Interesting observation (with caveats):

“In his latest market dispatch, the venerable technician Ian McAvity makes proper hash of the theory being bruited about by the usual suspect sources that gold is a bubble.

At $1,900 an ounce, he observes, gold was 2.2 times its early 1980 peak. U.S. gross domestic product and federal debt, he goes on, are some 5.5 times their early 1980 levels, while the Standard & Poor’s 500 and overall credit-market debt are 11 to 12 times their levels in the early ’80s.

Thus, “the real bubble,” he contends, has been the “issuance of debt that is increasingly stifling any recovery in the Main Street economy.” And there is no sign it won’t continue to do so any time soon.

Little wonder, then, that he’s convinced we’re in the fierce grip of a bear market that could get quite ugly between now and next year’s election day, with the already-battered housing and financial sectors pacing the decline.”

I have no problem with the argument that we’ve had a bubble in credit and an unfortunate reliance on printing and debt.

However, I find the rest of the argument hollow. The S&P in niminal terms may be up 12-fold, but so are earnings. So the value of the index has not risen, only its price.

Gold on the other hand is priced based on what the last guy paid for it (as are equities) — but without any other frame of reference. There are no earnings or yield, so it is strictly a function of last price paid. I don’t see how eventually, that does not end terribly.


Pocketbook Love
Barron’s DECEMBER 10, 2011

Category: Credit, Federal Reserve, Gold & Precious Metals

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “Where is the Bubble — Gold or Credit?”

  1. Bill Wilson says:

    In last night’s Republican primary debate, Newt Gingrich stated that the housing bubble was caused by the Federal Reserve creating too much credit, not by Freddie or Fannie. I wonder if he’s been reading The Big Picture.

  2. matt wilbert says:

    The other thing is that in 1980, gold was clearly in a bubble. Even if you buy the underlying argument, all you can say is that gold is probably not in as big a bubble as it was in 1980, which isn’t all that powerful an argument.

  3. Global Eyes says:

    CREDIT is the ultimate drug. The more bonds we make, the more likely a bursting bubble becomes.

  4. DrungoHazewood says:

    It still perplexes me why the gold bugs thought they’d just cruise through the crises unscathed. I hadn’t seen such a lovefest since people were having sex with sock puppet back in ’00.

  5. Winston Munn says:

    In our economic system,new debt equates to either money creation (loans) or money redistribution (bond purchases). Either way, the role of new debt is to fulfill demand. In the current environment, what is occuring is that new debt has been used to purchase existing obligations – the demand has been demand for solvency assistance rather than demand to satisfy the needs of increased consumption.

    The malinvestment of the credit/housing bubble caused an unemployment bulge after the inevitable collapse, much like WWII created a bulge of baby boomers in the retirement timeline. It will take years to retrain and redistibute these extra employees into the workforce in sufficient numbers to increase demand much above expected rise caused by population growth.

    That means for years increased demand can only come from government spending, but the existing debt and political climate have made increased government spending problematic.

    Rather than allowing our bank entities to fail, the decision was made to save these institutions at the minimum cost of a decade (most likely more) of low-to-negative economic growth. The real cost of the bailout is the 2-3% loss in a $15 trillion economy times 10 or more years plus the money already thrown at the problem.

    How can losses of that magnitude spur inflation? Without inflation, what is gold but a shiny metal?

  6. ezrasfund says:

    One question is just how much “gold” is owned through the various ETFs and other investment vehicles as compared to the real gold that exists above ground. That may be where the real bubble is. Somehow the gold bugs have managed to create “paper gold”, the fiat currency for those who hate fiat currencies.

  7. Sechel says:

    It is interesting in that the availability of Gold is relatively fixed, where as Credit doesn’t necessarily have the same constraints. Also the 2.2 multiple of Gold from 1980 is not inflation adjusted. It’s not a stretch to imagine that hte U.S. & Europe eventually inflate their way out of debt problems and gold plays into that. Gold is not so much going up due to greed and bubble mentality but fear and capital protection. One thing that I don’t get though, the people who are buying gold should not be going into an ETF or gain their exposure via derivatives. Someone buying Gold for fear of calamity should be insisting on the physical metal(my opinion).

  8. dead hobo says:

    BR observed:

    Gold on the other hand is priced based on what the last guy paid for it (as are equities) — but without any other frame of reference. There are no earnings or yield, so it is strictly a function of last price paid. I don’t see how eventually, that does not end terribly.

    No. Gold is real. I see no reason why it can’t and won’t go to $10,000 / ounce by 2025. Silver will cost over $1000 and people will beg for it. It’s better than food. You can wallow in it if you have enough. Governments will lie, cheat, and steal for it and then bury it in vaults. How can you top that??!! Be like Fort Knox. Buy gold and sit on it. Just like nature intended. That’s some valuable shit.

  9. drewburn says:

    Sir John Templeton said something like: “Democracies will always tend toward inflation.” I think he meant that when the going gets rough, the gov will err on the inflationary side. Suspect it will happen again and am long gold miners heavy & have been for quite a few years now.

  10. machinehead says:

    Just like the post office, gold miners see their energy, materials and labor costs rise with inflation.

    Unfortunately, since most gold isn’t consumed into oblivion, its marginal cost of production doesn’t exert as tight a rein on its market price as one sees in other commodities.

    That said, gold is the quintessential uncorrelated, alternative asset. Even at an assumed zero real rate of return, gold deserves a place in every multi-asset portfolio … but at a reasonable weighting (10-20 percent).

    Those putting most of their net worth into precious metals should check their watch — is it 1978 or 1979 yet? To adapt the old saw about marriage to bullion — “Stockpile in haste; repent at leisure!”

  11. csainvestor says:

    you price gold in dollars, but what if you price it in Euro’s or British pound.

    i guess it depends on what you think gold is.
    is it an ancient currency, a store of value?

    gold is indestructible, and rare.
    it’s unique properties are well suited for specific modern industrial use. in the future, as technology advances we may find even more important use for gold.

  12. Frilton Miedman says:

    I won’t touch precious metals, and for that matter, I won’t over weight myself in commodities/softs.

    Knowing that a vast majority of precious metals are owned by the TBTF’s, and recalling the way they cornered the oil market in the Summer of ’08…and looking back to the Hunt bro’s era (1980) where such practices were illegal back then (pre-CFMA),

    The mere presence of this topical blog arouses the underlying question of real supply/demand vs market manipulation by the TBTF’s…atop recent changes to the CFTC (position limits) and the Dodd-Frank act…all too complicated for my little brain right now.

    For the premise of using debt alone as a guideline to value gold (or silver), I suggest looking back to the early 80′s…while the start of our current debt explosion had begun, gold and silver had a miserable 20 year run, after experiencing absolutely explosive valuations up to 1980.

  13. ElSid says:

    It’s funny to come here and see the term “gold bugs” used without any sense of irony, like all this is will be going swimmingly again any minute now, and the shadow banking system’s going to hit new highs any minute now, and we’ll just start arguing about the most important question of the day like whether Goldman Sach’s earnings will beat Bear Stearn’s…oh, wait…

    What hobo says.

    But see, this precious metals business takes all the power from Wall Street, Central Bankers, and financial bloggers, so of course there’s an issue?

    BR apparently hasn’t been reading the QB Partners stuff he’s occasionally posted here, or hasn’t taken it to heart. It must be a bit disconcerting to get usurped by Zerohedge, QB Partners, and Kyle Bass as the likely authorities on the next move from here. I am a liberal and dare I say almost a Keynesian (like anyone who uses that really knows what that is — this hasn’t been Keynesianism, it’s been heroin addiction), but I can recognize that this is these peoples’ time to shine. Good luck to those who don’t recognize that.

    To the above issue, I believe the theory is that there’s a direct connection between the “credit market” bubble and the S&P price and earnings. So what’s to stop PMs from reflecting that also (I mean, besides lots of Central Bankers getting JPM and HSBC to pile on naked shorts in the dead of night)?

    You could say the same thing about gold: its value hasn’t risen, only its price. That’s the product of the credit bubble and the “reliance on printing” that we admit exists above.

  14. T_S says:

    I’m enjoying this discussion. I don’t think gold or other precious metals are in a bubble. Pull up a 3-year
    chart of gold. Steady rise. No parabolic blow off. The bubble isn’t here yet. Silver sorta looked parabolic
    and exploded earlier this year. Is it done yet? All ‘bubble’ phases have a mania. Either
    gold will never go parabolic (it is consolidating or breaking down right now), or the best of it
    is yet to come. FWIW a good chunk of this discussion is great fuel for a big fat wall of worry
    for gold to climb.

    is the public overinvested in precious metals yet? I do not think so.

    That being said, I do agree with BR, the day of reckoning will come at some point. And
    those with half their net worth in gold will get blasted. Personally I think that starts
    at 5000 or 10,000 dollars an ounce though.

    good luck to all


  15. the bankster says:

    Of course gold has a yield. It’s called the gold lease rate.

  16. csainvestor says:

    empires and fiat currencies fade away, gold remains.

    a dollar’s worth today vs. a dollar from ten years ago, buys less of anything and everything- including gold.

    a weak US dollar must lose value against gold.
    Conversely, the Euro and the UK pound haven’t been as inflated as we have- not yet anyway.

    Is gold the only real currency- the base for which all other currencies must be measured?
    or is it just a yellow metal?

    if you think gold’s worth, is only as an industrial metal or as jewelry- you might very well believe its in a bubble.
    peoples opinions on the meaning of gold vary incredibly.

  17. barniebrains says:

    The gold market is commonly misunderstood. The price of gold is simply a reflection of the extreme levels of sovereign debt in the global financial system. When sovereign debt reaches extreme levels, even the slightest rise in government bond yields can make interest payments destroy government budgets. This is what transpired in Greece and more recently in Italy. After the Euro crisis, Japan will be next, eventually followed by the US, unless our government learns from these crises (unlikely based on the way debt ceiling negotiations have transpired).

    There are only two solutions to a debt crisis: default or print money. Since no one ever wants to default, governments always favor printing. The next round of money printing will easily send gold over $2000/oz if not much higher. Its not a matter of if but when. There’s an excellent interview with Kyle Bass where he explains where he sees the debt crisis going:

    Its likely we’ll first see a severe round of deflation before the Federal Reserve finally decides to print more money. Therefore, its highly possible (in fact likely) that precious metals may go down further from here until the Federal Reserve is finally forced to print, at which point the price of gold (and silver) will be sent into the stratosphere.

  18. barniebrains says:

    One last note: Just because gold can be valued by earnings and yields, doesn’t mean it can’t be valued. As I stated in my previous post, look to the levels of sovereign debt and money supply for a more fundamental reading on the value of gold.

  19. BigBlueCrab says:

    I feel like I am trying to proselytize, but 100x more paper silver is traded than physical. If everyone in just ‘This country alone ‘ tried to by 100 oz, they couldn’t… 6 billion could buy the worlds’ yearly output. You buy your 5% and hold it. It’s insurance, and hope you never need it. The ‘Experts say hold 10%. Do what you will after that, but hold your ‘%’. Who is it that said always have enough to ‘bribe the guards’. It’s funny to listen to the banter: “you can’t eat it, No one will want it if they’re hungry”…Oh no? There may be a few that will trade for the day you need ‘that something’. Global trade, deficits, fiats etc etc aside. Gerald Celente, the big ‘buy and hold ‘ trader just lost his ‘paper’ gold several 100g’s?when his MFGlobal was frozen.. Talk about NOT walking y0ur talk…Live & learn.
    I keep envisoning… a ‘Bronx Tale’ where the cocky bikers think they own the place. Sonny walks over and locks the door…”Now youzzzz can’t leave….”

  20. Petey Wheatstraw says:

    DrungoHazewood Says:

    “It still perplexes me why the gold bugs thought they’d just cruise through the crises unscathed. I hadn’t seen such a lovefest since people were having sex with sock puppet back in ’00.”

    The crisis has been raging for a few years now. I don’t see gold being scathed, in any sense of the word, during that time. It might drop to $200/oz., or even zero sometime in the future, but I can’t imagine what would cause such a drop, considering the fiat and fiat-based alternatives.

    It’s interesting that you compare gold, with its continuous and unbroken use as a store of value throughout the history of mankind, with a casualty of the internet bubble (a short-lived bubble and in pet food and supplies, no less).

    BR says:

    “Gold on the other hand is priced based on what the last guy paid for it (as are equities) — but without any other frame of reference. ”

    Gold doesn’t exist in a vacuum — the current frame of reference is exactly what it always was and always will be: the ratio of a quantity of gold to a unit of any fiat currency. It is also pertinent that gold (or any other commodity, for that matter), cannot be divorced from the laws of supply and demand (the most basic frame of reference for anything traded). The frame of reference for gold is the broader economy. In a certain sense, gold is the benchmark from which all else is measured.

  21. DeDude says:

    Cherry picking the previous bubble high for comparison time 9to make gold look cheep) is pretty pathetic. Why didn’t he take the prices at the S&P top a decade ago for his comparison. Oh I guess that would have made a different story than they one he is trying to sell.

  22. constantnormal says:

    There are only two cases where gold has a sustainable increase in fiat currency valuation …

    1) there is a significant and persistent devaluation of that fiat currency, usually via money printing

    2) there is a fear that 1) is about to occur.

    The first case is real, the second is a transient emotional response. What we have today, in pretty much ALL fiat currencies, is a case of #2, with no significant #1. The longer that we go without the monetary printing necessary to induce hyperinflation, the more of a bubble gold becomes.

    We are NOT currently experiencing any monetary printing of consequence. We DO have a significant debt overhang, with a large but unknown fraction of it being toxic debt that would require a truly immense amount of inflation to overcome, and it seems highly unlikely that the political or economic (federal reserve) will exists to bring that about. The bulk of the developed world currencies are in the same boat.

    I suppose we could see a toppling of fiat currencies around the world, brought on by a collapse of the massive CDS float. But even that would result in only a short-term spike in the price of gold, with the long-term result being even more debt-driven deflation, and a stronger fiat currency, in dry short supply relative to the debt overhang.

    I regard none of this as a Good Thing, as persistent deflation is at least as harsh as persistent inflation, and much more destabilizing socially (it favors the wealthy, and promotes income inequalities). But that seems to be the direction that we are headed in, politically and economically.

  23. ElSid says:

    That’s great, bankster. BR would know that, if he had any idea what physical or any gold was about. And his people would be able to call him on that, if they knew.

    It’s really funny to see BR post this, like some troll post, fishing for ideas, but the guy obviously hasn’t really thought about this issue, or is just looking to rip ideas from posts responding to his post like he did a post I put up some weeks ago.

    Oh, hey, Dedude, how about we take the S&P high of 2000 to show how great the S&P is!!! LOL. Or how PMs suck. Are you kidding? This is now, that that was idiot-time then. You do the analysis, then send it to BR for posting here. What was the S&P P/E then? You guys are soooo fundamentally sound!!! Or were you just data mining, to prove some point you couldn’t otherwise? I couldn’t tell.


    BR: I know I recommended buying Gold $1300 dollars ago, because of the impact of Greenspan’s 1% fed rate would have on inflation. The risk/reward ratio was a no brainer.

    What is more fascinating to me is your knee jerk reaction to this post. Emotional, over-compensating — my guess is you are nervous about many things, not the least of which is your Gold holdings,

    Learn to take motions out of your trading, or suffer the consequences.

  24. herberq says:

    I don’t understand your point. Gold is money. The only possible reference point for its value is confidence that others do (and will) also consider it money. With gold’s 5000 year track record I don’t understand what else you are looking for. By its very nature money has no “earnings” or “yield.” The value of one kind of money versus another is simply a beauty contest. That’s all there is to it. Why this contest should “end terribly” for gold is beyond me. If anything, it is the dollar (and all its ugly paper sisters) that are at risk of turning into pumpkins.

  25. JasRas says:

    All bubbles end badly, so AA saying that is simply stating the obvious. What he implies is inane because the logic of his thought is this: Because bubbles end badly, I should not participate. To which I will take another quote from another endeavor of life: To love and lost is better than to never have loved at all.

    There will always be negative people. There will always be people who let their emotions and bias cloud their judgement. To be truly successful avoid the negators and attempt at all costs to prevent emotions and bias from hampering wise decisions…sounds soooooo easy. And if it were, we wouldn’t be reading posts here early in the morning.

  26. parapooper says:

    If you view gold as money it is near all-time lows vs. the money supply.
    If you view gold as a commodity it is around 1.5x production costs and thus hardly even profitable to produce if you consider the time, expenses and risks involved before production can even start.

  27. Al_Czervik says:

    To echo JasRas, everything ends badly. The question is when.

    Agreed, there is no objective way to value gold except for Jim Grant’s dictum that it moves inversely to investors’ confidence in paper money. Based on that, I think this bubble is barely getting started.

  28. olddogDALTX says:

    (I agree)^^10 with this post. The technical or manufacturing uses of gold do provide a basis valuation, now insignificant since before 1980 its valuation has been 24.999 karat psychological. All H breaks loose when Pradip figures the price is sure to fall and forces Ghita to sell and to buy something of value for life, freedom from drudgery, or happiness.

    Can’t wear, eat, roof your house with the stuff. Non-reactivity good for a few purposes. Gold filled looks the same as 24 K. Gold makes for better fiat money than paper since the paper has real value as it may be burned for energy, worn as clothing, turned into animal feed, composted, etc.

  29. [...] Where’s the bubble:  gold or the S&P 500?  (Big Picture) [...]

  30. Fredex says:

    Douglas Adams on gold investment.

  31. victor says:

    National currencies (fiat money) come and go. Gold stays. When the Communists seized Eastern Poland in 1939 (Molotov Ribbentrop Pact) they made all arms AND gold illegal and confiscated them. If you didn’t turn in your gold you’d be deported. If you turned in too much gold you were put on the dreaded lists of “enemy of the people” and deported. In many ways owning gold was considered a curse by the defenseless population. The most widely held was the French Rooster 20 Francs Coin (Le coq Gaulois). It had been legal tender until 1914. The Nazis did the same with the Jews who owned gold all over Europe. Let’s hope that history wont repeat itself.

  32. barniebrains says:

    Here’s an interesting model for the price of gold put out by some stocktwit dude:

  33. badaitz says:

    Gold is for refugees. There is nothing that isn’t good for gold, just listen to the talking heads, if that’s not a disaster waiting to happen I don’t know what is. If you bought gold at it’s peak in1980 you would have had to wait until 2004 to break even at 1980 dollars. You have talking heads like Cramer telling his fans to put 20% of their portfolio in gold, not mentioning that when gold falls it falls fast and furious and they will lose a bundle.

  34. JasRas says:

    Some additional thoughts on gold, or anything else for that matter… It bothers me that people can say it has no value, retains no value, etc… if it doesn’t, what does? This is a philosophical question, but a very real one. If one can value a company by what it produces, the assets it owns, the debt it owes, then surely something as simplistic as gold can be valued. In simple terms, it’s value is the price of discovery, extractions, processing, transport, and storage–in real terms, and add inflation for nominal… Then econ101 will let supply and demand create a sliding scale of premium or discount….It is simply ridiculous to say the value can not be calculated or that a future value can not be extrapolated in the most basic terms… If that were the case, what is the value of copper, aluminum, corn, a Coca-Cola, a Big Mac, thirty seconds of advertising??

    So when those with bully pulpits scream it has no value, either they are idiots with no real financial background, or they’ve been leaning wrong for too long to switch now. That person has no problem taking data from balance sheets, 10-Qs, etc and extrapolating the value of a company and then transposing it to millions of sheets of paper called “stock”, which in theory represent fractional ownership of said company… really?! Oh, maybe in the value of the intangibles that is too difficult? Nope. Not with a company….But with gold, attaching additional intangible value due to paper currency dilution, inflation, deflation, country instability, region instability…that’s impossible?! Huh…really?

    Look it will end in a bubble. And it will burst. But that is not unique to gold. It happens and has happened in all asset classes. It is nothing magical. And bubbles aren’t bad. They are a natural byproduct of our humanity. We naturally chase things up to irrational levels, the music stops, and the bubble bursts. It has happened since the beginning of recorded history. Think the tower of Babel was rational? No, some idiot just had to make it taller and taller… Until Humans become Vulcans bubbles will happen. Deal with it. Learn to ride them. Learn to walk away with tidy profits and not to get caught up in the “this time it’s different”

    Are we close with gold? No. Too many haters. I’ve never seen a more hated class of asset. Want another? Utilities. Talk to most stock people in the business and they hate ‘em. No growth. Highly regulated. High debt. A high P/E compared to historical norms… Horrible. But, they’re domestic (mostly), pay high dividends(mostly), are counter cyclical and viewed are boring and stable… In a volatile world, with abnormally low interest rates, global unrest, slow-to-slower growing economy…that fits the bill for a lot of people! Yet their broker will likely fight tooth and nail to keep them from making that “big mistake”!

    Good luck to all and may you have a healthy dose of skepticism to help guide your decisions.

  35. [...] Where’s the bubble:  gold or the S&P 500?  (Big Picture) [...]