Why gold is in a bubble

This is the first installment in a several part series on why gold is in a bubble.

I'm going to start with charts. Here's the thing, folks: When a stock explodes like this in only 300 trading days, it has only one direction to go, and that's back down.

Oops, sorry, that chart got flipped around somehow. Here it is.

Oh, that's the enron chart. My bad. The enron chart has nothing to do with the price of gold.

Enron's abruptly descending chart pattern would have something to do with the quotient 1/$GOLD -- i.e. how much gold a dollar buys -- if somehow the price of gold reflected the strength of the dollar, but we all know there's no such connection, since gold just goes for whatever price people are arbitrarily willing to pay for it. The two heavyweights Paul Krugman and Nouriel Roubini both said so.

An aside: it's actually pretty funny - gold, comic books, antique thimbles, the crazy stuff people like to collect these days! Good thing the government charges "collectible taxes" on GLD - at least 1/3 of the profit people make on this crazy stuff can go to better uses, like keeping our banking system strong and healthy.

Remember, with these matters it's important to keep a strong historical perspective. Maybe you've heard the saying "If we don't learn from history, we're condemned to repeat it." So let's look at goods that have matched gold's parabolic move this decade. How about the tractor?

Look how parabolically tractor sales shot up over a few decades! And we all know how that ended. The graph only goes to 1980, but I didn't bother checking the actual data, because I'm sure the "tractors sold" number is now around 1000 or so. That's just how bubbles play out, "returning to the mean" as the sophisticated economists have wisely told us. But none are so blind as those who will not see.

Note: the graph also has "horses and mules" on it, which unfortunately I couldn't remove. Not sure why they put that on the graph. What do horses and mules have to do with tractors? And what could horses and mules have to do with the dollar bill? Anyway, please just ignore that aspect of the chart.


Louis Cypher said...

Do I detect a little sarcasm?

Warren James said...

I feel sorry for anyone still viewing gold as being in bubble territory, they are going to miss out because they'll think the price action should 'correct' like the Elliot Wavers claimed for 2010 (how are the EW folk doing?). And then you've got the folk like Bob Pisani who went out of his way to downplay a huge room full of gold - "... just a commodity!" as if to say (paraphrased) "what is all the fuss over this yellow metal? It's common as muck - after all I was in the GLD vault (oops I mean the ETF Securities vault) for 6 hours - the bars aren't even heavy!"

Of course, I don't presume to know any better but with gold in the role of the wealth of nations I can only see the freegold scenario driving the price for years to come. I'm expecting a (hobbled) journey to freegold valuation levels, maybe keeping on going at the current rate of 20% per annum average per year for about 20 years should do the trick and surprise everyone all the way. Silver is the wildcard but expecting similar treatment (to reach $1000/oz in about 30 years or so), driven mostly by currency debasement then eventually scarcity.

As much as I also detest gold bubble talk, I'm not sure I can handle 20 years of conspiracy theories all the way either. Yukon is out of the race, Brian not far behind. After last week's capers I've decided not to read Zero Hedge any more - especially having suspended some trades last year waiting for the massive market failure which was just around the corner. I've stopped looking at SilverGoldSilver because he's discredited himself with the Perth Mint rumour and it's clear to me that his insider info is no better than tabloid quality. Harvey still keeps going on about GLD and SLV having no metal (nearly every post) and even Turd says the same, and repeats the mantra of 1 ounce physical to 100 ounce paper. But silver doesn't seem to be as scare as it is made out by some popular fund managers (like Sprott). At least Wynter Benton has some original material - their $36-dollar-silver-derivatives-bomb is kind of unique but even then it's probably just a glorified pump and dump, this time at $80/oz silver.

Rant finished. Just feeding off the energy from your post. I was going to mention that you can't eat tractors, but interestingly you can eat a horse or mule :) If the price of oil ever shoots through the roof then I know which I would rather have.

Kid Dynamite said...

Warren - I'm counting on you to keep us posted on JPM's imminent bankruptcy due to the $36 "derivatives bomb"...

if anyone wants to bet that JPM will blow up in a few weeks, I'll gladly take the other side of that wager.

What's the date, Warren? a few weeks from now makes 60 days, right?

GM Jenkins said...

As much as I also detest gold bubble talk, I'm not sure I can handle 20 years of conspiracy theories all the way either.

Aw come on, Warren, sure you can :P

It pays to remember that the conspiracy side doesn't have the monopoly on mental weaklings.

Yes, the typical conspiracy theorist tends towards paranoia, and an important point to understand about the paranoid schizophrenic is that as much as he suffers from his malady, he would suffer more if he wasn't convinced that e.g. the government cared enough about him to track his every move. In other words, there's a lot of warped wish fulfillment at play in every conspiracy crowd. "Any day now the economy will collapse, and we'll all be driving around on technicals firing indiscriminately at moving objects!" (Read: "I can't get laid, but by years end, you won't either!")

But, let's be even-handed here. Where the conspiracy side of a debate (including this one) may have its share of disgruntled muddleheads with delusions of persecution, the anti-conspiracy side is often enriched for those with a girlish and deep-rooted need for social acceptance and optimism (especially when optimism is unwarranted): an incapacity borne of fearfulness to see reality in all its ugliness. (I mean in addition to the outright disinformation agents and those who, having profited from a monstrous and corrupt system, would prefer heads be kept in the sand on that account).

So, you got lots of freaks, nuts, and losers on one side, and pussies, dupes, and scum on the other. I say, sit back and enjoy the theatre.

silverto500 said...

you are completely right.

A lot of sites turn into those parrots, citing other blogs and commenting about the state of the economy without providing any real input. Just because you have some experience trading (if at all) doesn't mean you are a Marc Faber or Jim Sinclair.

SGS: I stopped reading him... he is entertaining, but he doesn't contribute any new material. Market data is mostly taken from Harvey's blog. When I listened to his interview about SLV, I realized very quickly that he could not deliver the quality I was looking for.

(I loved Jeanne d'Arc's post about the relationship between the bears, SGS and ZH)

Harvey: I value his summary of OI and vault movements because these are facts, but all his comments are useless. His covering of the earthquake in Japan (sensationalism) just made me puke. Again, just by citing other blogs, you do not make an expert out of yourself, especially in matters you have no knowledge about.

ZH: I still cannot really understand why a financial blog would try to blog about radioactivity... it's amazing how everyone can turn into an expert in any field suddenly. All news they published as a "scoop" about Fukushima was openly available in Japanese. And as it's always the case, now as nothing seems to happen which ZH hoped for, that topic is just dropped. It made me realize that ZH is just another blog publishing their biased views.
And the post about that dude living in Japan thanking ZH for keeping him up to date with "the truth" is still hilarious. I guess this dude does not speak any Japanese at all and is one of those totally overpaid investment bankers in Tokyo.

Btw, I wonder why no one has picked up your research regarding that gold bar... that was quality work.

silverto500 said...

kid, c'mon,
I am still waiting for you to come up with any reason why ZJ6752 *does* belong to GLD.

Kid Dynamite said...

@silverto500 - huh? Warren wrote a whole piece about it, which you clearly read. GLD never claimed to own that bar. I'm half surprised that Harvey isn't running around screaming that GLD's vault has EXTRA gold in it...

As I commented on Warren's piece, it's a colossal f*ckup by Bob Pisani (Especially since it looked like his goal was a GLD puff piece, and he ended up holding someone else's gold), and he looks like a fool.

anyway - what are you saying - that you believe that a $36 strike derivatives contract is real in silver and about to bankrupt JPM, as WB says? As I said - my money is on the other side of that bet - let me know how much you want to do.

GM Jenkins said...

Well, what kin dof odds are we talking, KD. I'd take 100:1. Do you think there's <1% chance WB is real?

Robert LeRoy Parker said...

You sound ridiculous putting that all on pisani. Hsbc is just as stupid in that situation.

Louis Cypher said...

C'mon Rob,
Pisani is supposed to be a journalist. He showed guys checking off gold bars on a list. Wouldn't it make sense to do a quick check on the inventory list before releasing this knowing the gold community would pick every frame apart?

Kid Dynamite said...

@RLP - I agree with Louis - this is PIsani's report, and his error. HSBC is probably furious that he f'd it up and introduced doubt where none was necessary.

@GM - I think there's a less than 1% chance that a $36 strike 60 day silver derivative is about to blow up a bullion bank - yes. But I'm glad you put 100-1 odds on it - I hope that's the amount of faith you have in WB. (ie, minimal)

Robert LeRoy Parker said...

I completely disagree. They are the ones that drive him in the kidnapper van to the what he thinks is the gld vault. Is it two vaults in one? Three vaults? Is it even the right vault?

If Pisani thinks it's the gld vault only, then it is equally on hsbc. And if it is in fact only the gld vault, the hsbc is up shit creek. Even if Pisani did know that it was the vault for multiple etfs, then the bank needs to be damn sure he doesn't fuck up like he did. It looks like they just let him and his crew run around the vault willy nilly. That was stupid.

But seeing as these banks can't locate titles to houses, I wouldn't be surprised if they were equally disorganized when it comes to gold bars.

Kid Dynamite said...

@RLP -

so are you surprised that he had to go in a "kidnapper van" ?? is it surprising that HSBC doesn't disclose the location of one of the largest stores of gold bullion on the planet? Not to me.

anyway, it's not the GLD vault - it's the vault where GLD's gold is probably stored, along with a lot of other people's gold. That Pisani didn't understand this is embarrassing for him. (PS - that's also WHY GLD has their vault there instead of somewhere like Canada or Russia or China - so that creations and redemptions can be easily done, since EVERYONE's gold is there - they just move the piles of gold around on those palates - they don't need to unload tractor trailers full of it)

HSBC obviously had no idea he was going to f*ck up the story 9 ways from Sunday - as they come out of this with even more suspicion on them from the doubters.

anyway, there are really two main scenarios here:
1) Pisani was taken to what was represented as the GLD vault, where he miraculously managed to pick up a bar that GLD didn't own, and thus confirmed that all of the ETF data on allocated bullion is totally fabricated or
2) Pisani had a serious lack of understanding of what he was actually doing, wasn't in a "GLD Only Vault," and his error caused even more confusion when he ended up with a non-GLD bar in his hand.

It's pretty clear to me that what happened is #2.

what would have been really cool, if Pisani wanted to help GLD really allay fears, is if he'd asked on Twitter (live, on camera) for someone to submit the number of a gold bar from GLD's list at random. Then, he'd show an uncut camera shot of how long it takes them to find that actual bar.

Warren James said...

Hi RLP, re: 'equally disorganised when it comes to gold bars', I would have to disagree. Each of those 400oz babies is on someone's balance sheet, somewhere. That's about half a million worth of wealth so that single ledger entry is more liquid than you and I. The chances that the record of ownership is not closely managed is very low. Gold title trades slightly differently to house mortgages and I venture has far less paperwork by comparison.

Re: the vault shown in the video clip, FWIW I'm going to do some extensive study on the video sequence and see where the gold stacks fit in relation to the fund inventory records we know of. Inquiring minds want to know the approximate allocations :)

@KD, I agree with your scenario #2 above.

Robert LeRoy Parker said...

Even if it is scenario number 2 (which I'm inclined to agree with), what is Pisani, some fucking moron? I don't actually know because I very rarely watch cnbc.

If he is a moron, then hsbc is stupid for letting a moron into their vault where he can run around with the potential to embarrass. They should have made it explicitly clear what the vault was, so that a 5 year old could understand.

As for the convenience factor of having the vaults right next to each other. Could that vault be dedicated to both allocated and unallocated gold? Seems dubious if so. What would we be discussing if Pisani picked up some bar not located on any list that's available?

Hsbc acted stupidly here, and putting it all on Pisani is not reasonable imo.

Warren, if you can see another serial number from the same pallet, that had better belong to etf securities also, right?

If the unallocated situation is as fucked up as Fofoa believes, then maybe lbma had robo-signers giving the saudis unallocated gold back in the nineties along with whoever else wanted it. California houses were worth a half a million also.

Warren James said...

@RLP, the camera moves too fast to get a good look at the other items on the pallet, but I'll look into it for you.

From what Bron explained to me, the allocations are not necessarily based on physical location, but hopefully the same pallet would belong to ETF Securities. I know from the data that BullionVault and GoldMoney are physically segregated on their own (numbered) pallet.

You are possibly encountering what I have been experiencing - looking at all the data and at the TV news segment, the metal is there in the vault and the bar list entries correspondingly represent real bars (just like in housing the house is real but fraud can exist in the claims and paperwork). If you're following the same path as me then your next set of questions will be related to how the paper and physical dynamics work, and about the real ratio in the 'musical chairs' analogy. I believe Bron Suchecki has the best analysis of this, you'll find his summation of his recent comments on FOFOA useful.

I will offer just two more snippets in the interim for you to ponder on ;)

1. He who has the gold, makes the rules. HSBC may do whatever they wish, like it or not.

2. We are all flies in the bullion banks web [Bron Suchecki].

Swampfox said...

GM said,

"So, you got lots of freaks, nuts, and losers on one side, and pussies, dupes, and scum on the other. I say, sit back and enjoy the theatre."

That pretty much sums it up.

As for comments about Pisani look - he is doing what he is paid to do - represent a view. Most of what passes for "journalism" these days is not. It is either story telling, lieing/propoganda or simply editorial in nature. Actually looking for the truth... well... that's kinda old fashioned isn't it (hell - has it ever really been in fashion???)

Robert LeRoy Parker said...

Bullion banking web, bullion banking bullshit.

These are the same companies that have fucked themselves into being public enemy number one. Just because there information is better doesn't mean they are infallable. And it doesn't preclude them from being stupid.

The reason they are not transparent is because they
are hiding something. Probably what Another talked about 14 years ago.

Robert LeRoy Parker said...

Their information*

Kid Dynamite said...

@RLP wrote: "hsbc is stupid for letting a moron into their vault where he can run around with the potential to embarrass. "

I agree. If they were going to go through the trouble of putting Pisani in the "kidnapper van" then they should have insisted on the right to see his story before he aired it, or at least made it crystal clear to him that he wasn't in a vault that held nothing but GLD gold.

@Warren - fyi, my "guy" says that GLD creations and redemptions do result in the actual physical movement of gold - that's a question whose answer we have suspected, but has been in some question. Ie, do they actually move the gold? or just change the title? They do actually move it (within the vault the vast majority of the time).

good luck, folks. see you in another future thread.

tyonk said...

Tell us pray, where the fault in thinking lies, don't just berate our lack of knowledge as stupidity.
If Paul Volker admits to suppressing gold then how does one know where to draw the line on what is possible. And, let us not forget that these suppressive acts spring from the same government and it's chosen banks that are supposed to be bastions of rectitude.