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Those who learn from history are doomed to repeat it

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September 17, 2011 – Comments (14) | RELATED TICKERS: GLD , SLV

....ad nauseum to people who couldn't care less.

Ok, so I don't know if we've done this before, but if we take a bunch of simple ratios from the last gold bull market/bubble, we can come up with a thumbnail sketch of what to expect in this one. Where did gold start in the 1970's gold bull? $35/oz. Where did it peak? $850/oz. Where did it come to rest, as a floor (or trampoline), the price below which it never sank again? $257/oz ($257.30, to be precise).

So first we have ~24.28:1, the peak price to starting price ratio. If we apply that (erroneously, but bear with me) to today's gold bull market, we get a (tentatively) projected high of $6,248/oz. 

Next ratio ~7.35:1, the latter floor to previous floor ratio. If we apply that to today's gold bull market, we get a future floor of $1,891/oz. I am not kidding.

Now, of course, today's gold bull market does not necessarily need to reflect that of the 1970's exactly, but why does $1,890/oz seem like such an astronomical price, when it is no higher compared to the $257 we are coming from than $257 is from the $35 it came from. It just seems really high, because.... well, because people, as a rule, are stupid and lazy - too stupid to know ratios offhand, and too lazy to figure them out (see, I may be stupid, but I'm not lazy - oh wait, I am definitely lazy, but through some bizarre confluence of events, I happened to have the diligence to calculate these few ratios).

What about that $6,248 figure? For reals? Yes. Of course, past performance is no guarantee of future results. But then, if there is any reason to expect things to be "different this time," it has nothing to do with gold "underperforming" in the many decades of the gold window handing out Ameican citizens' gold to foreigners who are wisely ditching their dollars. It has nothing to do with changes in how much gold is mined each year. It has everything to do with Federal deficits and the monetary base being much higher and rising much faster than they did in the 1970's, and the Fed funds rate being lower, and staying low longer than it did in the 1970's.

When gold peaked at $850 in 1980, the Fed target rate was 18-20% (they were so panicked that they targeted not a specific number, but a range that was broader than the difference between today's rate and zero). When the Fed target rate approaches 18%, I'll start to reexamine calling a top in gold. It's 0-1/4% right now and they've promised they won't change it for at least two years. No worries. (Also, the rate at which the Fed increases the target rate might become a concern. If cavemen storm the Eccles building and beat Bernanke to death with clubs, and then start to implement their own Fed policy, that is.)

Besides deficits and low rates, look at the timelines. $35 to $850: 10 breathless, frantic years of about 37.5% annualized returns. $259 to $1,812.50*: 10 measured, constrained years of about 21.5% annualized returns, while the fundamentals (the decay of the private sector and the explosion of the monetary base) have been far more favorable. If gold were to get to 24 times its previous low (as it did in 1980), it will have taken a lot more than 10 years, and I expect the longer gold bull market to be a larger one in terms of price change as well.

With all things considered, a high of $6,250 and a future low of $1,890 are pretty conservative, not wild-eyed predictions of raving lunatics. Rather than being the top of the bubble, we are about (or below, depending on Fed policy) where the bursting of a gold bubble is liking to land. Look for gold prices to triple or more from here, and, as others have said, watch for gold mining stocks and silver prices to gain relative to gold when the gold bull market turns into a bubble. Right now, the gold bull market is just a bull market, and a relatively sleepy one at that.

*Gold reached its 30-year low of $257 in 1999, but to be fair, I calculated 2001 as the start of the gold bull market, because it reached $259 and change that year.

Note: nothing has been inflation-adjusted, because that would be absurd.

14 Comments – Post Your Own

#1) On September 17, 2011 at 1:10 PM, Frankydontfailme (27.40) wrote:

But.... gold is in a bubble right?

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#2) On September 17, 2011 at 1:12 PM, FleaBagger (28.91) wrote:

To clarify the caveman comment: I don't mean to imply that raising rates quickly would be bad policy. Cavemen are vastly underrated. I mean to imply that cavemen would probably implement far better policy to that of Bernanke, and only cavemen might actually storm the Eccles building by force and implement new Fed policy.... you get the idea.

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#3) On September 17, 2011 at 2:49 PM, Frankydontfailme (27.40) wrote:

Fed policy, so easy a caveman could do it.

I like your style. 

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#4) On September 17, 2011 at 7:09 PM, FleaBagger (28.91) wrote:

Thanks, Franky.

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#5) On September 18, 2011 at 8:54 AM, Entrepreneur58 (37.94) wrote:

I am old enough to remember the gold bull market of the 70's.  The US inflation rate had gotten out of control and US treasury bonds at that time were called "certificates of confiscation" since they kept going down in value.  Today, treasury bonds are called a "safe haven" since they keep going up in value.  If there is a bubble that is overdue to pop somewhere in the world today, it would be the bubble we have had building in treasury bonds since 1982.  The form of that bubble pop in treaury bonds (outright default vs. exponential increases in money printing) will determine the eventual top price of gold in dollars.  Thus, the price of gold in dollars is not as important as the price of gold compared to other things of enduring value such as oil or real estate.  And as an investment, US treasury bonds look about as attractive as fresh vomit.

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#6) On September 19, 2011 at 1:04 PM, FleaBagger (28.91) wrote:

I love this comment! Entrepreneur58, not only do you know how to spell "entrepreneur," your writing is insightful, concise, and incisive. I am now going to make you one of my favorites.  

I am old enough to remember the gold bull market of the 70's.  The US inflation rate had gotten out of control and US treasury bonds at that time were called "certificates of confiscation" since they kept going down in value.  Today, treasury bonds are called a "safe haven" since they keep going up in value.  If there is a bubble that is overdue to pop somewhere in the world today, it would be the bubble we have had building in treasury bonds since 1982.  The form of that bubble pop in treaury bonds (outright default vs. exponential increases in money printing) will determine the eventual top price of gold in dollars.  Thus, the price of gold in dollars is not as important as the price of gold compared to other things of enduring value such as oil or real estate.  And as an investment, US treasury bonds look about as attractive as fresh vomit.

And before anyone asks, yes it was worth reposting the whole comment. If anythig deserved to be double-posted, this is it.

Entrepreneur58 - I know that it is pretty silly to "pick a price" for gold in U.S. dollars (or any fiat currency, for that matter), but with this article I'm trying to reach out to people who understand things differently, because I'm compassionate to them, and because the more people who understand the economy and invest (and vote) accordingly, the better the economy will be for everyone.

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#7) On September 19, 2011 at 1:05 PM, FleaBagger (28.91) wrote:

I forgot to italicize the quoted portion above. Sorry!

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#8) On September 19, 2011 at 11:56 PM, DrDoom1929 (< 20) wrote:

The real history we need to learn is that of civilizations.Face it, markets are the sideshow to the Main Event. Comparing fiat gold to the fiat statues reveals the meaning of this observation.

 

Fiat gold is the modern equivalent of those statues on Easter Island. Those not familiar with its tragedy and extinction should explore the best selling Canadian book, “A Short History of Progress”. For the same egocentric and nonsensical reasons, its inhabitants exploited and exhausted all the resources of this island, to the point of virtual extinction. It was then consequently impossible to leave the island. John Maynard Keynes also pointed out the absurdity of mining for fiat objects, for the purposes of largely storing them in underground basements? At least they could see the fiat statues on Easter Island, while marching to the drum beats of their self-inflicted extinction.

 Hucksters of fiat gold again promote the beating of these tragic drums; so we may all merrily march in unison, off the cliffs of existence. Today, there is an estimated 120,000-140,000 tons of fiat gold stored above ground, by some accounts enough to provide for over 400 years as an industrial input. Here’s the clincher? According to BP's 2010 World Energy Report there is only sufficient proven energy supplies for less than the next 50 years. So our choice of using limited energy reserves for fiats, is similar to the decision faced by the inhabitants of Easter Island who used their last essential resources for more "fiat statues" Those who may retort, “don’t worry a magical source of energy will emerge at some juncture,” should recall that all efforts since the Energy Crisis of the 70's have since yielded little in the way of infinite stores of fossil fuels. With little future prospect one should add. Still, the famous, highly-regarded nuclear scientist,

Dr.Glen Beck argues and promotes that fiat gold stores value. And he says "those who compare its value to Santa Claus, The Tooth Fairy and The Easter Bunny are just not aware of the scientific facts. If they examined the scientific evidence more closely, they could comprehend the nature of the quantum particles that create its intrinsic value." Since the writing of "The Wizard of Oz" parody, one hundred years of scientific the general debate has raged over this evidence, without conclusion. 

So consider the possible choices for the years ahead, either existence on an island populated by fiat statues, or one populated by living species. Somehow, Dr Glen Beck's scientific evidence lacks any credence. Somehow, the beat of a different drummer steps to a more sensible sound. Indeed, much more

…    http://firstfinancialinsights.blogspot.com/2011/09/most-important-economic-blog-ever.html 

 

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#9) On September 20, 2011 at 2:44 AM, FleaBagger (28.91) wrote:

Dr. Doom - please explain what you mean by "fiat gold" and why you call it that. Please provide evidence that gold is "fiat gold" (or whatever you're saying).

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#10) On September 20, 2011 at 11:11 AM, NEMnyWtch (< 20) wrote:

Franky - No - FB is suggesting that gold is currently at a low from where it will go.

FB - WOW - I thought my call for gold to reach 2K by the end of his term, when Pres. Obama was elected; was brave!  You have outdone me!!  However, I do see the reason in your argument.

Dr. Doom - Yes, please do explain what "fiat" gold is.  Thx!

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#11) On September 20, 2011 at 5:28 PM, TMFCrocoStimpy (93.85) wrote:

I think Dr. Doom's definition of "fiat" gold is fairly clear: he/she believes that gold is no more an intrinsic carrier of value than any other fiat currency that holds value by declaration rather than use.  As an example they contrast the longevity of industrial use of current gold reserves (400 years in this estimate, which makes it a fairly low demand commodity) to that of energy, which is something that has a very tangible (though variable) value due to its constant demand, and postulates that real wealth storage is more in this type of commodity than in gold.  It may be that Dr. Doom is looking to a time where scarcity of energy will suddenly make gold no more valuable to hold than paper since it cannot be used to fuel (quite literally) our economic engine, but I don't want to make too many assumptions about the meaning.

-Stimpy

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#12) On September 20, 2011 at 8:14 PM, rags2riches247 (81.24) wrote:

Hmmm.... Gold isn't really that useful, except for electronics. I guess it is "useful" if you can sell to someone else for more than you paid for it.  I think I keep my net worth in real estate and equities... I am glad everyone is pricing these things for financial Armageddon because it is allowing me to accumulate them more quickly.  Good luck with your gold!  I will continue to invest in the stock of US banks and Florida real estate.

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#13) On September 21, 2011 at 12:53 PM, FleaBagger (28.91) wrote:

US banks and Florida real estate? You are a brave man. Or woman. No offense, but it's hard to tell from your screen name.

As for "fiat gold," I understood the comment the way Stimpy did, but I wanted to hear the explanation from Dr. Doom. Failing that, here's my response: "fiat" refers not to anything decided arbitrarily, but to something decreed arbitrarily by a government. Fiat is not fiat if there is no corcive force involved. Even if it is silly for us all to attribute value to gold, it is not by fiat, but by voluntary choice, and as such, it is much probable that the governments and central banks will devalue their currencies to alleviate their debt burdens than that all of us will, suddenly and without discernible reason, stop liking gold more than we like tin. 

As a side note (a freebie), the longevity of the industrial use of a commodity depends entirely on price, anyway. If it took fifty ounces of gold to buy a Hyundai Accent, instead of just five or six, we might find more industrial uses for it. As it is, most people get more use from gold as an investment/speculation than they could industrially. 

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#14) On September 22, 2011 at 3:52 PM, FleaBagger (28.91) wrote:

For further reading (hat tip kdakotafund), here's an interesting article (link) that shows a correlation between skyrocketing gold miner P/CF's (similar to P/E's) and the end of the gold bull market in 1980. I would be curious to see a chart like that of the last 5-10 years.

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