The Recurring Gold “Bubble”
A lot of people are getting all worked up about the rising price of gold. Some say the current move has gone “parabolic” and that we’re in the midst of a “blow-off top” akin to the early 1980s peak that saw the gold price disappoint investors for years afterward.
Just this morning, Hu Xiaolian, a vice-governor at the People’s Bank of China, called gold a bubble and implied that the central bank wasn’t much interested in buying thousands more tonnes of bullion as bank reserves at current prices.
Looking at the one-year gold chart below it’s hard to disagree with that view, but there’s much more to the story than that. In fact, as compared to previous moves up in this decade, the recent move has been rather tame so far for reasons that will be explained in a minute.
Since the yellow metal began its decade-long ascent in 2000, there have been distinct periods of rising prices, most of which have begun in the odd numbered years, peaking in the even numbered years as indicated below.
The moves up in the 2001-2004 period are a bit difficult to see, coming off of a long bottoming process, however, the last three surges are so easily identifiable, it seems reasonable to just look at these three to see how the recent surge in the gold price compares.
At first glance, the most recent ascent looks like a smallish version of the last two, however, the steepness of the curve, not its duration, is probably what has people calling this a bubble.
If it is a bubble, based on the graphic above, it would clearly be the third bubble in the last six years which would call into question the use of the term “bubble” in the first place.
But, what is critically important when comparing the last three moves up for the gold price is to note the scale on the chart. For example, some quick math reveals that the 2005-2006 move from just over $400 an ounce to $725 was a gain of some 70 percent and this occurred during a relatively calm period when central banks were still selling their gold reserves as fast as they could and the entire world still thought it was getting rich due to rising asset prices.
The 2007-2008 jaunt from the high $600 range to just over $1,000 was a surge of about 50 percent which took a few months less to accomplish than the prior move. This occurred when there was growing fear of inflation but the sustainability of the global financial and monetary system was not being widely challenged as it is today.
Depending upon how you measure it, the most recent move only amounts to about 30 percent, though you can surely get a larger number if you start the measurement in late-2008 when the entire financial world looked like it was in the process of imploding.
In fact, picking starting points that were the “final lows” for each of the three cycles described above (a judgment that, admittedly, is somewhat arbitrary), the picture looks like this, the current “bubble” appearing to be still something of a “baby bubble”.
While slightly ahead of the 2005-2006 move at only half its duration, it is still back of the pace set in 2007-2008 and 40 trading days short of a similar peak.
There are likely many ways to compare these three periods, but, since they are all clear stretches of surging prices followed by a consolidation and then another move up, probably the fairest way to look at them is to measure from the time that a previous high had been surpassed until a new peak was reached.
For those of you with a Kitco.com page open on your browser at home, those starting points would be mid-September 2005, early-September 2007, and just a few months ago in – you guessed it – September 2009.
Here too, the current run-up is just a pipsqueak, ahead of the other two at this stage in the game but, overall, still looking pretty wimpy.
I don’t know. If this is a gold bubble, it’s unlike any other bubble that I’ve ever come across because it keeps happening over and over.
Normally, after a bubble reaches its maximum point of inflation and pops, it stays popped and doesn’t begin to inflate again for many years or even decades – think Nikkei stocks in 1989, Nasdaq stocks in 2000, and housing in 2005. None of these bubbles show any real sign of inflating again, though, with all the money printing over the last year or so, anything is possible.
No, if the current move up in gold is a bubble it has to be some kind of new “recurring” bubble that offers better prospects for those wondering whether they should be buying the metal at more than $1,200 an ounce – if the bubble does burst sometime in the months ahead, given what’s happened in recent years, it’s likely to inflate again at some point, probably in September of 2011.
Of course, governments around the world could probably put an end to these recurring gold bubbles if they took Paul Volcker-like tough-love measures to restore confidence in paper money once and for all.
But, realistically, given today’s decision makers, there are probably only two chances of that happening – slim and none, slim reportedly having just left town.
ooo
Tim Iacono is a retired software engineer and writes the financial blog “The Mess That Greenspan Made” which chronicles the many and varied after-effects of the Greenspan term at the Federal Reserve. Tim is also the founder of the investment website “Iacono Research” that provides weekly updates to subscribers on the economy, natural resources, and financial markets.
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December 2nd, 2009 at 1:25 pm
Judging from the parabolic trajectory, the blow-off top should be around $1500-1600.
December 2nd, 2009 at 1:49 pm
A long-term upwards trajectory makes complete sense given the debauchment of the worlds major fiat currencies. How long before the USGovt does to the $ what North Korea just did to its Won?
December 2nd, 2009 at 2:02 pm
Gold, schmold! “El oro es un petróleo de ayer” (that’s for you Hector LaVoe fans).
‘Free market’ capitalism merges with piracy*
http://www.boingboing.net/2009/12/01/somali-pirate-stock-.html
I’m going long AK-47′s and RPGs…opening ask…7.62
*If you wear a tie, you’re not a pirate.
December 2nd, 2009 at 2:08 pm
Found in the comments on the BB thread:
An-arrgh-chy: The Law and Economics of Pirate
Organization (with a special dedication to Hank “The Sperm Whale” Paulson and crew)
http://www.peterleeson.com/An-arrgh-chy.pdf
December 2nd, 2009 at 2:12 pm
Climategate:
You are correct.
RE, the article:
Did Mr. Hu Xiaolian mention China selling any gold at this price? I doubt it.
December 2nd, 2009 at 2:13 pm
I don’t consider my self a gold bug, but I do keep 5-10% of my portfolio split between gold / silver (wish I had started in 1999 vs. 2007, but at the time I still followed the CNBC BS). Gold is a good store of value over the LONG – TERM, just simply dollar cost average like most investments and you will come out ahead. I typically buy after 10 – 20% down moves. I am doing well so far, but I actually wish it would crash down to $500 per oz then I would purchase a like mad (remember I only started buying in 2007 not much to loose).
Anyway, Silver is on a bigger run right now look for this to pull back first!
December 2nd, 2009 at 2:23 pm
So instead of taking two paragraphs of text to explain percentage gains, why not use a log scale on the y axis? I generally assume people don’t do this because it tends to make bubbles harder to demonstrate but, in this case, it would strengthen the argument that there is not a bubble.
(BTW I have no opinion on the price of gold, I just like to come out from time to time in support of good graphical data presentation.)
December 2nd, 2009 at 2:45 pm
I don’t think you can fairly talk about the gold bubbles of the ’00′s without mentioning two significant fundamental factors that definitely helped drive them. One was the legalization and encouragement from the government of gold trading in China. When you add over 1.3 billion potential new customers it is going to affect the market no matter how poor the majority of them are.
Secondly you have the advent of the gold ETFs which effectively securitized the trading of gold for institutional investors worldwide. This is also a huge fundamental factor that must be factored into the price before those parabolic moves can be dismissed as overt speculation.
Those two significant moves are better classed as democratizing the gold market and not speculation in any means and it explains where all the recent and ‘unexpected’ support for gold is coming from
December 2nd, 2009 at 2:48 pm
It is me, or is the “Recurring Gold Bubble -View # 1″ chart INCORRECT:
The “Recurring Gold Bubble -View # 1″ graph is supposed to show price movements in days starting with the “final bottoms” for each of the three cycles. The how is it possible that the current (i.e. 2009-2010) move is only 100-120 days in the making? From this very presentation, the “10 Year Gold” chart clearly shows the “final low” was reached in late 2008. We’re approximately one year from that time, so how can the current “bubble” be running for just 100 days on your chart? It should be waaaaaayyyyy past the other two, i.e. literally “off the chart!”
December 2nd, 2009 at 3:26 pm
a key indicator is what happens with Comex deliveries vs settlement in something other than actual physical gold (or silver for that contract)
December 2nd, 2009 at 3:30 pm
“Of course, governments around the world could probably put an end to these recurring gold bubbles if they took Paul Volcker-like tough-love measures to restore confidence in paper money once and for all.”
That is a more meaningful measure than historic charts showing percentages. If reasonable profits could be made from solid business investments or if equities were priced based on reasonable earning potential, gold would not soar as it has done. It is an alternative when there is no confidence in normal business. Given that, I expect that gold will continue up until something changes… and I see nothing on the horizon that looks like the slightest change.
December 2nd, 2009 at 3:41 pm
Bullish on silver and palladium right now. Too unsure about gold to do more than just hold.
I found BusinessWeek’s interview with Jim Rogers last week both illuminating and comforting:
http://www.businessweek.com/magazine/content/09_49/b4158011706814.htm
December 2nd, 2009 at 3:43 pm
Thanks for putting together those charts. That really does help put into perspective those calling this a bubble.
Re Wally: ” It is an alternative when there is no confidence in normal business. Given that, I expect that gold will continue up until something changes… and I see nothing on the horizon that looks like the slightest change.”
I totally agree.
December 2nd, 2009 at 4:06 pm
I agree, gold is not a bubble, per se. There are supply issues; a long- running decrease in mined gold- Barrick closing its long- running hedge book is best evidence. Another long article by Luis de Sousa @ the Oil Drum:
http://europe.theoildrum.com/node/5995#more
Gold as a short term investment vehicle is iffy but all other investment vehicles are iffy now. Don’t start with the ‘gold – as – money’ riff. Nobody here would want to live in a world with gold money. Only a few would have money and all would be hungry.
I see a large and increasing speculative long overhang in gold and silver futures. This means the settlement will take place in currency for those who want to close their positions. This voids the effort to buy physical gold or silver in the futures markets. As more and more customers take long positions the shorts will be bought out leaving only the exchanges and their banks as sellers (Goldman- Sachs). This leaves the exchange as the sole buyer when the market turns which it always does.
With Goldman on the short side of the trade I know how all the other trades will end up.
Keep in mind, the Fed is running a money laundering racket right now, pumping securities markets to allow insiders to trade illiquid bonds, equities and derivatives for US dollars. Fed open market money creation has been aimed at generating sufficient cash to allow for as many of finance exiles safe haven as possible. The Fed lends the dollar which is shorted. That, massive government deficits and resulting low rates promote the cheap dollar. This, in turn is good for the exiting scalawags of Wall Street, for whom the scarce dollars are made into a bargain. Driving up the price of gold is part of the process.
If you don’t think dollars are scarce, try to find someone who has any.
The smart money is moving to cash not gold, best to follow them and not get left holding the bag.
December 2nd, 2009 at 4:20 pm
If there’s a bubble, its inside the Fed’s Balance Sheet and in the programs to keep the Ponzi Dollar alive with more DEBT. The solution to a debt/credit problem, is not more debt/credit. Gold, when owned free and clear (aka not futures, not the bogus GLD, etc.) has no debt and issues no credit. It is what it is, Money with a 6000 (4000 or 5000) year history. How many other currencies can claim that.
When Joe and Jane Sixpack are in the office chatting about their gold purchases by the water cooler, then it’ll likely be near the end of gold’s run.
http://www.runtogold.com/images/dollar-bug-v-gold-bug.jpg
December 2nd, 2009 at 4:24 pm
While I respect everyone on this board, especially the posters, Tim’s lack of knowledge to use a logarithmic chart immediately knocked the entire analysis down a few notched for me. And the various arbitrary starting points for performance charts took it down another couple. To me, this kind of analysis lacks any real depth. But perhaps I am biased.
I don’t know if there is a bubble in gold. Certainly, the late night commercials, vending machines, and department store kiosks are an ominous sign. It doesn’t help when I am consistently hearing average people – flight attendants, gas station cashiers, etc – talking up the latest junior gold discovery. But this doesn’t mean there isn’t a powerful argument backing Gold’s move – central bank buying, dollar destruction, financial system panic, whatever…
What I can do is analyse hard data. Gold is a hedge against inflation, right? Pick your period (post gold standard, of course) and run a regression of Gold price to CPI. There is no consistent relationship. In the late 1970′s as inflation rose to double-digits, gold rose coincidently (positive correlation). Now, with Gold making new highs, yearly CPI change remains negative (negative correlation). Panics? Possibly, but if people are buying gold for panic protection, who is buying other equities? The only relationship that makes sense is Gold-to-DXY. The regression is fairly tight, especially the past couple of years (78%). Even the current DXY implies gold at $1100.
Now, obviously most on this board are bearish the US dollar. I am not, and I am extremely concerned about this one-way, crowded trade. As bad as the US is, I think people give far too much credit to the relative underlying health of other economies. Remember, the DXY is the USD value judged against a basket of other currencies. Is the DXY going to zero? I will say this – if that happens, these other countries will not be sitting pretty. And while I’m at it, don’t kids yourselves about China. There has rarely, if ever, been such rapid credit expansion without a dramatic consequence to the financial system.
Maybe there isn’t a bubble in Gold. But there is no fundamental support to copper (look at supply), zinc, iron ore…hell, even garlic is in a bubble in China. This smells a lot like last year. People thought Gold would be safe then too. News flash: when you need to sell, you look to where your gains are. And if it is a DXY rally induced sell-off, the historical correlation with gold put the probabilities in favor of gold going lower.
December 2nd, 2009 at 4:41 pm
There’s an old saying regarding trading commodities that says “they take the escalator up and the elevator down”. The downdrafts, when they come, tend to remind you of the “Tower of Terror” ride at WDW.
December 2nd, 2009 at 4:49 pm
Contemporary Bubble Assessment Process:
>I own it and am current in a paper loss position: Healthy gains indicate a return to normal conditions.
>I don’t own it: Price increase!? OMG a bubble!
December 2nd, 2009 at 4:54 pm
@Alex: And you base your “analysis” on exactly what? I’m pretty sure that many holders of gold here and elsewhere (I can name a few who no longer post here regularly) that still think gold is in at least a mini-bubble. Full disclosure: I have a very small holding of Gold and, yes, I think it’s a mini-bubble that will blow up. Do I know when? No. Like other bubbles, it can run far long than any conventional wisdom would suggest, but when it does blow, like Steve Barry mentioned (and see last year’s oil collapse), watch out, and panic first.
December 2nd, 2009 at 5:23 pm
In the interest of full disclosure, I too own gold. In fact, I own it in a fund that in a perfect world has no business owning it. But “market weight” is my max. I am embarrassed to say that top down pressure to perform often trumps rational thought, prudence, and preservation of capital in this business. All too often I hear the refrain, “It is acceptable to underperform in a crash, because everyone is in the same boat so what’s 2-300 bps? But underperform in a bull run? Then you put your job on the line…that’s when we make money!”
December 2nd, 2009 at 5:46 pm
b_thunder wrote:
It is me, or is the “Recurring Gold Bubble -View # 1″ chart INCORRECT:
The “Recurring Gold Bubble -View # 1″ graph is supposed to show price movements in days starting with the “final bottoms” for each of the three cycles.
— View #1 and the “final bottoms” used were admittedly subjective (I think it says so above) – it was not the low for the previous cycle (as discussed above), it was the last bottom before the next move up. The unambiguous View #2 that tells basically the same story was created for people who don’t like View #1.
4horseman wrote:
Tim’s lack of knowledge to use a logarithmic chart immediately knocked the entire analysis down a few notched for me. And the various arbitrary starting points for performance charts took it down another couple. To me, this kind of analysis lacks any real depth. But perhaps I am biased.
…
It doesn’t help when I am consistently hearing average people – flight attendants, gas station cashiers, etc – talking up the latest junior gold discovery.
— A log scale chart would show that the recent move up isn’t all that impressive compared to the two prior ones but it wouldn’t show a direct comparison of the three which is what I set out to do. I could be wrong, but I don’t consider this to be a lack of knowledge on my part since I was quite knowledgeable about what a log-scale chart would convey and that wasn’t what I wanted. As for the arbitrary starting points, the second set in View #2 is anything but arbitrary – see the response to b_thunder above. Lastly, what airlines and gas stations do you hang out at? I’d love to hear some of these people talking about inferred versus measured and indicated resource estimates and next summer’s drill programs.
December 2nd, 2009 at 8:13 pm
Did you just read this article a couple posts down?
http://www.ritholtz.com/blog/2009/12/fed-we-will-pop-future-bubbles/
The bottom chart clearly points to gold being in a bubble and one that is “easily identified in real time”
December 3rd, 2009 at 12:45 am
4horsemen: Thanks for your well thought out analysis. I own the GLD etf, and will hold till something strengthens the dollar, which may be a while.
December 3rd, 2009 at 8:11 am
I made similar analysis here: http://raphaelkahan.blogspot.com/2009/11/more-on-gold-charts.html
December 3rd, 2009 at 9:34 am
[...] Here is another point of view on gold (medium): http://www.ritholtz.com/blog/2009/12/the-recurring-gold-bubble/#more-45191 The financial fallout of Tiger’s indiscretions: [...]
December 3rd, 2009 at 10:47 am
150% Increase In Gold Prices Over Next Four To Five Years Says Money Manager: Buy Copper, Silver And Agricultural Commodities Too
http://www.twst.com/yagoo/kattar9.html
“John D. Kattar, CFA is Chief Investment Officer at Eastern Investment Advisors. Prior to joining Eastern in 2005, Mr. Kattar was Managing Partner at Ardent Asset Management, a hedge fund management and consulting firm. He has been Director of Growth Equities at Mellon Financial, Director of U.S. Equities at The Boston Company, and has also held senior investment positions at Phoenix Investment Partners and Baring Asset Management.
Mr. Kattar earned his MBA from the University of Chicago and MS and BA degrees from the University of Massachusetts.”
MBA from UofC…hmm…let me guess…uh…he’s got a tattoo of Milton Friedman on his heiney.
December 3rd, 2009 at 11:12 am
Never confuse a fancy degree with investment savvy or even intelligence, for that matter. This rally has humbled many bears, as the bulls are quick to forget the disaster that was 2008. I know many people who skirted through decent grad schools that come out with the same cocky hubris that destroys people in this business. Humility is lacking in an industry where greed always ends painfully. It is one thing to be bearish on the economy and buy gold as a result, but at some point we bears need to assess our own bets too. Gold may be in a bear bubble, admit the possibility, and then find fundamental proof (besides charts with pretty lines on them) to back up your thoughts.
By the way…Tim Iacono wrote:
“Lastly, what airlines and gas stations do you hang out at? I’d love to hear some of these people talking about inferred versus measured and indicated resource estimates and next summer’s drill programs.”
Admittedly anecdotal, but still, I hardly live in the center of the financial world. I am in prairie Canada for God’s sake! And yet I DO hear ordinary Joe’s increasingly talking about Gold. No, they are not talking about resource estimates, S&D, or drill programs – but that is my point. Those are fundamental factors, some of which mean upside in spite of the gold price. The people I hear are talking only of “buying gold” with no fundamental consideration. ETF’s obviously. These are the same people that would just as easily sell with little or no fundamental information. That is what happens in a bubble…rallies are faith-based, but internally the upside is thought of as a certainty.
December 3rd, 2009 at 11:55 am
@steve from Virginia
“Nobody here would want to live in a world with gold money. Only a few would have money and all would be hungry.”
I would like. And I think it will be the big bankers and oligarchs that will become poorer, not the middle classes. If there is no paper money, people studying maths or physics will not be wasting their time trading paper assets, but would be involved in constructing something productive.
Just check out that the industrial revolution, thanks to which you are well off, happened during a gold standard. All your talk is the result of Fed’s and monetarists’ propaganda. For more info check for example http://www.chrismartenson.com/
December 3rd, 2009 at 12:06 pm
@ 4 horsemen
Gold is not necessarily an inflation hedge, although it could be. But gold is also a financial system instability hedge and it outperforms relatively in deflations/depressions. And when every country worldwide is printing like mad to avoid that its currency appreciates too much against the USD (like now), then gold is acting like a fiat currency system failure hedge, so do not be surprised it it decorrelates from the DXY.
Check also the period 1980-2000, which was full of inflation all the way, but gold dropped (maybe due to a second derivative effect / trust in central banks and fiat currencies?)
December 3rd, 2009 at 1:49 pm
Sounds like China’s vice-governor is out trying to use US-style rhetoric to manipulate the market. I am sure China is not interested in Gold just like the US has strongly defended the Dollar …
December 3rd, 2009 at 2:57 pm
@ IvoZ
Gold is apparently whatever a particular investor wants it to be. Some anticipate hyperinflation and are buying gold as a hedge. Some see deflation and see gold as the best in a bad lot. Some (like myself) see pending financial crisis and want gold for “stability.” I am amazed whenever an investment comes up that outperforms in any situation – it can’t lose! This justification is right on par with the peak oil and food shortage ramblings of last year. Whether true or not in the long-term, none of it explained the rapid ascents we saw in 2008.
I truly don’t know the real reason to own gold, other than the fact that it looks pretty. I tend to agree with @Steve – I don’t think a gold currency world is practical or even possible. It is great in theory. But I also believe it works at times simply because it has in the past – it is self-fulfilling. But again, the only consistent relationship I have found with gold post-1970′s is versus the DXY. So if, as you say, “every country worldwide is printing like mad to avoid currency appreciation vs. the USD” (except AUS, CDA, etc etc) then on balance, the trade weighted value of the USD would rise and gold would sell off.
December 4th, 2009 at 6:40 am
@4horseman
If every fiat currency is printed, then gold would rise in any currency. This is what is happening, so the DXY may be less relevant this time.
December 4th, 2009 at 2:03 pm
“…the DXY may be less relevant this time.”
Maybe. Then again, maybe not.
December 7th, 2009 at 6:49 pm
Personally, I wish the ETF’s on Gld.& Slver were not even allowed.
If folks wanted to PLAY in this sandbox, MAKE them take physical delivery,or storage.
The, we would( along w/ the rest of the world) see what the real VALUE is, as both of these are not commodity’s first.
They are MONEY.
They have always been money…………………
The true prices on these, if speculators were not allowed to play, would be SO far off any chart, you likely could not afford either.
Other than theft(fiat currencies) the debasement of these metals, occurs for only one reason, and that’s again, theft.
Not ONE nation, or dynasty, has ever survived fiat currencies, not debased metal coinages.
The Gld std, was what kept the USA the most powerful nation on earth………………..once removed, the thugs came out to play.
Either way, it all ends very badly, except for the select few.
Always has, always will.
This is why our Founders(US), hated Central Banks.