Warning. Gold is a bubble

@andy77e (5170)
United States
September 26, 2011 2:12pm CST
This is a general warning. I'm hoping someone somewhere will heed this warning and not invest in gold. If you have Gold, sell it, all of it. I'd like to give you guys a quick history of Gold, where we started, and where we are now, and what the future is likely to be. http://www.nma.org/pdf/gold/his_gold_prices.pdf This is a quick history of gold prices. As many know, from the US creation of currency, the gold standard kept prices stable, at just under $19 an ounce. In 1918, the price jumped to just under $21 where it remained until 1934, where it jumped to just under $35. Now, why did the price change even during a gold standard? This is key to understand for those who believe returning to a gold standard will fix everything. The theory of the Gold standard is that you only have enough money printed, to equal the amount of Gold you actually have in stock. Thus if the government only has 10 ounces of gold, and the standard is $20 per ounce. How many dollars can you print? Obviously $200. But do governments always stay in the rules? No, they do not. So the governments routinely printed more dollars than they had gold to cover. So how do you fix that situation? You inflate the currency. Make the conversion $21 per ounce, or $35 per ounce. Then you can cover all the notes you shouldn't have printed. So to make my point, going to a gold standard, will not solve all our problems. A more responsible government will. The bubble Starting in 1972, the price of Gold was released. Meaning that the value of Gold was no longer determined by the government, but floated in value. In 1977, with the election of the brilliant Jimmy Carter, the price of gold started a climb. After succeeding in crashing the American economy with the policy driven energy crisis, Gold drastically in value until 1980 when it reached $600 per ounce. After Carter lost the election in 1981, the bubble crashed, down to the mid $300 per ounce. The steady decline From the crash of the early 80s, to 2001, the price of gold remained fairly stable year over year, with a slight decline to about $270 in 2001. Now there were a few hiccups during this time. The recession in 1987, caused a short lived spike in prices. Then again in 1992, a even shorter recession caused a spike that was even shorter. So much so, it doesn't show on this chart. But ever since free floating gold prices, there have always been a consistent spike in gold price any time the economy hiccups. But over the long run, the price of Gold declines. What is the intrinsic value? If you have a gold coin, take it out and put it on the table in front of you. For the rest, imagine it there. What do you have in front of you? What is it? It's a gold coin.... which is? A rock. Gold is a rock. A shiny rock, but a rock nonetheless. What value does gold have? Gold has the same intrinsic value that all commodities have. The value is what you can do with it. Take oil. The value of oil is you can power a car, or burn it for heat, or use it to make other chemicals for other uses. Gold is the same. So what can you do with Gold? You can forge it into jewelry. You can make electronic components out of it. That's the utility value of Gold. The reason why the price of gold was slowly dropping, was because more and more jewelry was being made out of other metals, because gold is expensive. So back to economic basics... demand goes down, supply is relatively the same. Price declines, right? The real market price of Gold has declined consistently over the 20 years prior to 2001. Where are we now? As I mentioned before, the price of gold consistently spikes during recessions and economic instability. Right now, there's still many economic problems throughout Europe, and the Americas. This instability has driven people to buy gold in mass, creating a bubble, just like the property bubble that crashed in 2008. Ironically people prior were saying the same thing about property, as they are about Gold right now. Oh property values are climbing, and you should buy some and make some easy money, and property is a safe investment. What do they say about Gold? Gold is climbing in value, and it's safe! It has intrinsic value! The value of Gold never goes down, even though it has many times in the past, just like property never goes down in value even though it has many times in the past before 2008. Gold is a bubble, just like the Oil price bubble of 2008 crash, the property market crashed. Bubbles will eventually crash. It will happen, now or later.
1 person likes this
6 responses
@dark_joev (3043)
• United States
27 Sep 11
Well yes a Bubble is being formed but their is an issue when you over print money so the issue that the Gold Standard would fix is the Federal Reserves ability to make money out of thin air. The ability for the Government to just make more money appear in the system that wasn't their before. The Gold Standard would work for as long as people felt that it was of value and their would be a demand from governments who wanted to make more money. The United States would be one of the only one if we went back. While pretty much any thing traded on the market has a Bubble around it and everything does. I mean the Ipad sales are down from what they use to be but these aren't referred to as bubbles they are Product Cycles. I have some money in Silver as well Gold will start to lose its gains after some time and I may sell it. But then again we will continue to have Bubbles that Break from the current Federal Reserve System that doesn't have a limit on how much money they can put into the market.
1 person likes this
@andy77e (5170)
• United States
27 Sep 11
I recommend you go back and re-read the section under "Now, why did the price change even during a gold standard?" I covered this already. Governments routinely printed more bills than they had gold to cover, even under the gold standard. You are assuming the government will stay within the rules, when there is no evidence of that. If the government doesn't stay within the rules now.... why would they under a gold standard?
1 person likes this
@dark_joev (3043)
• United States
28 Sep 11
Well because some have a hope for it working this time. I think that we would need to put it in law that they can only have this much money in circulation as a max that way we could curb inflation. I think that we would have to review this max as needed but it should slow down congress slightly if we made it to where the Federal Reserve had to go through congress before increasing the money in circulation. That is what people hope for in going back to the gold standard is that it would control the Federal Reserves ability to print money. Sadly this isn't the case. They where allowed to do so under the gold standard but their was a limit of like 1000 per gold bar or something weird like that so they could go to a max of 1000 dollars over per the amount of gold they had.
1 person likes this
• United States
27 Sep 11
Personally it is like every other item that exists in the Free Market...Buy LOW and Sell HIGH...Now is definitely a good time to sell, especially if you bought the gold in 2001. Now mind you I do not agree with the the minor value of it...as someone who does lots of work with "electrical components" that use gold the demand for the high quality wires and connections that use gold is going up due to new markets such as China. Oh, and Gold is not a rock, it is a metal and that is actually a very big difference.
1 person likes this
@andy77e (5170)
• United States
27 Sep 11
Thanks Mr Wizard. The point was it's a big block of metal. A paper weight. You can't eat it. Can't breath it. Can't really use it for clothing. And far too costly to build a house out of. It's effectively useless. And no, no one is going to barter you a house for a block of gold. You'll need to sell it for something called "currency" to purchase stuff with. Buying low and selling high isn't how most people work. That's called market speculators. That's like buying oil, and speculating the price will go up. The problem is, you have to make that a profession to do it. You can't just randomly buy in, and sell off, generally speaking. People go bankrupt constantly for trying that. Remember the housing bubble? There's no difference. In order for you to really succeed at 'buying low and selling high' you have to work at it like a job. For example Warren Buffet spent his life doing this. But he worked thousands of hours reading everything about every potential purchase to determine when would be the best time to buy, and the best time to sell in order to make sure he bought after the market bottomed out, and sold before it peaked. Most people have a full time job already, and a family to take care of, and thus can't do the research required to make wise choices. This is why I'm warning people who have tons of money wrapped up in gold. The price is going to crash. I promise it will at some point. It has to. All bubbles do. It's pretty easy to say "well what if they had bought gold in 2001?"... yeah and what if they had bought Gold in 1979, and sold it in 2000? They would have lost half it's value. (between the price decline and inflation). That's the problem with speculation. You have no clue what is going to happen. You realize that in the last 10 days, Gold has lost almost $300 per ounce, which is nearly 15% of it's value. Will it recover? Will it fall another $300? Will it go up to $2500 an ounce? You don't know. I don't know. No one knows. I don't think gold is going up because of China. Gold has always spiked in value during times of economic instability. People are buying gold as a hedge against inflation. The problem is, the rarity of gold is causing the price to be inflated beyond it's utility value, which is making speculators join the market. Thus the price continues to rise as more people join the market which feeds the price hike. But at some point, as gold mining companies crank out more and more gold, the price will eventually flat line, which will cause a panic in the speculator market. They will be forced to sell off as quickly as they can to make a return on investment. That sell off will drop the price, which will make those who are hedging against inflation to also sell off in fear of losing their hedge. That will feed the sell off and the price of gold will drop even more. Since the utility value of gold hasn't changed (demand for use in things like electronics), but the supply has greatly increased (because production is at an all time high), the price will fall even lower than it was in the 90s. This is exactly what happened in the property bubble, and it will happen in the Gold bubble too.
1 person likes this
• Greece
27 Sep 11
i think gold is the safest investment. when everything else goes down. precious metals go up. look at the stocks, look at our fiat currency. they all have problems while gold and other metals keep climbing. the last 10 years gold in particular has gone up more than 2000%
1 person likes this
@andy77e (5170)
• United States
27 Sep 11
Just like property. Property always goes up. It's the safest investment there is. Seems like I heard that back in 2006
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@Taskr36 (13928)
• United States
27 Sep 11
Gold is a good investment. The key to investing in gold is the same as the key to ANY good investment including housing. Buy low and sell high. It's the simplest thing in the world to understand, but inevitably a ridiculously large number of morons do the exact opposite. The foreclosure crisis didn't hurt the people who followed that principle. My sister bought her house in the 90's for $58K, and sold it in 2004 for $145K. The guy who bought it sold it in 2005 for $240K. The person who bought it from him was a complete and utter moron who ended up selling it in 2008 for $120K. It's worth about 110K right now. Gold isn't much different. Like property it has permanent, lasting value. The people who bough gold when it was $300-$400 an ounce were wise to invest their money in something stable. Once it hit $1,000, people who didn't understand the buy low, sell high principle started buying it up, making money for those who had owned it for a while. Now that the price is over $1,600, smart people would realize that this is the time to really start selling even if you bought it at $1000, and your profit won't be too big. Sadly, many morons who bought it at $1,000 are going to cling to it as though it will hit 3,000 or 4,000. Those are the morons who will cry for welfare when the price plummets to $600 and they end up selling at a loss, because greed overrode common sense, much like people who overpaid for their homes.
1 person likes this
@petersum (4526)
• United States
26 Sep 11
Jeez! I didn't read all that! Yesterday, I heard an economist predicting that gold will continue its steady rise for at least another ten years. Personally, I don't believe in economics anymore! Yes, I might get some gold teeth!
1 person likes this
@mehale (2200)
• United States
26 Sep 11
Very well thought out and said. And yes I agree with you, gold is a bubble like the housing market and will eventually cause serious trouble. If our government would put forth good economic policies instead of trying to make something out of nothing, then maybe we would be able to improve the state of our national economy. Until then we will suffer the consequences.