patrick.net

tatupu70 says

The one thing you are correct about is that the market sets the price. However, the market can be irrational, as the last several years in the housing business has shown.

I think this is the key take-away.

But the consumer uses of gold jewelry is not like platinum catalysts-- gold is a pure personal luxury, while limiting exhaust emissions is a quality of life and public health issue.

Gold has some store-of-value properties, but it's my thesis that when the chips are down more industrial metals will be bid up more than gold. Gold is a want, not a need, in the end.

tatupu70 says

Oak–
There are so many things wrong with your post, I don’t know where to begin. But, first let me try to understand why you think gold is so valuable. Sounds like your theory is because it’s rare. You understand that there are several other metals that are rarer than gold, right?
You mention that gold has no industrial applications to speak of–well that’s not really correct. Gold is a very useful metal that would be excellent in any number of industrial applications. Only it’s too expensive. If it could be purchased for the same price as silver then I’d expect it would replace many if not most of the industrial uses of silver.
Further, I’m not sure how you leave of jewelry as a use for gold. Not sure how that’s different than being used in a catalytic converter. At the end of the day, it’s all being used for a consumer good.
The one thing you are correct about is that the market sets the price. However, the market can be irrational, as the last several years in the housing business has shown.

I suggest you clearly read my posts before you start questioning them. I've got a pretty good grasp on industrial applications, the mining industry, and relative scarcity of elements. I have degrees in Chemistry and Geological Sciences. I'll also have my PhD in Chemistry once I decide I stop wanting a second paycheck.

Gold is not an industrial commodity that gets readily consumed. The electronics industry uses up about .001 % of the gold in the world each year. I didn't say anything about metals that were rarer than gold so I'm not sure why you even bring that up. You asked why copper is different than gold and the number one answer is RARITY!. Gold is not only rare, but it's properties were ideal for it to function as money. The fact that it doesn't get used in industry is one of the primary reasons it can be used as money.

If you expect Gold to replace Silver industrially, you are nuts, and I suggest you look up the properties of Silver that make it such a superior metal in its industrial applications. There's a reason why I didn't mention jewelry. That's because we don't consume gold when we make jewelry. We melt it down and shape it into pieces that fit around people's neck. It's no different than shaping it into a coin or bar. Furthermore, people pawn their jewelry and it constantly gets recycled, not consumed...

Diamonds will ultimately be worth next to nothing. Recently, a computer chip manufacturer artificially grew flawless diamonds the size of your fist.

theoakman says

I didn’t say anything about metals that were rarer than gold so I’m not sure why you even bring that up

I brought it up because I understood your theory to be that gold holds its value because of its rarity. That was your explanation as to why it is different from copper... My point was that if that is the case then what about other, rarer, metals?

theoakman says

The fact that it doesn’t get used in industry is one of the primary reasons it can be used as money

Gold had been used as currency far before the industrial revolution, so I'm not sure what you are talking about. Additionally, as I wrote before, Gold is actually very useful and would be used often in industry if it weren't so darned expensive. The real reason gold has been used a currency throughout history is because it is pretty and can be used ornamentally.

theoakman says

If you expect Gold to replace Silver industrially, you are nuts, and I suggest you look up the properties of Silver that make it such a superior metal in its industrial applications.

lol--OK, please share with me. Silver is slightly more conductive, but gold has many other advantages... I don't expect it to replace silver, like I said, because it costs WAY too much! And you also realize that metals in many "industrial" applications get recycled, right?

theoakman says

Diamonds will ultimately be worth next to nothing. Recently, a computer chip manufacturer artificially grew flawless diamonds the size of your fist.

We've been making lab grown diamonds since the 50s. Yes, they are getting better, and probably will routinely make flawless stones at some point. But, like gold, I don't think diamonds will ever sell for "next to nothing".

"Gold was at $850 for a whole 12 minutes. I prefer too look at it’s purchasing power the other 1051200000 minutes it was used as money. A temporary price spike does not define a range to consider when talking about a time horizon of more than 4 years."

Your retort illustrates my point. The price of gold fluctuates far too much for us to consider gold as somthing that holds its value in any meaningful timeframe. Look at the gold chart at the top of the page. There are very few periods where you would want to have owned gold. It was a big loser of nominal and real value for most of the 30+ years on the chart.

It is of little comfort that gold looks more stable when viewed over the centuries. Most people need their value protected over much shorter periods.

Gold is good for speculation, not for protecting value.

E-man,

You asked about my occupation.

I am an investor/speculator.
I make my living by betting on what the economy and markets will do.
When I am right I make money.
When I am wrong I lose money.

I have more than 30 years of experience in the financial services industry, including more than a decade running large (>$1 billion in assets) financial enterprises within the fortune 500 environment. I am retired and do some consulting for private equity/hedge funds.

E-man asks: “Looking at graph posted at the top of the page “Main Stages in a Bubble”, where do you think we were on the graph in early 09 and where are we now with respect to the housing market?”

In early 2009 the housing market was in the beginning of the despair phase.

However, the housing market is really many small submarkets. Right now, some parts are already in the early recovery phase, while others are still headed for the bottom. Generally the lower price segment is past despair and is slowly developing the base for the next up market. The middle is still faltering, and the higher end has more pain to come.

As a real estate investor, I am back in the market trying to buy again. I have not been a buyer since early 2003. I was a seller in 2006.

I love to play the cycles.

"What makes gold any different than diamonds or silver or platinum? Or copper?"

People and governments hoard gold, making its available supply artificially very low, and its demand artificially high.

God is pretty

I think the phases of bubble behavior are spot on; however, I'm a little skeptical about the timescale and one other more unique aspect of the housing bubble. In reality, this country hasn't seen a broadbased nationwide recrash since the great depression. That is almost 80 years from peak to peak. Now local markets have had their ups and downs relative to fundamentals (affordability) much like a rubber band being stretched and snapping back to the mean. But fundamentals were perversely skewed but by ridiculously loose lending standards. In the past, banks taking a chance on a shaky loan almost always recouped their funds. But the most absurd thing is that they began to believe the bubble mantra that real estate was a sure thing. THIS IS THE HALLMARK SYMTOM OF A BUBBLE. When EVERYBODY believes its a sure thing, look out.

The same holds true the market bottom. We have yet to see panic selling- the hallmark of a major market bottom. We have seen lots of forced selling (like classic margin calls for those over leveraged).
There is lots of bottom calling (a sure sign that the market speculators are still out in force). Yet looking at solid fundamentals, like price to income, we appear to be only half-way there. There is a lot more foreclosures to come, and when it becomes painfully obvious that the speculators are running out of greater qualified fools to sell to and start dumping properties en masse along with those with equity trying to get out while they still have some left will signal a true bottom. One more thing. If we start to see deflation in the general economy, house prices may go a great deal lower than the current price to income fundamentals would suggest.

"lol–OK, please share with me. Silver is slightly more conductive, but gold has many other advantages… I don’t expect it to replace silver, like I said, because it costs WAY too much! And you also realize that metals in many “industrial” applications get recycled, right?"

No one recycles Silver. It all goes to the junkyard.

Solid fundamentals would be the monthly cost of housing compared to monthy income, and compared to the rent alternative. And this analysis must be stratified relative to the appropriate housing segment. Price is only one element in this analysis.

Using broad averages can be very misleading. For example, on average, americans have one testicle and one breast. So, if you encounter someone with two (or none) of either, that person does not fit the average. But they may very well be normal.

theoakman says

No one recycles Silver. It all goes to the junkyard.

Your point is?

As far as conductivity, the order of the 4 metals is Silver, Copper, Gold, Aluminium. The reason Gold is used for computer parts and system critical connections is two-fold: It doesn't corrode/tarnish/oxidize compared to the other 3, and it maintains it properties over a wide range of temperature, like sub-freezing space to boiling hot computer processors.

Gold as a stable store of value?
Not if measured by workers purchasing power.

The real value of gold has been like a Yo-Yo over the last 40+years.

Hours of work needed for the average US worker to buy an ounce of gold:

A few selected high and low points:

. In ... 1 ounce of Gold=
1969 10 hours of labor
1975 40
1976 20
1980 96
1981 40
1982 62
1984 35
1987 55
1992 30
1993 35
2000 18
2005 30
2007 55
2008 40
2009 65

Even the stock market has been more stable than this!

Time to buy on the dip Laddies! Gold is going through the roof! This is what we've been waiting for!

I think GLD has still some room to fall. I will wait to see if it comes down to 100 and then place my bet.

tatupu70 says

Your point is?

forget it. I give up.

Side note: I just bought 400 more ounces...

400 more ounces.

Now that is walking the walk!

Zeph,

I maintained my own chart like that, MEDIAN wage from US census website. But I also assumed that the purchasing power of US wage earner has declined at a rate of about 1.4% per year after 1967. Looking at it that way gold is not so overpriced (not underpriced either).

Zephyr says

400 more ounces.
Now that is walking the walk!

Zephyr says

400 more ounces.
Now that is walking the walk!

errr, maybe I should have clarified...400 ounces of Silver.

sybrib,
Gold could be reasonably priced today. I don't know.
I am just pointing out the dramatic fluctuation in real (and nominal) price.

sybrib,

The purchasing power of the average wage earner has increased significantly since 1967. If you doubt that, just look at the typical home and its contents today, and compare that to what was typical in 1967. Worlds apart. The house is bigger and has better contents and far more luxury goods. People take much fancier vacations, more restaurant dinners, etc. People often complain about old tiny houses. Well, back in 1967 those tiny houses were not considered tiny at all.

Zephyr,

Wow, what a miscalculation. There is well over twice the manhours worked per household today than in 1967. That is a massive shift in quality of life. Yes, SOME costs have been allayed over that time, but it takes TWO earners to produce the average lifestyle none-the-less.

Zephyr, I sure hope you are right, but I came to a different conclusion.

I don't really know what you are talking about with respect to the housing. With the same 20/80 fixed rate financing standards that my single-income blue collar parent borrowed and bought his then-new 1200 sqft sh*tbox in 1968, my dual-income household of accountant and engineer could similarly qualify to purchase a similar-sized 1970-built sh*tbox in the same zip code. What changed? about 20 years of declining purchasing power of US wages.

Here are some things that have "made up the difference" so that there's an "apparent" rise in living standards:
in the late 1960's the average household had about 1.1 workers. Now it's much higher, I think closer to 1.8 - 1.9;
"back in the day" it was standard to make one-fourth downpayment, PITI not to exceed about one-fourth of income. Loosening standards permitted folks to borrow more, to buy more house, especially with that 1.8x worker per household income, another "apparent" rise in living standard.

Other gimmicks like 7-year car loans, credit cards, HELOCs, student loans, have allowed us the "apparent" maintenance or even apparent rise in standard of living.

More gimmicks like deflation in pricing power for discretionary spending like the stuff at big box stores that's made in China have also masked the decline in standard of living, and efficiencies of scale with FrankenFoods and industrial agriculture have helped with pricing deflation for food, papering over the decline.

Our wages buy a whole lot less tuition at GOOD schools (and childcares), and medical costs, those things not as easily to adjust prices with gimmicks.

I understand the point about people working more, but the data does not support a big change in that regard. In 1970 about 60% of adults were in the labor force (men and women). Today it is about 65%. That is not a significant change in the workforce participation rate.

But it suggests that about 10% of today’s earnings are because of more people working. But look at all the cool stuff that people have today for that extra 10%!

But the best test is how much you can buy for your labor.

It takes fewer hours of work today to buy almost everything in the typical household budget, and the goods are better. Compared to 1970 the average home is about 60% bigger (with fewer people in it) and has more upgrades, the TVs are better, the cars are better and we have more of them per capita, the vacations are better, people dine out more, we have more conveniences and buy more services, the list goes on. We have lots of things today that did not even exist back then, but we now consider them to be necessities (cell phones, computers, more than 3 TV channels). Life was good then, but today the average family has much more material wealth (& cool stuff).

Here is an interesting link to a comparison of material wealth in 1971 vs. 2005:

http://austrianeconomists.typepad.com/weblog/2009/11/the-economic-condition-of-poor-americans-and-the-rest-of-us-continues-to-improve.html

A key excerpt:

“And do note that the average American household in 2005 was doing much better than its 1971 counterpart. MUCH better - and this doesn't even count medical advances and the like. So whatever one hears about stagnating wages and the like, the bottom line is ultimately what we can afford to buy and have in our households to improve our lives. By those measures, life for the average American is better today than 35 years ago, life for poor Americans is much better than it was 35 years ago, and poor Americans today largely live better than the average American did 35 years ago.”

wish i was lucky says

Today it takes about $30,000 or more to do the same thing - so wages have not gone up - the dollar has gone downhill

technically I think the dollar has gone "uphill". Strong dollar = high US wages compared to our trading partners.

Zephyr's latest is pure bullshit since land values and rents suck up any excess earnings accruing to the laboring masses. 30%+ of this country has no discretionary income after rent & food.

Yes it is true that it is possible to live cheaply like a King with all the access the poor have to 80s & 90s era second-hand stuff that still works fine for the most part.

Except when it comes time to pay the rent, see the doctor, consult a lawyer, fill the tank, or have an economic encounter with any other active rentier in our system.

wish i was lucky says

In 1967 you could rent a 2 bedroom apartment with a swimming pool, buy a car and food and all utilities on minimum wage.
Today it takes about $30,000 or more to do the same thing - so wages have not gone up - the dollar has gone downhill.

No--minimum wage has not gone up (enough) is what that means. Other wages have definitely gone up as Zephyr's table shows.

wish i was lucky says

I’m not sure that having a big TV with 5000 channels and all day programming is really better. Back in the old days we only got 3 good stations and yeah sometimes we had to climb on the roof to fix the antenna - so we read books, went to the library and actually did things outside of the house.
Sometimes when you don’t have toys - you have to think - and sometimes you find out you actually have talents and interests when you use your brain.

I didn't know we were going to get into a morality discussion. The point is that all of those "toys" (and I'm not sure I'd call a washing machine or dishwasher a toy) cost money. And people can afford more of them today than in 1967.

wish i was lucky says

In 1967 you could rent a 2 bedroom apartment with a swimming pool, buy a car and food and all utilities on minimum wage.

This seemed a little odd, so I looked up some stats from 1967. Minimum wage was $1.00/hour. = $40/week = ~$180/mo. Before taxes. Average monthly rent was $125/mo. So, unless I'm missing something, I don't see how someone making minimum wage can afford to rent the average house. Much less one with a swimming pool.. That would be ~70% of his wages going to housing--don't think any landlord would be OK with that...

Just some points to consider about that lovely chart...

Cell phones didn't exist until 1973:
Using a modern, if somewhat heavy portable handset, Cooper made the first call on a hand-held mobile phone on April 3, 1973 to a rival, Dr. Joel S. Engel of Bell Labs.[11] http://en.wikipedia.org/wiki/Mobile_phone

Personal computers 1977:
The first complete personal computer was the Commodore PET introduced in January 1977.
http://en.wikipedia.org/wiki/Personal_computer

No wonder why 0% had them in 1971.

wish I was lucky--

I think you are feeling nostalgic about the past--it is very common to remember the past as a better time... But, in reality, purchasing power has most definitely increased in the US. The most commonly used measure is GDP/person. And it has approximately doubled since 1970.

The funny thing is that we'd all be a lot wealthier if our mortgages and rents were say 50% of what they are now.

but we bid up home prices to the point of unaffordability and rents are jacked to match. It is a treadmill, a veritable hole in our economy that was first diagnosed over 120 years ago:

http://en.wikipedia.org/wiki/Progress_and_Poverty

This is as clear as day to me yet few people incorporate this into their models. I was just reading a Krugman article on France's lower per-person GDP and even he didn't get it -- that lower productivity will not result in "smaller houses" (as he asserted in passing) -- just lower land values, since land values are driven by the disposable income of the masses.

I feel like I'm in a Twilight Zone episode about this fundamental economic point that few if anyone (other than Patrick!) groks.

wish i was lucky says

Doesn’t GDP include purchasing power which could include a debt that one cannot afford?????

No, it's the value of all goods and services in the country divided by the population of that country.

wish i was lucky says

I used the low end of the pay scale as a reference because it deals more with affording basics.

That's fine I guess, but what you're seeing is more the growing inequality in the US rather than a deteriorating standard of living. The rich are getting richer and the poor are getting poorer.

wish i was lucky says

If a person making $3000 per month now could afford approximately the same thing as a person making $300 a month then - how do you get that we can purchase more - more what?

I'm not quite sure what you are asking here. I'm saying that the average person right now can buy more with his 40 hours of work than he could in 1970.

wish i was lucky says

How many college graduates can expect to get a job paying more than $3000 per month now?

The average starting salary for fresh college graduates was $49,353 in 2009 (according to the American Society of Employers) or $4,112/mo.

Zephyr says

q

Well, when you choose to measure your standard of living in cheap appliances from China, I guess you are content.

tatupu70 says

The rich are getting richer and the poor are getting poorer.

http://www.calculatedriskblog.com/2008/12/fed-household-percent-equity-cliff.html

tatupu70 says

I’m saying that the average person right now can buy more with his 40 hours of work than he could in 1970.

After paying the rent or mortgage ? 30%+ of this country has no discretionary income so the average person is damn near penniless.

http://www.housingbubblebust.com/Fed/GDPvsHSG.html shows how housing costs are the sucking chest wound of the modern economy, even outpacing GDP growth, impoverishing the working masses and enriching the lucky (admittedly, there is significant overlap here).

Minimum wage in 1967 $1.00 per hour = $40 per week = $160 per month. Price of silver in 1967 was $1.29 $160 / $1.29 = 124 ounce's of silver could be bought with one months wages at minimum wage.

To be able to buy 124 ounces of silver today ($18.65 per ounce) would cost $2,312. $2,312 / 160 (hours per month) = $14.45 would be an equilivant minimum wage today.....IF we had HONEST MONEY. We wouldn't need a minimum wage law if we had sound money because the value of real money would be at least double what it is today. THIS IS HOW INFLATION STEALS FROM EVERYONE.

It is really quite simple. People can afford to have more good stuff today than they could 40 years ago. That is fact. How and why this is so is open to debate.

Zephyr,

Your data reminded me about President Bush's "ownership society", like Bush's platitude, asterisk denoting that the"ownership" was achieved by being up to eyeballs in debt was conveniently left out.

So that table's just great for folks who buy all that stuff every year. Actually, we may have to buy them more frequently since the quality has been traded off to get that price deflation.

Here's some things that matter, that haven't had such price deflation: quality child care (it's a daily expense for many people for several years); college tuition, medical insurance premium, hospital costs, nursing home costs.

Besides omitting those ongoing expenses, there's some other categories of growing ongoing expenses for Americans which went a long way to paying for the deflated prices of all that stuff made in China, also omitted in your table:

% of income on home mortgage, 1967 (or 71) vs now
% of income on housing (renters) 1967 (or 71) vs now
% of income on car payments, 1967 (or 71) vs now
student loan interest payment, 1967 (or 71) vs now
credit card balance, 1967 (or 71) vs now

We are going to disagree. You argue that price deflation proves that the purchasing power of our wages has gone up. I argue that inflation for non-offshoreable critical services is due to the purchasing power of our wages going down, and that even to defray the deflated priced stuff you cite, we went into debt rather than trade our wages for that stuff.

Time will tell which perspective is wiser. How it relates to the gold price is that I think 40 hours of American labor in 2008 (or now) ought not to be expected to purchase the same amount of gold as did 40 hours of American labor in 1975. We will disagree, readers can make their own conclusion.

Time kind of has told, and its not looking great so far. Here's a vid of Elizabeth Warren talking about what she sees as the "Coming collapse of the middle class" and the trends of the past few decades:

http://www.wimp.com/notgreat/