understand. Who is to stay what is overpriced, underpriced, or properly priced if not the free market?

Wasn't the swiss currency priced to perfection, and is now underpriced due to central planning? 

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#9) On May 07, 2012 at 7:40 PM, TMFAleph1 (95.13) wrote:

"Wasn't the swiss currency priced to perfection, and is now underpriced due to central planning?"

It depends what you mean by "underpriced." If you mean that the Swiss Franc would be stronger if the Swiss National Bank were not selling Swiss Francs to maintain a minimum exchange rate of CHF 1.20/ euro, then I agree with you.

If, on the other hand, you mean that no price that is set in the market in the absence of SNB intervention will ever deviate from fair value, then I disagree.

 

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#10) On May 07, 2012 at 7:43 PM, TMFAleph1 (95.13) wrote:

Either way, the current impact of SNB intervention is simply not that significant to the analysis of the Swiss franc-denominated gold price and return series.

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#11) On May 07, 2012 at 7:46 PM, TMFAleph1 (95.13) wrote:

...particularly since both series are inflation-adjusted.

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#12) On May 07, 2012 at 8:02 PM, Frankydontfailme (27.30) wrote:

What is the "fair value" of a currency?

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#13) On May 07, 2012 at 8:06 PM, TheDumbMoney2 (98.59) wrote:

Alex,

Off topic, but you should do an article about how Jeremy Grantham's increasingly Malthusian impulses are getting in the way of his more generally-correct reversion-to-mean worldview.  I view your work as very similar to what GMO does, but without the wild-eyed view of what is likely to happen with commodities.

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#14) On May 07, 2012 at 8:39 PM, TheDumbMoney2 (98.59) wrote:

Franky, do you think that China's currency is fairly valued?   (no)  If not, why not? (because they have artifiically pegged it to the dollar, refusing to allow appreciation) What do you think would happen if China removed the dollar peg? (the appraised value of the renminbe would soar)   Do you not think the dollar/renminbe exchange rate would shift dramatically?  (not applicable)

My answers are in parentheses.  The value of a currency is determined by the supply and demand for that currency.  For real countries, demand is created by things like capital inflows/outflows, investment, use as a reserve currency, and supply is created by central banks and by lending.  (Roughly speaking.)

Currencies absolutely can be valued, and can be over-or  undervalued, and the renminbe is undervalued  (To a certain extent, this has expressed itself in internal Chinese inflation, as the real exchange rate begins to assert itself in that manner.)

Before the Swiss Central Bank acted, temporary "safe haven" demand for Swiss francs by terrified Europeans was driving the currency to a vastly higher valuation than would conceivably be possible given every single other component of supply demand.  The currency was over-valued.  This was expressing itself by making Swiss-manufactured goods intensely and increasingly non-competitive on the world stage, which they did not deserve -- why should Swiss manufacturers get screwed because Europeans are freaked out?  (So said the Central Bank, though likely in impeccable French.)

So anyway, the actions of the Swiss Central Bank are in a certain sense no different than the actions China has taken re: the currency PEG. 

Of course, if you are just a believer in the efficient markets hypothesis, as applied to currencies as well as equities, then there is little hope of convincing you.  Of course, if that is true, then to be intellectually consistent you should also be invested in nothing but index funds and a basket index of currencies, which I doubt is the case.  (Otherwise, why try to exploit non-existent inefficiencies or under- or over-valuations by picking anything specific?)

Gold is a tough nut.  I have accepted it is a currency, or a pseudo-currency.  Unlike other currencies, it cannot be manipulated by a central bank.  (You and Mr. Barker love that.)  However, it can be increased randomly by new gold production, which I find troubling, as I would rather have the Fed deciding when we need more or less currency than I would the executives at Yamaha Gold.  And moreover, demand for it is unconnected to any deeper productive capacity of any country, at least today (a peg would change that to some extent I think, but only to some extent).  This means gold can only really be valued in the negative, by looking at the value of what it is not, sort of like a quantum particle or something.  That's why I love Eddy Elfenbein's model.

People who love gold often do just that, only they do it in less empirical terms by talking about central bank "debasement" of what it is not, namely actual country currencies.  The thesis is that as all of the other countries "debase," money-demand will flow to the "real money," gold.  Tyler Durden and Ron Paul are the most culturally-relevant proponents of this view.  I think there is a grain of truth in this, as there is in all nonsense.  The truth is as follows: if the Eurozone and the U.S. were simultaneously to collapse, gold would become the world reserve currency.  That's your bull case if you are a gold bull, which is, well, whatever.  But when Zimbabwe's currency collapsed in hyperinflation, they did not turn to gold, they turned primarily to dollars and Euros and Swiss francs and the Rand.  If any small country collapses or hyperinflates into oblivion, that's what happens, and will happen.  (Unless it's total societal collapse, as in Sudan, where they reverted to pre-gold-era, hunter-gatherer-style bartering.) 

Even if the Eurozone itself collapses, it could be done in a manner similar to how the Austro-Hungarian empire was unwound, where the Euro would be converted back into local currencies.  The demand would go to the lira and to the deutsche mark, not to gold.

And the U.S. is not going to collapse.  All the talk about the derivatives market for the last three years is the helium-voiced talk of people who know nothing about the market.  And all the people who scream in horror about our national debt ignore how high our national net worth has gotten in the last forty years: the national debt is the result of a loss of will to tax, not of national insolvency -- per-person-individiual and corporate net worth are back at all time highs, as a nation.  It just doesn't feel like it to you, because Gates and Buffett and Zuckerberg and the Waltons hold all of that national net worth, more so than in fifty years, not you.

Sorry for the typo-laden and un-proofread rant!

 

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#15) On May 07, 2012 at 9:30 PM, Frankydontfailme (27.30) wrote:

Thanks for the rant TDM. 

"Franky, do you think that China's currency is fairly valued?   (no)  If not, why not? (because they have artifiically pegged it to the dollar, refusing to allow appreciation) What do you think would happen if China removed the dollar peg? (the appraised value of the renminbe would soar) "

I don't agree with your answer that it would soar, and suspect that the yuan is artificially overvalued... just a suspicion and no way to know (wouldn't it be funny if Romney and crew got their wish and the yuan tanked lol)?

" The currency was over-valued.  This was expressing itself by making Swiss-manufactured goods intensely and increasingly non-competitive on the world stage, which they did not deserve -- why should Swiss manufacturers get screwed because Europeans are freaked out? "

I agree with you that the strong currency was potentially detrimental to major Swiss exporters. However, the Swiss Franc strength greatly benefitted the common people of the nation (who had a very low unemployment and a strong currency they were paid in). I haven't done the research on this yet, but do you think wages of the common Swiss person have risen with the devaluation?

Strong currencies benefit the people at the expense of the 1%. Oh Em Gee why don't liberals want strong currency (they are dumb and or they hate the poor or both..(kidding..(not really))).

I like your analogy of the quantom particle and gold.

I don't get why world's currencies need to collapse for their to be a bull case for gold. Actually, I'd be content for the major economies to just keep on keeping on like they're doing. Not allowing any scary deflation.  Not allowing any scary austerity. China will not allow a hard landing during a political turn over year (print print print), Greece and France won't vote for austerity (print print print), Cameron's "austerity (lol this is austerity?)" has failed in the UK (prrrrint), every news reporter and their mother is terrified of the "fiscal cliff (um it's a cliff?)" that will take away a million points of GDP from the US (deficit spend, devalue), Australia is slowing..... you get the point. 

Whenever there's a calamity, gold actually drops. I'd prefer for the idiots to keep on keeping on.  Let them have their fun. The question, when the true crisis comes, will gold continue to rise or drop?

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#16) On May 07, 2012 at 9:40 PM, TMFAleph1 (95.13) wrote:

"Strong currencies benefit the people at the expense of the 1%."

What's your basis for writing this? It doesn't necessarily benefit them if they are employed in export-driven businesses.

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#17) On May 07, 2012 at 9:44 PM, whereaminow (20.23) wrote:

Alex,

Rather than argue methodology again, I was wondering if you could detail your reasoning for how gold became a bubble asset class. For example, during the housing bubble, economists who predicted it was a bubble could detail a story about how the bubble came into effect, which in turn leads to discussion about how bubbles are formed and exacerbated.

I think that would be a more interesting discussion, and perhaps it would keep the conversation from the usual goldbug v. paperbug mud slinging. Well.. hopefully.

David in Liberty

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#18) On May 07, 2012 at 9:46 PM, TMFAleph1 (95.13) wrote:

@TheDumbMoney2

I'm trying to post a response to your initial comment, but for some reason CAPS isn't putting it up, which is extremely irritating... 

Thanks for your comments, both of which are interesting.

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#19) On May 07, 2012 at 9:51 PM, TMFAleph1 (95.13) wrote:

@TheDumbMoney2

You can send me an e-mail at alex.dumortier@gmail.com and I'll send you my response; I'm afraid I'm too busy to re-type it, but copying-and-pasting is within my capability.

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#20) On May 07, 2012 at 10:18 PM, whereaminow (20.23) wrote:

TheDumbMoney2,

I want to discuss one paragraph in your comment. I'll leave the rest alone for now, except to point out that you are missing a very key component in your brief analysis of a currency's strength or weakness.

Gold is a tough nut.  I have accepted it is a currency, or a pseudo-currency.  Unlike other currencies, it cannot be manipulated by a central bank.  (You and Mr. Barker love that.)  However, it can be increased randomly by new gold production, which I find troubling, as I would rather have the Fed deciding when we need more or less currency than I would the executives at Yamaha Gold.  And moreover, demand for it is unconnected to any deeper productive capacity of any country, at least today (a peg would change that to some extent I think, but only to some extent).  This means gold can only really be valued in the negative, by looking at the value of what it is not, sort of like a quantum particle or something.  That's why I love Eddy Elfenbein's model.

If new gold production is troubling to you, how can you also support central banking, which is the ability to create any amount of money (deemed necessary, which I'll get into) at the whim (end result of an equation) of a technocrat?

It seems to me, that no invention and advance in technology has ever generated the capacity to increase gold production at the rate which central banks can create paper money?  If the sudden increase in the money stock is actually a legitimate concern, how in the world can you find any refuge in central banking?

Judging by your commentary, I suspect that you believe the econometric approach of the Federal Reserve economist is the safe haven that will keep the money stock at the optimal or near optimal amount.  I find this view flawed, but I will say that I can't be certain it is your view, since you have not flatly stated it. After all, you believe that Franky is a proponent of efficent market hypothesis, and since I've known and debated with Franky for quite a long time now, I can say flatly that you have him in the wrong pigeon hole.

Instead, I will tell you what I believe. I believe that any amount of money is the proper amount so long as it is subject to the laws of supply and demand.  I hope you do at least believe in the laws of supply and demand. They are just as applicable to money as to any other economic good.  Money is an economic good, subject to the same laws as an iPad or a bushel of wheat.

If the value of money rises, which in turn lowers costs, this provides an incentive to Yamaha Gold to seek out and mine more metal. In turn, as more money enters the market, its value falls, profits for miners are reduced, and the incentive to bring more gold to market drops.

This is economic law. Under a classical gold standard (not the gold exchange standard of post WWI), the consumer is not beholden to Yamaha Gold. Yamaha Gold is beholden to the market, like every other business.

For a better understanding of the Austrian School view of money production, this speech - to be delivered tomorrow at the Fed hearing - is a nice summary.

With all that being said, can the Federal Reserve actually know the correct amount of money in an economy? Obviously not, but let's examine the real reason why they cannot.

In the physical sciences, there are constants. I have yet to discover a single constant in economic study that is as exactly measured as "Water freezes at 32 degrees F."

Now, if you can find one, I'm open to changing my mind. But until then, I don't see any value in treating economics as if it did have constants whose mathematical precision can be calculated.

Value, as was pointed out by another commentor above, is always in the eye of the beholder. In other words, all value is subjective. It is ranked, not statistically measured, in the actor's head.  I am certain you have never said "I want to see Movie "X" 43% more than Movie "Y"".

In order to determine the proper amount of money in an economy, if one is intent of using central planning and force to do so, then you must be able to prove how it can be that a central banker can peer into the cranium's of every single market actor and determine their subjective value of the money in their wallet versus the goods that can be purchased with it.  This would be quite a feat! But even after such ESP is employed, our central banker would still have the problem of seeing only rankings and measurements. Ay karumba!

So instead of that hocus pocus, why not allow money to enter an economy in the same way as any other good?  I will not be swayed by arguments of chaos, since that is all central banks have every provided anyway.

David in Liberty

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#21) On May 08, 2012 at 12:18 AM, TheDumbMoney2 (98.59) wrote:

David, you said:

"I believe that any amount of money is the proper amount so long as it is subject to the laws of supply and demand. I hope you do at least believe in the laws of supply and demand. They are just as applicable to money as to any other economic good."

I would amend that statement thusly:

I believe that any amount of money is the proper amount so long as it is an amount that maintains a moderate but stable rate of inflation, in the face of the irrational, wild swings one sees in the demand for money, as one sees in demand for about any economic good.  I for one don't seek constants in economics, ever.  I only seek better alternatives. 

And no, I don't have to prove that a central banker can peer into anyone's cranium, let alone everyone's.  All I have to do is trust that with blunt instruments a central banker can basically keep the rising level of prices within a relatively tight band, such that anyone with a brain who invests in productive assets can profit handily over time.

I do not choose fiat money because I like central intervention.  I chose fiat money and the imperfect hand of a central bank because it is empirically better.

This guy recently posted a graph that I myself have created in the past using data from the FRED database, although I did not do it just this way.

The chart is here:  http://esoltas.blogspot.com/2012/04/good-old-days.html?m=1

It is stark.  Before the creation of the Federal Reserve there were more recessions, they were worse, and a greater percentage of each prior decade was spent in recession.  And if you look closely you will note that the real change did not even occur with the federal reserve, rather it changed when countries went off the gold standard in the 1930s.  Anyone who wishes to be taken remotely seriously while advocating a serious gold standard needs to grapple not with theory, not with ideals, not with textbooks, but with the stark distinction between the 1854-1935 data, and the 1935-2012 data.

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#22) On May 08, 2012 at 12:48 AM, TMFAleph1 (95.13) wrote:

Rather than argue methodology again, I was wondering if you could detail your reasoning for how gold became a bubble asset class. For example, during the housing bubble, economists who predicted it was a bubble could detail a story about how the bubble came into effect, which in turn leads to discussion about how bubbles are formed and exacerbated.

What a civil tone, David -- I barely recognized you.

The "story" of this bubble is not mysterious and it is based on exactly the concerns that goldbugs are constantly going on -- many of which are, at their basis, perfectly legitimate. However, expressing those concerns in terms of millenarian scenarios for the U.S./ global economy is not enough to justify any price for gold.

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#23) On May 08, 2012 at 1:23 AM, whereaminow (20.23) wrote:

TheDumbMoney2,

I do not say this with arrogance, but rather with a simple understanding of the situation. You are at a tremendous disadvantage here. I have studied the position you are taking for years and can disect it in and out, which I will do starting in the net paragraph. On the other hand, it is evident by your response that you are only vaguely aware of the positions of the economic school that I follow and do not fully grasp its method or analysis. This puts you in a serious uphill climb in a debate with me. Imagine going into a battle where one general knows a great deal about the other side, while the other has only bits and pieces of information about his counterpart. But take heart. First, it's easy to learn about Austrian School Economics at www.mises.org. Second, you are no worse off than the Motley Fool writers I regularly debate. I just hope you won't end up like so many here, who once defeated in debate simply put their fingers in the ears (figuratively speaking) and reflexively taunt with buzz words (kook, goldbug, wingnut, etc), thinking this will make their worldview safe again.  Ah, so much fun here....

I believe that any amount of money is the proper amount so long as it is an amount that maintains a moderate but stable rate of inflation, in the face of the irrational, wild swings one sees in the demand for money, as one sees in demand for about any economic good.  I for one don't seek constants in economics, ever.  I only seek better alternatives. 

I will assume you use the term "inflation" in the modern sense of a general rise in consumer prices, not in the classical sense of an excess issue of currency. From here on out, I will refer to the former as "price increases".

It is impossible for a central banker to know what amount of money will bring about a steady, moderate amount of price increases. I'm not quite sure you understand the point of all value, even the value of money, being subjective. An economic actor choses to exchange or not exchange money based on their ranking of the value of the marginal unit of money to be exchanged versus the marginal unit of the good to be attained. This cannot be known in advance. Only through action is an actor's preferences revealed. Hence, the central bank cannot know in advance how economic actor's value the marginal unit of money.

The idea of a stable rate of price increases comes was popularized by Irving Fisher, father of the Chicago School. Fisher was able to "overturn" years of economic study, including the marginalist revolution, by assuming away the subjectivity inherent in the utility of the marginal unit. He fallaciously concluded that utility was measurable and that the incremental decrease in utility was a constant. As you have agreed, such ideas are nonsensical. There are no constants in economic science.  For more Irving Fisher's follies, see "The Theory of Money and Credit" by Ludwig Von Mises, pp.42-45) PDF here.

Fisher's theory has led to a 2,240% increase in prices since the creation of the Federal Reserve. I do not view such price increases as "moderate". The money supply has increased by 12,230% under the Federal Reserve system. Again, there is no economic means by which a central banker can know that an economy needs x amount of dollars to maintain a stable amount of price increases, let alone a 12,230% increase over 100 years. 

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

I am not aware of wild swings in the demand for commodity money under a classical gold standard, though I am sure one could point to one time or another during its history and find some evidence of an event. However, we have seen wild swings in the demand for paper money all throughout its history. This is natural and perfectly understandable. Commodity money arises because the commodity itself is in demand. It is an economic good before it becomes a money. However, paper money has never been voluntarily selected as a money by any community in human history. Paper money must be implemented upon its first generation by force. Whether or not future generataions understand how they came to use paper does not change the fact that purely fiat money must be thrust upon the market from an external force. It is not organic. Therefore, it is also not essential to the market economy.

Taking this line of reasoning one step further, since all prices arise from the voluntary exchange of market actors, and adding that we know that any intervention distorts price signals, pure paper fiat money can never deliver prices that represent reality as closely as voluntary money can. It is an intervention in the market economy that requires violence or the threat of violence to maintain its existence. This is why the producer of Liberty Dollars was accused of engaging in a "unique form of domestic terrorism" by the Federal prosecutor.  Force must be in place to keep paper money supreme.  Hence, prices under a paper regime will never be closer to representing the real value of the underlying resources as they will in an economy with natural money.

So we have determined several things.

1. There is no way for a central banker to know what amount of money will bring about a stable level of price increases.

2. Under central banking prices have increased by 2,240% since 1913.

3.  Central bank money violates the economic law that prices are formed from the voluntary exchange of market actors.

All I have to do is trust that with blunt instruments a central banker can basically keep the rising level of prices within a relatively tight band, such that anyone with a brain who invests in productive assets can profit handily over time.

This is a non-sequitor. Anyone with a brain can invest in productive assets whether the price level is rising or falling. Whether it is stable or unstable. As we have seen, the Fed does not maintain a stable price level, unless a 2,240% increase is your definition of stable.

This guy recently posted a graph that I myself have created in the past using data from the FRED database, although I did not do it just this way.

The chart is here:  http://esoltas.blogspot.com/2012/04/good-old-days.html?m=1

Ah yes, well besides being an Appeal to Authority ("the NBER says it's a Recession so it must be true"), the chart is obviously false.

For example, there is a large period of Depression in the chart starting in 1873 and extending for several years. We know now that there was no Long Depression.  Even Charles Morris has admitted in the NYT (no kid!) that there wasn't really any such depression. In fact, it might have been the most propserous growth period in American history!  That makes the NBER's cycle data just a bit suspect, doesn't it? When the biggest depression it recorded was actually a period of spectacular and consistent growth?

http://www.nytimes.com/2006/06/02/opinion/02morris.html?_r=1

"But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history."

So why did economists (at the NBER) think that the 1870s was a Long Depression? Because prices fell.  To a modern econometrician, price declines are the apocalypse.  Never mind that there is no correlation between deflation and depression.

"The data suggest that deflation is not closely related to depressions.  A broad historical look finds more periods of deflation with reasonable growth than with depression, and many more periods of depression with inflation than with deflation.  Overall, the data show virtually no link between deflation and depression." (Emphases added.) 

Andrew Atkeson and Patrick J. Kehoe, ""Deflation and Depression: Is There an Empirical Link," American Economic Review Papers and Proceedings 94 (May 2004): 99–103. The first co-author is on the faculty of the Department of Economics of UCLA and the second works in the Research Department of the Federal Reserve Bank of Minneapolis.

Anyone who wishes to be taken remotely seriously while advocating a serious gold standard needs to grapple not with theory, not with ideals, not with textbooks, but with the stark distinction between the 1854-1935 data, and the 1935-2012 data.

I'm curious as to why the cutoff was selected at 1935. Wasn't there a really big event that happened just before that?  Since the Federal Reserve began its existence in 1913, it seesm that anyone selecting time periods for comparison would choose that date. Well, we know the answer to this.

I suppose we'll move to the Great Depression next. I fear you believe the textbooks which tell you the GD was caused by unfettered free market euphoria.  You will not include in your analysis that the money stock was increased by the Federal Reserve from 1921-1929 by 61.8%, or will you? ("America's Great Depression" by Murray Rothbard, pp. 92-93)

David in Liberty

 

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#24) On May 08, 2012 at 1:31 AM, whereaminow (20.23) wrote:

Alex,

What a civil tone, David -- I barely recognized you.

I've been drinking heavily.

The "story" of this bubble is not mysterious and it is based on exactly the concerns that goldbugs are constantly going on -- many of which are, at their basis, perfectly legitimate. However, expressing those concerns in terms of millenarian scenarios for the U.S./ global economy is not enough to justify any price for gold.

This is pretty much schtick that I hear from the usual sources. Doesn't really get my nipples erect. Gold prices hit their low in 1999. That's 13 years of being pushed up by a tiny miinority of the population. I think we both agree that the percentage of Americans who own gold is miniscule - a tiny minorty at best.  Doesn't seem like the whole story to me.

David in Liberty

 

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#25) On May 08, 2012 at 8:42 AM, TheDumbMoney2 (98.59) wrote:

David,

It may help you to learn that TheDumbMoney is a renamed handle for "dumberthanafool," I was under the misapprehension that you knew that, since Franky and Babo and Housel and many others know that.  And TheDumbMoney2 is just a second handle I created to actually try to do well in CAPS.

Amidst all your helpful attempts to educate me, you failed to grapple with the start divergence in data from before the era when the U.S. went off the gold standard.  I selected 1935 simply because that was during the line down on the chart after which it changes its character entirely.  And I chose it because of the federal Gold Reserve Act of 1934 and related measures, which were the beginning of ushering in a relative era of greater stability. 

I fear based upon your rather wrote response, which obviously I have seen before, that you did not even look at the actual link and its chart, which was the centerpiece of my response to you. Prior to the U.S. going off the gold standard, the Fed had obviously not been freed entirely to act as a true central bank in the same sense that it does today.

Cheers.

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#26) On May 08, 2012 at 9:53 AM, whereaminow (20.23) wrote:

DTAF,

Amidst all your helpful attempts to educate me, you failed to grapple with the start divergence in data from before the era when the U.S. went off the gold standard. 

Appearantly you missed the part where I took the most egregious example of the NBER's chart being completely wrong. I did that to save time so I wouldn't have to take every single example of the 1854-1913 period, excluding the Civil War, and show you how the NBER has no clue.  I figure a reasonable man - you are a reasonable man, right? - would see that if the Long Depression is indeed classified incorrectly (or do you dispute that?), he might also come to understand that 1800 economic data reconstruction is about as useful as a c*ck flavored lollipop.

However, if what you want is a detailed description of the economic conditions of 1873-1913 (I get to choose the dates - because of the Greenback/Civil War issue, the US was not on a true gold standard from 1861-1873), perhaps I will give you that. But as Colonel Jessup said, you have to ask me nicely.

I'm disappointed to find out it's the same old DTAF, for sure. As you can see, when I think there's someone new in the house, I try to be reasonable. You may not remember, but before your looney tunes attacks on libertarians and anyone who likes gold, this is how I treated you.  Unfortunately, you've long past shown any interest in learning as much about Austrian School Economics as I have learned about econometrics.

So, to summarize, I have answered the critique of your nice little chart. Either I can continue to breakdown every way in which the NBER is hilariously off base, or you can read Murray Rothbard's A History of Money and Banking in the United States, Colonial Era to WWII, or Capitalism and the Historians by F.A. Hayek, or if you want something more recent The Politically Incorrect Guide to American History by Tom Woods.

Of course, it should be obvious that you actually haven't answered a single critique of mine, particularly how in the world a central banker can know the amount of money that brings about a steady rate of consumer price increases (and as you see I haven't even touched on the fact such a steady increase isn't even desirable or how it leads to asset booms.)

Same old, same old. Yawn.

David in Liberty

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#27) On May 08, 2012 at 10:33 AM, TheDumbMoney2 (98.59) wrote:

Yawn indeed.

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#28) On May 08, 2012 at 11:38 AM, TheDumbMoney2 (98.59) wrote:

Also, David, having now had the pleasure of experiencing one of your opening salvos for a second time, I must say that I actually much prefer the later insults to the preemptive condescension!

With much affection,

DTAF

TDUM

DMON

Or, as Mr. Barker initially dubbed my new handle,

HUM T DUM T

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#29) On May 08, 2012 at 12:11 PM, JaysRage (89.42) wrote:

Currently intervention is currency intervention.   You can dismiss it all you like, but the fact is that Swiss currency is being debased in a very public way.  Therefore it cannot be used in a store of value comparison.   Is it debasing itself slower than other fiat currencies....sure (not too difficult)....but it is not close to zero, therefore there is reason to believe that the price of gold should not remain stable as measured in this currency.  It means that Swiss franc is not a store of value.    It is a means to stabilize the Swiss economy and there is no foundation to use it as a comparison for a store of value.    I find it completely stunning that you would actually defend this line of reasoning. 

Again, I am not passionate that gold is or is not overpriced at current levels.   I do not see how treating the Swiss franc as a store of value adds any meaningful or useful weight to the discussion. 

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#30) On May 08, 2012 at 1:15 PM, TMFAleph1 (95.13) wrote:

@JaysRage

Even if your argument were absolutely correct, it would not help to explain why gold prices and returns were running significantly above historical averages well before the SNB took any action to weaken the Swiss franc.

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#31) On May 08, 2012 at 1:19 PM, Frankydontfailme (27.30) wrote:

#30 what is the market *gasp* anticipated the devalution?

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#32) On May 08, 2012 at 1:26 PM, TMFAleph1 (95.13) wrote:

@JaysRage

Furthermore, these are real prices and returns, i.e. increases reflect increases in purchasing power. A store of value maintains its purchasing power, it does not compound it at 11% per annum, as gold has done.

No need to debate the semantics of currency debasement when I have a series that represents the real value of an ounce of gold to a Swiss citizen over time.

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#33) On May 08, 2012 at 1:27 PM, JaysRage (89.42) wrote:

You could certainly compare gold price vs supply against Swiss franc price vs supply if you have that data available.   

With the U.S. dollar, the exponential increase in the monetary supply makes that a really scary graph because it could potentially support very high gold prices (far above the current levels).   Does the Swiss franc increase in supply happen in a lesser fashion (as I suspect it does), even prior to the public formal debasement?    

I do not think the hypothesis that the Swiss franc was holding steady holds water prior to the SNB announcements.   I just think the debasement took on a whole new level when there was a formal, intentional plan to do so.   

 

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#34) On May 08, 2012 at 1:30 PM, TMFAleph1 (95.13) wrote:

If the market had correctly anticipated it, then the Swiss franc would have weakened accordingly and there would have been no need for intervention.

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#35) On May 08, 2012 at 1:34 PM, Frankydontfailme (27.30) wrote:

The gold market anticipated it, the Swiss Franc market isn't a free market, central banks set its price.

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#36) On May 08, 2012 at 1:38 PM, JaysRage (89.42) wrote:

If you are comparing purchasing power, you need to compare to things that are purchased, such as food and gasoline, which are significantly inflated as well.   

Of course, you could make the argument that gas and food are also in a bubble.   It's possible.   The difficulty comes in finding something....ANYTHING.....that is actually standing still to make some sort of a comparison.  These things don't go up in straight little lines.  They go up in bursts and drops.  When gold was steady at $500 an ounce, oil was steady at $30 an ounce. Does anyone realisticly think that we're going back to $30 oil?   $60 appears to be a floor, which means that a realistic floor for gold is around $1000.   At $100 oil, $1650 gold seems about right.   Is there speculation in oil?  Sure.  Is the price inflated? Possibly.   Right now, oil and gold are priced almost to historical perfection with one another.  

At some point, you have to seriously consider that the seeds of inflation are taking root and manifesting themselves in several different areas, including oil, gold, food and other commodities.

Again, I'm open to the idea that gold is overpriced at $1650.   However, I have no reason to believe that monetary policy will EVER allow the long-term recessionary situation that would find oil at $30 and gold at $500 ever again.   In fact, I'm convinced that Bernake would fight to the death to make sure that doesn't happen.   I would expect to see a total collapse of the entire financial system before we see $500 gold ever again.  

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#37) On May 08, 2012 at 1:44 PM, Frankydontfailme (27.30) wrote:

#36 NAILED IT.

Sure, gold is a bubble if you end the central banks and allow the debt to liquidate. Otherwise enjoyed being the boy who called wolf on the gold bubble.

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#38) On May 08, 2012 at 1:45 PM, TMFAleph1 (95.13) wrote:

With the U.S. dollar, the exponential increase in the monetary supply makes that a really scary graph because it could potentially support very high gold prices (far above the current levels).

This is a common fallacy used to argue for higher gold prices. The money supply has not increased exponentially -- the rate has been roughly constant since 1995 and, in fact, it was higher during the 1980s:

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=M2&log_scales=Left

The monetary base, on the other hand, increased rather dramatically during the financial crisis:

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=BASE&log_scales=Left

Monetary base and money supply are not equivalent! Note that the monetary base is a narrow measure of money.

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#39) On May 08, 2012 at 1:47 PM, TMFAleph1 (95.13) wrote:

If you are comparing purchasing power, you need to compare to things that are purchased, such as food and gasoline, which are significantly inflated as well.

That is exactly what I did by using the Swiss CPI to normalize the Swiss franc-denominated gold prices.

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#40) On May 08, 2012 at 1:56 PM, TMFAleph1 (95.13) wrote:

The gold market anticipated it, the Swiss Franc market isn't a free market, central banks set its price.

The only way central banks could set the price of the franc would be through intervention. If you think major central banks give a toss about the value of the Swiss franc, you're mistaken. Besides, what possible motive could major central banks have for keeping the Swiss franc artificially inflated? Your narrative is becoming confusing.

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#41) On May 08, 2012 at 2:05 PM, whereaminow (20.23) wrote:

The only way central banks could set the price of the franc would be through intervention.

The only way a murderer can kill someone is by murdering them... and we all know that could never happen!

A central bank is an intervention. Its function is to set the price of money. 

Arguing that it would never do that is like arguing that the murderer would never kill anyone.

David in Liberty

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#42) On May 08, 2012 at 2:05 PM, JaysRage (89.42) wrote:

CPI is a metric that purposely excludes oil (gas) and food, which ironically are a large portion of a household's actual purchasing, so you've conveniently avoided the most apt comparison and instead focused on items that are generally discretionary in nature, and during a non-expansionary environment, it is expected that discretionary items would not be allowed to increase at the same rate as non-discretionary items.      

Yes, I realize that CPI is an official and approved government measure.  I also think it's critically flawed and biased and inappropriate to use in a comparison with a commodity.   I continue to favor the "basket of commodities" approach.   I think gold price appreciation continues to hold up well against oil and food comparisons (especially oil, as stated in an earlier post) 

 

 

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#43) On May 08, 2012 at 2:14 PM, TMFAleph1 (95.13) wrote:

CPI is a metric that purposely excludes oil (gas) and food

It's important not to confuse everything in economic matters. Just as the monetary base is not the same thing as the money supply, the core CPI is not the same thing as the CPI. What you are referring to is the core CPI. The CPI absolutely includes food and energy costs.

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#44) On May 08, 2012 at 2:24 PM, TheDumbMoney2 (98.59) wrote:

Folks,

It's important to parse what people mean when they use the term, "debasement."  I have seen at least three meanings: 1) it is used to talk about the value of the dollar vs. other country currencies; 2) that failing, people will use it to refer to inflation rates; 3) that failing, people will use it to talk about value of dollars vs. gold, i.e., the price of gold in dollars.  This is the self-fulfilling definition of debasement, used when gold happens to be increasing.

Often you will see the usage shift while you are in the same discussion.  Ask yourself, has it shifted or been used in multiple ways in the above discussion already? 

Review of Debasement Meaning 1:  As can be seen in this chart, folks, there has been no, zippo, zipitisimo "debasement" of the dollar against a basket other currencies since the inception of the financial crisis in Fall 2008, though there was a ton from about 2002 through Fall 2008:

http://www.fxstreet.com/rates-charts/usdollar-index/

Clearly however, given the peaks and troughs you see, which match the timing of QE1, QE2, and QE3 (more popularly known as Operation Twist), Fed policy has prevented dollar appreciation that would otherwise have happened.  This has made dollar-rich multinational investors very unhappy, since it has meant they can't buy as many foreign-denominated assets as they otherwise could have.  But it has made U.S. manufacturers very happy.

Review of Debasement Meaning 2:  After a brief deflationary bout in late-2008-early-2008, we have resumed our very steady upward slope on the CPI, which shows no extraordinary "debasement" in inflation terms since the 2008-2009.  See here:

http://research.stlouisfed.org/fred2/series/CPIAUCSL?rid=10&soid=22

Note that I'm using BLS data as charted by FRED because I know that David in Liberty thinks so much of the BLS and of the St. Louis Fed.

Of course one does see the early-80s inflation reflected in a steeper curve there.  And one sees that inflation has generally been higher since some event that happened in the early 1970's.  David, maybe you can fill everyone in on what happened in the early 1970's.

Of course, since that time, U.S. individual net worth, net of our debts, has also grown as well, from about $4 trillion to just shy of $60 trillion (unadjusted for inflation), see here:

http://research.stlouisfed.org/fred2/series/TNWBSHNO

Adjusted for inflation, net worth has in fact actually dropped since 2000, which is totally unsurprising since at that time the stock market was in a bubble larger than the one from 1929.  But since 1972 it has basically kept pace with inflation overall.

2000 was of course the beginning of a rawther typical cyclical bear market, as one can see here:

 http://dumbmoney.tumblr.com/post/22651008154/ritholtz-on-100-years-of-bull-and-bear-markets

My only problem with that chart, which Rithotz made, is that I think the entire period from 1929 to 1940ish was one big secular bear market.

In my view, the buying of gold and silver and guns et all will peak again at the end of this secular bear, just as it did in the early 1980s at the end of the last one, and just in time for the next secular bull market to begin.  Also at that time one will see the loudest screams about "structural problems," before the investment and credit cycle begins anew, and many of these "structural problems" disappear.

I tend to think we're not there yet.  I agree with Hugh Hendry, here (http://dumbmoney.tumblr.com/post/22257653619/is-it-time-to-invest-in-europe-by who thinks there is likely to be at least one more major leg down before the secular bear ends and a generational buying opportunity for stocks arrives. 

But since I'm not sure, and since we are way down still from the peaks, I continue to buy here and there.  Also I buy because at the end of the day I'll follow Buffett more than anyone, and he just said look for cheap stocks.  I managed to pick up some XOM and PM even near the great all-time 2000 market P/E peak and still make great money over the last 12 years.  The same will undoubtedly be true now, notwithstanding the hypertechnical (and possibly more technically correct)  focus on PE10 and Tobin's Q, etc.

Cheers.

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#45) On May 08, 2012 at 2:40 PM, whereaminow (20.23) wrote:

In regards to the CPI, I've never seen a response by anyone at Motley Fool to the analysis I've provided on several occasions.

I've noted that in order to determine substitution effects of the rise in price of one good versus another, the BLS uses geometric mean. Geometric mean, while useful in certain analysis, is an objective and cardinal utility function as employed here.

We know two things. One is that utility is subjective and ordinal. Two is that there are no constants in economics that can be measured with the accuracy of the hard sciences. 

What this means is that the CPI is of limited value, and can be properly viewed as fancy guesswork and not rigourous economic analysis.

That is, unless you can show that utility can indeed me measured objectively.

David in Liberty

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#46) On May 08, 2012 at 3:14 PM, whereaminow (20.23) wrote:

1) it is used to talk about the value of the dollar vs. other country currencies

That would be debasement relative to that engaged in by other countries. 

2) that failing, people will use it to refer to inflation rates

That would be debasement in the language of an econometrician, since only they speak in terms of inflation rates - i.e. general price increases. When used by me, it's generally an attempt to at least speak your language. That you never reciprocate by learning our language is not our fault.

3) that failing, people will use it to talk about value of dollars vs. gold, i.e., the price of gold in dollars.

That would be because a dollar used to be defined as 1/35th of an ounce of gold (and 1/20th before that.) The term dollar comes from the word Thaler, which was a coin respected for its quality and... wait for it... lack of debasement.

David in Liberty

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