Pop Goes The Gold Bubble

Is Gold the new Bubble? - The Case Against Gold
Gold today is hitting record levels, primarily due to the uncertainty surrounding world currencies, debt, and central banks around the world printing money to support their government spending (USA) and over-leveraged banks (Europe.) This will eventually have inflationary effects on commodities which have a real intrinsic value.
What do I mean by “intrinsic value”? In the case of apples, I can eat the tasty fruit to survive, in the case of gas, I can use it to power my car, to heat my food and house. These commodities have value for all of humanity. Does gold have intrinsic value? Absolutely.
Throughout history everyone from the Incas, to the Chinese, to the Europeans recognized the shiny metal’s beauty. It was used as a store of value. You could buy things around the world with gold. Today you can also use it as crown for a tooth, as well as a few industrial uses. So I’m not debating that gold has value, I’m trying to make to decide whether it is worth the $1,660 price an ounce of the metal commands as I write this.
Gold- shiny + purty, 2012 bubbalicious

Let's take a look at prices from the year 1977 in the U.S. and compare them to today's prices (which I have estimated very conservatively and are likely lower)
Cost of a new home:
Median Household Income:
Cost of a first-class stamp:
Cost of a gallon of regular gas:
Cost of a dozen eggs:
Cost of a gallon of Milk:
Similarly, I did research from the year 1967 on a basket of goods consisting of Skippy peanut butter, apple jelly, raspberry presevrves, olive oil, etc. and found the factor (comparing 1967 to 2011) to be less than 5. That was ten years earlier from the above. But for simplicity sake, let's just say that the inflation factor since 1977 was 5, even though gas is the only item in our basket above this mark. Let's err on the side of caution.
Also, the reason I chose the year 1977 was because during the three year period preceding it, the price of gold was quite stable, its annual average price ranging between $125 and $161 an ounce, suggesting to me this is a good representation of what the metal was truly worth.
Let's use $150 as the price of gold for this period in time. (the 1977 average was $148 an ounce)
Now, by 1994, which was also a period of relative price stability for the metal, it had risen to $384 which was very much in line with the steady rise of the consumer price index, which rose by a factor of 2.45 over that period of time. (Gold would have been $362 at that factor so we're in the same ballpark)
Flash forward to today- Gold is $1,660 an ounce meaning that the price of gold has risen by a factor more than 11 since 1977. A factor of eleven? Most other things have risen by a factor of five, not 11. Is gold worth so much more today? Have they found new uses for, thus increasing its intrinsic value? Let's not be hasty, let's examine.
To be sure, there are a lot more customers who can afford gold now. The populations of India and China, can afford to purchase this precious metal, but the same is even more true for oil. Gold has not found many new industrial uses- in fact, industry uses silver far more, making it the rarer of the two metals on earth's surface.
So, unless someone can counter me, I would assume that what's driving the price of gold so much higher than other commodities is-- psychology of the masses. More and more people I know are asking, "Rich, should I invest in gold? I hear that's the big thing."
When I hear this, my instinct is to run the other way. In 2000, my dear Grandfather, who had never operated a computer in his life, told me he was thinking of taking all his money and putting into Yahoo (YHOO), a sure sign that we were in a bubble.
I don't know if we're at the height of the bubble, but at some point you have to ask, which would you rather own, a new high tech Android Phone (sorry Apple fans, I'm a Google guy,) a LCD TV, and a tank of gas for your car, or an ounce of shiny metal that you have to pay to store in a secure area?
And that's a serious question. I was in Dubai five weeks ago, and walked into the Gold Sooq (marketplace) and saw wall to wall of this very eye catching yellow.
One of the store owners was a Yemeni named Ali. I asked him what he would do if gold suddenly rose to $4,000 an ounce. "I would instantly liquidate everything I owned and retire. I don't care if I got less than market price," came his reply.
Well, there's likely a ceiling in this case for the price of gold. He'd rather have the LCD TV and Android Phones.
So, I'm just applying common sense here. Even with the fear of governments printing more money, of a US debt default that won't "technically" happen, because we can always print our way out of it, which would of course raise prices of all commodities, gold included ... the question is how much would it raise prices IF that took place.
In 1980 the price of gold jumped to $800 an ounce. This was during a serious inflationary period with little growth, and hell of a lot of fear. Gold dropped back pretty quickly from that price.
Is gold fairly valued at 11 times 1977 prices compared to other goods and services? The metal has value, but I don't think it's worth $1,700 an ounce. Unless the worst case scenario takes place, gold is simply overvalued. Just ain't no way buddy boy. You'd better sell that gold while you can. That bubble is gonna pop. Might not be today, but it will happen.
Want to profit with as little risk as possible if my opinion is correct? Buy gold puts a couple years out.


  1. I dont agree with you but I think you did a great job making your argument for why gold is overvalued. One thing i'd be curious about is, according to your logic if we give gold a 400% valuation based on the 1977 price we get approximately a value of $600 / oz ($150 * 4) - which would theoretically be the place where gold should be compared to the other commodities mentioned.

    We know the 1980's gold bubble peaked around $850 / oz in 1980 and lets assume that the avg for the 1980 bubble peak year was around $750 / oz. That would be a 5 times jump from the 1977 price (5 * $150) which would be the bubble peak price from 1977 fair valuation.

    Now, lets take the current projected gold fair value of $600 (mentioned earlier) and now do that times 5 to get the expected peak of this "bubble" in the gold price. That would give us approximately $3000 / oz to be the fairvalue-to-peak price. So if your argument parallels then you should expect gold to AVERAGE around $3000 for a year to parallel the 1980 run. What would you say about that?

  2. Sir,
    As to drawing a price comparison from 1980, and even dropping it down to $750, my argument would be that you are drawing comparison to an illogical peak.
    My argument would be that it is much more logical to take a price from when gold was fairly stable in price, and use that as a metric.
    Thank you for your compliment btw.


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