Thursday, April 7, 2011

Buying gold is a doomsday trade

This chart of inflation-adjusted gold prices omits (because it plots only month-end data) the speculative frenzy that briefly drove gold prices to almost $900/oz in January, 1980, which in today's dollars would be about $2500/oz. If you want to see a chart with that included, Mark Perry has it. If you think gold might revisit its former highs in real terms, then be my guest and buy gold today, and you might make a quick 70% on your investment if you're nimble and can get out before it collapses, because I seriously doubt that gold can sustain prices of $1500-2000 for very long. Gold is as high as it is today because there is a lot of bad news supporting its price, and it's priced for even more bad news: the explosion of the Fed's balance sheet, which potentially could lead to a gigantic rise in U.S. inflation; the record weakness of the dollar, which threatens to collapse; the multi-trillion dollar federal deficits that could stretch as far as the eye can see; and the turmoil in the Middle East that could threaten a major portion of the world's oil supply, for starters.

Any or all of these developments could create havoc and even chaos all over the world. I'm not saying that it won't happen, but I do believe that "the end of the world as we know it" is a low-probability event. Those who buy gold at today's levels must believe it's a relatively high-probability event, because they are paying a price that historically, in real terms, is very high. In today's dollars, the average price of gold over the past century has been about $450/oz.


Benjamin Cole said...

Gold is Old?

Maybe. Prices are driven by a huge growing buying class in the 2.5 billion person Chindia. That is where the bulk of gold is sold--for jewelry. This is all good news.

Gold has much less to do with whatever Bernanke does.

I frankly don't know if literally hundreds of millions of people entering the middle class in China and India will continue buying gold. World economic power centers, and centers of gravity, are shifting right under our feet.

My hunch is that the Chindians will keep buying gold for another generation or two. But if ever gold stagnates, and property and equities rally, then gold may be old for some time. Like the last bust after boom.

You may have to wait a few decades on gold to break even, if that happens.

I still believe the next two decades will look like the last two decades: Good global economic growth, resulting in huge fortunes to be made in property and equities. And you can earn dividends and interest, or rental income, along the way.

Gold? A pretty bauble, glittering. All gold is fool's gold, is it not?

Anonymous said...

On the other hand, it might be interesting to compare the real broad dollar index (yesterday's post) with the real gold price, beginning, say, in 1985 (admittedly a peak).

Gold may very well be a doomsday trade, but it might simply capture the bulk of the dollar decline (and some fear premium, as well).

Public Library said...

The end of the dollar is not the end of the world. If your mind can make this leap, the outcome is not as drastic as it seems.

Feels more like a necessary outcome than a capitulating event.