patrick.net

Bork, it is often irrational behavior that bring prices to a new high. Gold is still mostly a precious metal and a form of currency. If you want industrial uses, look into silver.

NOT INVESTMENT ADVICE

35$ to 850$ over 10 years: 37% annual growth
670$ to 5000$ over 10 years: 22% annual growth

(rough figures)

Conor,

Exactly! I think the next time I get an earful from a fund manager about "upside/downside" capture I'm going to go off!

$850 to $270 over 15 years factoring in inflation: losing your shirt

You guys are supposed to be contrarians in your housing position. Why follow this gold rush crowd?

Gold will form a bubble sooner or later. There are not many places left for dumb money to roam free.

NOT INVESTMENT ADVICE

SQT: I think it’s an acknowledgment of another bubble combined with the hope of taking advantage of this one.

Gold fell from that $850 peak to $490 in less than 6 months followed by a suckers rally.

Best of luck. Anybody want to buy my remaining Eagles?

Gold fell from that $850 peak to $490 in less than 6 months followed by a suckers rally.

So?

SQT Says:

You guys are supposed to be contrarians in your housing position. Why follow this gold rush crowd?

I think it’s an acknowledgment of another bubble combined with the hope of taking advantage of this one.

It could be true. The Gold bubble hasn't even begun by most definitions of the bubble. We are still in the doubt phase, questioning why it is moving higher, and how it is going to crash. It will be bubble when everyone is defending why it will continue to go up. That has been mentioned quite a few times.

But isn't a good diversified portfolio supposed to have SOME exposure to precious metals, commodities etc ? The % amount would be different for different fold depending on the circumstances.

Some may be trying to cash in on the next big thing. But there is now a new sense of urgency that is in large part driven by the fear of imminent devaluation of US$ over LONG term, and taking a hedging position. In this aspect, it is consistent for bloggers here to evaluate Gold as the hedge.

Other hedges are other commodities and bonds/stocks in other currencies. Again, a diversified portfolio should have SOME exposure to other currencies.

NOT AN INVESTMENT ADVICE

I guess I’m still not seeing the gold bubble. Other than chatter on some blogs and late-night infomercials I don’t see the gold mania anywhere.

It is too early to tell if there is a gold bubble. It is impossible to ascertain whether there is a gold bubble now, although there may be regional gold froth.

Peter P,

Didn't the same old wise sage also said "Bubble can be identified only in retrospect" or something like that ? Or who said it ?

Or who said it ?

That green wise sage.

There are not many places left for dumb money to roam free.

With pergraniteel in every kitchen, the discerning homeowner needs a way to stand out from the crowd. As any executive chef will tell you, the quality of a cook can be seen in his knives. With a set of Japanese blades hand-forged in the traditional matter, you too can send a message to your visitors that you can afford the very best. A good set of knives, like a good home, can last for a lifetime, and prices will only go up.

etc., etc.

Peter P: So?

High Beta -> High Return in the stock market.

Normalize gold by dollar inflation and its return doesn't justify these spikes.

So where do you hide your loot against dollar inflation? I confess I'm not sure although oil stocks have been pretty good. Eurobank trims too much off the top. Go gold if you want for a small part of your portfolio, but if you bank the nest egg, you're as risk-taking as the ARM interest only crowd. I bet you'd sleep more soundly with 5% short-term CDs.

NOT INVESTMENT ADVICE

Notsomuch “contrarian” as doomsday

You'd be better off with that 1000lbs rice-equivalent. Best case, you can eat it. If Bird flu or worse event hit, it'd be a lot more valuable than 1 oz of shiny stuff. Those knives aren't a bad idea either.

It's all game-theory. You can prepare for total worldly disaster and if you're wrong, you've wasted a lot of money. On the small chance that you're right, you've got lots of other problems as well. What's the table payoff?

That being said, definitely go out an buy your 72+ hour earthquake kit. Don't forget the dog/cat food. That will happen.

SQT: And you may be right, there might not be a gold bubble in the making. I only speculate that there is because of all the talk going on. It seems as if it could be the new “hot thing” in the making.

I had IB friends in NYC calling Gold in 2000. I wish I'd listened.

Normalize gold by dollar inflation and its return doesn’t justify these spikes.

This is exactly the problem with gold as a portfolio variable. The volatility is too high to justify the expected returns.

Of course, if you're wanting to patiently accumulate gold over a very long period of time as a personal hedge, that is reasonable in my opinion...so long as you have no credit card debt, no variable home equity debt, and no other "free money" obligations (like student loans or 0.9% auto financing).

Randy H: This is exactly the problem with gold as a portfolio variable. The volatility is too high to justify the expected returns.

Phew. Now that the Amazing Randy has backed my stance, I can relax and get back to work. ;-)

So far it looks like the board is roughly evenly divided on the Gold bubble issue:

--pro-Gold--
George
Conor
rat patrol
Owneroccupier
Astrid
re_2_au

--anti-Gold--
Randy H
Peter P
Mr. Vincent
FRIFY
nomadtoons2

The rest are (like me) not well informed enough at this point to make any big financial moves on precious metals without more understanding of these markets.

Here are some of my observations and questions:

1. Many pro-golders insist that today's valuations (against USD) while high vs. a few years ago are still historically low, with lots of upside potential. Anti-golders insist prices today are already too high, and are primed for a pull-back.

Q: As a gold-novice, how do I evaluate/reconcile these opposing positions based on empirical bias-free data?

2. There seems to be some confusion in terms of buying gold/metals to use as a capital/savings preserving HEDGE against Fed inflation vs. SPECULATION to make a quick killing and cash out. Big difference. I think most pro-golders here are being unfairly accused of being speculators, when they are hedgers just trying to guard their savings against the ravages of off-the-books inflation.

3. Anti-golders insist metals have little value outside their industrial/commercial use (jewelry, speculation, etc.) and could --theoretically-- fall to a fraction of today's prices. Pro-golders insist that much gold production is already for commercial/industrial use, and that any decline in gold's value is inherently limited, due to practical limits on physical extraction/mining.

Q: Who's right? What % of annual gold production is used for commercial/industrial purpose vs. jewelry or speculation? How can we go about determining a bias-free "fair market" or "fundamental" value of gold & other precious metals? Is there some kind of P-E or Rent-PITI ratio for metals?

too bad gold is too soft for knife making...maybe I should invest in a platinum knife...

According to my old National Geographic, gold pans make a superb omelet.

George,

What you're referring to was known as the era of the "Strong Dollar Policy". It's generally acknowledged now that the effects of that policy were to essentially wreck the US as a manufacturing base. Remember, strong USD = weak US exports. This is exactly why the Chinese keep buying (and will continue to keep buying) USD, to keep the RMB cheap enough for us to buy their stuff.

A weakening of the USD can have very strategically positive effects. The ZIRP guys aren't morons, just radical in their proposal. Mind you, I'm against any kind of dollar policy, weak or strong. That said, a weak dollar would eventually cause a huge rebalancing in the US trade deficit, capital flows, and current account balance. Moreover, it would force the host of nations that peg, fix and tie their currencies to the USD to either (a) subsidize us heavily, which politically won't cause anyone here to lose any tears given that the US consumer has essentially built their nations, not to mention the lost US labor and service jobs; or (b) break from the USD and pay the full price of inflation themselves; they're now essentially free riders on the back of US inflation.

Maybe I'm too much of a contrarian, but I'm not all so desperate and negative about the future of this country. Someone earlier said we make nothing here anymore. This is categorically false, even though it is the popular perception. US manufacturing is extremely capital efficient, productive and flexible compared to the Asian Tigers. Compare US mfg productivity to Korea, for example. US agriculture is unparalleled. The US is still creating (yes creating) more engineering and info-comp jobs than it is offshoring. The US is, despite the attempts by the current administration to destroy our progress, the unchallenged world leader in biotech, genetic R&D and related therapies.

The US engine of innovation is still very much alive, even if not as much so as last century. It will take a long long time for the sun to set on the US. Look, even Europe still produces things of value from time to time, and their empires have been dead for over a century now.

I think we're undergoing a major global economic rebalancing right now. And, if that is the case, the US is not a bad place to be. This is even more true as the world very much seems to be balkanizing, if anything. The future probably holds less globalization, more trade barriers, and lots of state-controlled industries in most countries--mainly related to energy. I say, let them try. They didn't learn their lesson the last 3 times they tried that, let them have another whirl -- it'll hurt them a lot worse than us.

Randy,

That's an argument to stay out of the exporting countries, but not for staying out of commodities. Even if US is in a relatively stronger position compared to those countries, we can still see our living standards degrade or stagnate in the coming years.

Phew. Now that the Amazing Randy has backed my stance, I can relax and get back to work.

Bah! I'm wrong about lots of shit. I thought object-databases were going to take over the world and lost a lot of HaHas in the late 90s shorting ORCL & IFMX and buying VSNT and ODIS. (and I still lost covering IFMX, which was a feat in and of itself).

Just because something is logical and rational doesn't mean that it is the face of reality. Gold could go to $5,000/oz, and I'll be sitting there wondering why everyone is so insane, holding onto my little balanced commodities index.

Randy,

For shame! Never overestimate the logic center of the masses!

astrid,

Even if US is in a relatively stronger position compared to those countries, we can still see our living standards degrade or stagnate in the coming years.

Compared to what? A standard of living is not an absolute measure in economics, only a relative comparison. Perhaps we're all in for a sinking GDP per capita. If so, better to be in a country where almost 80% of GDP is internally generated.

Again, I'm not against commodities. I just insist it is not an effective or efficient hedge; it is a gut speculation. There are more efficient hedges, people just like gold because they think it will do better. This is the definition of speculation. Hedging is a cold, calculating science, with no emotion or gut to it.

Randy,

Over the last few days, I think I have been slowly converted to view the devaluation of US$ as a net long term positive. That aside, doesn't the devaluation of US$ mean we should increase exposure to investments that will perform better in this scenario ?

Devaluation and inflation will go hand in hand. Metals, commodities, foreign stocks and other currencies definitely play a part in this strategy. Each has its own peculiar risks and those cannot be ignored. But portfolio diversification requires peridoic tweaking. So with that in mind, and not considering as Get Rick Quick scheme, we should look at these options.

Even the foreign stocks - specifically Asian - have had tremendous runs. I did benefit from it. Hence I am now looking at metals and natural resources, which have been absent from my portfolio till now.

I'm not actually a gold bug. I'm just extremely pessimistic about the ability of the American people (or the world, notice how much time Owneroccupier and I spend bashing the Chinese?). I'm betting the mass psychology to form another bubble around gold. I plan to be in this time and then exit near the top for less foamy waters.

TBONTB,

I agree completely. I balance my portfolios with Black-Litterman, and then sanity check with Sharpe. I can't get gold to come on the radar because of it's very high historical sigma. Were I smart enough to try to do some macro hedge-fund thing, then I'd be all about the volatility of gold. But I'm not that smart.

If I was, I'd be so rich that I'd have an assistant do my bogging for me.

Ou, or maybe tea and biscuits are an intense health booster. I’ll live forever!

DEVONSHIRE CREAM!

SFWoman,

Yup. And I think that cost will escalate as the baby boomers retire. The prevalence of cars, lack of exercise, and the disasterous FDA food pyramid has created very unhealthy Americans, with a lot of chronic conditions that will cost a lot to maintain.

I thought object-databases were going to take over the world and lost a lot of HaHas in the late 90s shorting ORCL & IFMX and buying VSNT and ODIS.

Huh? Object databases?

The world has a taste for mathematically inelegant crap like SQL and COBOL.

I prefer creme fraiche myself...

Again, I’m not against commodities. I just insist it is not an effective or efficient hedge; it is a gut speculation.

Nothing wrong with speculation. Just be right and one will get rewarded. :)

LOL

astrid,

More power to you. Sounds like you see your position for the speculation it is, and that's great, especially when you bet right. Just remember that gold can and will correct (if it's in a bubble, or goes into a bubble) much faster than RE. There's about 0 stickiness to gold prices.

SFWoman,

I'm afraid I agree with you. The direction of standard of living is down in the US. I tend to disagree with pure economic std of living measures (gdp per capita) as it doesn't capture the value of life well. Nazi Germany had a great GDP per capita; I wouldn't say it was a great standard of living. During the early Cold War, the USSR had over 2X the US GDP/Capita; again not a great std of living.

The whole damn thing is depressing to think about. Can you prescribe a pill that will fix this for me?

I prefer creme fraiche myself…

Creme fraiche for pureed sweet pea soup.
Devonshire Cream for scones.

The whole damn thing is depressing to think about. Can you prescribe a pill that will fix this for me?

Poison pill?

I looove double Devon cream

I love that too. I use half bottle per scone.

Cream and butter are delicious, but I like the tanginess of creme fraiche and sour cream. Plus, I'm not a huge scone eater...I'm more a bake my own yeast bread kind of person.

Randy,

Some people think Prozac is the legendary SOMA. You can ask skibum about it.

Cream and butter are delicious, but I like the tanginess of creme fraiche and sour cream. Plus, I’m not a huge scone eater…I’m more a bake my own yeast bread kind of person.

I am not a huge scone eater either, it is just a condiment to my Devonshire Cream. :)

BTW, for all of you who thought I was going to accumulate $20K in knife related CC debt, here's what I ended up getting.

From Lee Valley,

http://www.leevalley.com/garden/page.aspx?c=2&p=52770&cat=2,40733,40738&ap=1

http://www.leevalley.com/wood/page.aspx?c=2&p=31079&cat=1,130,43332,43393&ap=1

totaled up to be about $30 plus shipping

The MAC was very tempting, but at $60-70, it can wait.