Wednesday, December 2, 2009

Gold update

Gold prices seem to rising at a parabolic rate, which suggests that the market is just a tad bit too bullish. Gold could continue its run, but as we approach the levels (in constant dollar terms) that we saw in 1980, gold becomes extremely vulnerable to anything that could be considered "bad," such as an unexpected Fed tightening or a stronger than expected economy. It's easy to see why gold can continue to rise, since almost all the world's major central banks are extremely accommodative. Plus, gold thrives on the popular view that the future of the U.S. economy lies on shaky ground, and the prospect of trillion dollar deficits for as far as the eye can see is disturbing, to put it mildly.

I'm not trying to argue against gold going higher, but rather that, as we approach the peak levels of 1980 in inflation-adjusted terms, gold becomes very vulnerable to any bad news such as unexpected economic growth or an earlier-than-expected central bank tightening. Gold is now a highly speculative investment, even though the facts strongly support the bullish case. Lots of people are buying the stuff these days, and I'm sure most buyers are figuring they can make a quick buck and protect themselves with a tight stop. Beware the wisdom of crowds.


Public Library said...

The Fed currently sees no asset bubbles. In addition, the Fed finds it very difficult to use monetary policy to do anything about them anyway.

The Fed is low for a long time. Unless you are talking about 5-6% GDP and 7% unemployment, I frankly do not see a change in their stance.

One knock on effect is other central banks will be forced to remain accommodative for fear of making their economies uncompetitive as their currencies appreciate relative to the dollar.

We are in fascinating times. You cannot unleash this amount of global stimulus and not expect a leak somewhere along the hose line.

brodero said...

Median priced new home is now 205,000.One new home is now worth 169 ounces of gold. This ratio over the last 46 years has been between 100 ounces and 700 ounces.
I am not making a prediction but it
spent only 4 or 5 years over the last 46 years below the 200 ounces per new home ratio.

Bill said...

I would expect a halving of the price of gold before a doubling of the price of houses. I would love to see the reverse however.

Scott Grannis said...

Public: one could argue that gold is now in bubble territory, thus representing the leak you mention.

Tom Burger said...

I started buying gold in 2002 and have a very large allocation at this point. I think you completely misunderstand the reasons why people buy gold. Few think of it as an "investment" -- as a way to make more dollars. Gold is just a way to protect oneself from the depredations of the central bank, a way to lose less as a result of ongoing inflationary policies.

Any market can be expected to suffer a severe correction after a steep run up, but so far we haven't seen anything like a gold mania. Outside of a few internet acquaintences, I don't know anybody buying gold, or even aware that one can buy gold.

With the US government running a 40% deficit and the prospect for more bank losses which would tend to perpetuate large deficits, it looks like people should first of all seek protection against the possibility of serious consequences.

Public Library said...

Tom Burger,

Not sure I agree. If you look at the chain of bubble events, we had NASDAQ 5000, housing/mortgages, oil , the long end of the treasury curve, and now what appears to be gold.

There always seems to be at least one market attracting the last novice speculator. Gold looks like the next surest thing to make money from shorting.

It is all about when to jump in...