You have to wonder why so many normally astute and bright people commit basic errors such as buying gold just before the bubble pops. Part of the blame can be termed ” madness of crowds” , the hysteria and unbridled passions which succeed in entering the spirit of the otherwise experienced and common sensible. The allure of gold has been around forever; there are vast stockpiles in the world of the yellow metal hoarded away. According to the Bible, the source of Solomon’s reputed wealth were the gold mines located in an unknown land of Ophir. Yet, what the Scriptures and faith and god won’t be induced to reveal is exactly where this eldorado might be found today.In The Bible as History by Keller, the scriptures were proven to be remarkably accurate, however stockpiles of gold whereabouts were never committed to text. Some intrepids believe it is in the backwoods of Zimbabwe, somewhere in the bush. If true, Mugabe has already drained the resource. Now that the gold market is “correcting” a polite word for throwing a dart at a bubble, short of blaming a lack of supervision of those wily alchemists….
Flaming Lips,The Gold In The Mountain Of Our Madness :
They started up the hill
With their young lives exploding still
They love to dream and run
They had the grass and the trees and the sun
They dreamed of the gold they’d find
At the top of the hill as they climbed
No one would ever doubt
their spirit and strength would run out
But the hill was steep and long
They never thought they’d be wrong
It wasn’t a hill at all
It was a mountain a thousand feet tall
But with the gold still in their thoughts
They used their young lives to climb and climb
By the time they got up to the peak
They were old and they were weak
From Michael Ferguson ( Polymathica Institute ). Read More from Michael at :http://thefuture101.blogspot.com/
Now, I come to Gold. I have attacked the problem of the sustainable value of Gold from two directions. First, I did a linear regression on constant dollar prices and concluded that Gold should trade at about $600 the ounce. I then did a multiple regression against its comparative value to other precious metals. That also yielded a price in the $600 range.However, Gold traded as high as $1,889.70 the ounce (August 22, 2011). Forecasts (akin to $300 oil) are being made as high as $5,000 the ounce. So, for the past year or so, I have been calling Gold ‘a bubble’. Some people have asked me when I think it will burst. I will say what I said when people asked me that about oil. It is not possible to predict irrational behavior. One can only say that rationality will eventually prevail.
When pushed, when oil was at $140+, I said that I just couldn’t see it sustaining for another year. I was told that I was DEFINITELY wrong about that. Of course it lasted less than six months.I am now ready to say that I just don’t see how it can last another year for Gold. We have just seen that the price fell over 11% on a 6.7%l uptick on the USD. That shows weakness. On January 21, 1980 Gold hit $850 the ounce. At that time I said what I am saying now, with just about the same degree of skepticism. Two years later, it was trading in the low $300 for a loss of about 63%. If we apply the same calculation to the recent high we get a drop to $683. Fancy that. If you are in Gold now, you are at significant risk of significant losses. The last time, it lost almost 25% of its value in a week.
There was no gold that they could find
It was all just in their minds
They had dreamed and they had loved
They found the grass and the trees and the sun
They said “What do we do now?”
Spend the rest of our lives climbing back down?
Or we can treasure what we find
And make it golden in our minds.
Michael Ferguson: Read more fom Michael at:http://thefuture101.blogspot.com/
when gold gets this high, three things happen that contribute to a potential bubble burst. First, people who got in at very low prices start feeling like they want to do some profit taking. The number of people turning into sellers for this reason must be less than those who think that they will make large returns by buying in at this historically high price. The first group tends to increase with price while the second group tends to shrink. At some point it crosses over and the bubble bursts….
…Second, gold has industrial, jewelry and investment demand. As prices increase, both the industrial and jewelry demand start decreasing (classic price elasticity of demand). This tends to compensate for some of the increases in investment demand which also leads to a bubble burst. One of the most important things that people just don’t get is that the amount of natural resource reserves is determined based upon price and technology. As technology advances, deposits that were not economical before become economical and, consequently, turn into reserves. As price increases, deposits that were not economical at the lower price become economical and, consequently, turn into reserves This is critical to understanding oil and gold and, well, all natural resources. Yes, old gold mines are being reopened to mine gold that is now economical to mine….
The fourth type of gold standard could be called the “Dollar Bill” system. The name comes from the title of the bill that Congressman Ted Poe (TX-02) is planning to introduce into the 112th Congress for the purpose of fulfilling Congress’ Constitutional mandate to “…coin money, (and) regulate the value thereof…” (Article I, Section 8).
Under a Dollar Bill system, the monetary base consists of fiat dollars (both currency and bank reserves) created by the Federal Reserve. The Fed is not allowed to set interest rates, and it is relieved of responsibility for promoting full employment. Instead, the Fed is tasked with employing its Open Market operations to adjust the size of the monetary base so as to keep the COMEX price of gold as close as operationally practical to a target gold price. Fractional reserve banking is allowed….
…The target gold price is set by naming a “date and time certain” sometime in the near future, and then fixing the target price at the market price on the COMEX at that moment. This is similar to the approach that was used to establish the final exchange rates for the currencies that were replaced by the euro. A Dollar Bill system could work. Unlike a Bretton Woods system, it cannot be “attacked” in an effort to drain Fort Knox and panic the Fed. And, because the Fed is not involved in setting short-term interest rates, it creates no opportunities for arbitrage. The mechanism used for setting the target gold price would force the markets to disclose “what gold is really worth”, thus avoiding both inflation and deflation at startup.
The Fed’s discretionary, fiat money, “dual mandate” system is failing. It is creating inflation, impeding economic growth, and provoking rising anxiety. It is sowing the seeds of a sudden, violent “dollar crisis”. It is time to stop the madness and make the U.S. dollar once again “as good as gold”. The “Dollar Bill” will show the way. Read More:http://www.forbes.com/sites/louiswoodhill/2011/03/30/stop-the-madness-make-the-dollar-as-good-as-gold/
Contra Krugman again (as he acknowledges in a quick aside), the above-ground stock of gold does not “gradually disappear into real-world uses like dentistry.” Gold’s real-world use, throughout history and most especially in the ravenous consumer markets of India and China, is precisely in holding it, not in seeing it vanish.
Yes, the damn stuff is indestructible anyway. You need cyanide to dissolve. But the high and persistent value which humanity has long put on gold is what explains the fact that, out of the 170,000-odd tonnes ever mined in history, pretty much every last gram is still with us – known and accounted for – whether in sock drawers, around necks and wrists, in bank safe-deposit boxes or safe and sound inside concrete, steel-doored vaults three storeys back below ground.
“Just about everything you read about what gold prices mean is wrong,” says Krugman, adding (if only a little) to the wealth of inaccuracy and ignoring all that good stuff on gold on the internet. His new thinking, his claims, “is essentially a ‘real’ story about gold, in which the price has risen because expected returns on other investments have fallen.
“[Gold] is not, repeat not, a story about inflation expectations.”
Only half-wrong. Because inflation expectations DO drive the gold price, as the research papers which Krugman himself points to make clear. But it’s only ever a story about inflation relative to interest rates. Because low to negative real rates of interest – when cash-in-the-bank lags inflation, losing real value year-after-year – are very much behind the deep, long-term trend in gold prices today. Just as they were in the 1970s. Just as they were when the world decided it didn’t need QUITE so much investment gold in the 1980s and ’90s, and the price of gold fell over 80% in real terms. Read More:http://www.forbes.com/sites/greatspeculations/2011/09/08/gold-still-shines-in-a-deflationary-world-just-ask-paul-krugman/