[quote=“bchad”]
Slowdowns are not the time to own gold. When things are going down in price all over, the price of gold tends to go down too.
Do you think it happened in 2008 and 2009 or 1974(petrol crisis)?
During the 2008-9 crisis, the price of gold went down about 10%. Once the Fed started quantitative easing a bunch of people became convinced that the Fed would print forever and/or spark hyperinflation, and that pushed the price of gold back up. It wasn’t the slowdown that pushed gold prices up, it was the bet that the Fed would make the dollar valuless by printing excessively to get out of it. Once the Fed started talking about turning off QE, the price of gold tapered off.
1974 is trickier to disentangle because the dollar was pegged to gold at about $35 per ounce. Eventually that peg became untenable and the US went off the gold standard in 1971, so gold was still looking for an equilibrium price only a few years later. The stagflaiton produced by the oil crisis pulls gold in two different directions… the recession pushes the price down, but the inflation effects push the price up. So that’s a more complicated scenario that doesn’t really make a strong case in one direction or another.
It is significant that if recessions were the right time to own gold, we should see a much clearer increase in gold prices during recessions. Instead, gold seems to drop in the beginning of recessions but then pick up a bit towards the end. If you look at the chart below, what you see is that recessions at best tend to slow down the previous increase in gold prices, and often result in downward pressure.
http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart
That may have been true 20 years ago, but not so much today. Gold is mainly a retail investment and when the average person starts selling, they generally sell everything. In the case when hedge funds own it and the market collapses (like in '08-'09) they’re forced to sell their gold position to cover margin calls. So, it doesn’t really work out that way in practice.
When you look at correlations, be sure to look at varying time frames. For example, you’ll see the daily correlation between gold and USD is very negative, but over 5-10 years it’s actually positive. Point is, gold is very idiosyncratic. I can’t really give you any advice other than it takes experience in the market. As soon as you think you know what moves the price of gold, you’ll see it move against you and after some thought you realize it makes perfect sense. You just hadn’t thought of that variable before. Anyway, it just takes time.
Silver…I could talk about silver all day long. Keep an eye on that market as well. Silver has industrial purposes as well as many of the advantages of being a currency (central banks don’t usually buy silver, so that’s a major drawback). The long and short of it is silver has a 3.0 beta to gold. If you like gold at a certain point, might as well buy silver.
In emerging markets, panics often lead to currency crises, which is why you hear of the price of gold going up when there is a crisis. In the local currency, gold shoots up as people do anything to reduce their exposure to the currency for “something that keeps its value” like gold. In USD terms, the extra buying can push things up a bit, depending on whether the crisis is in a small country like Thailand, or a big one like India. So a lot of the “things are bad, so gold is going up” are emerging market crises stories.
This might make a panic in Chinese markets make the Chinese jump for gold, but the currency isn’t in freefall yet, and gold is likely being sold to cover stock losses right now. Also, I suspect the government is actually doing things to discourage excessive gold purchases. Authoritarian governments do not like their populations owning things that they can’t control very well, and gold is one of them.
But there are a lot of other dynamics going on as well. One dynamic is that people run to gold when they don’t trust their currency to hold value. Another is that there is more consumption of gold jewelry and shiny things when there is lots of disposable income. Another is that central banks accumulate and sell gold when they want to adjust their mix of reserve assets. There is some industrial use for gold, mostly in electronics because gold pretty much does not oxidize or tarnish, but my understanding is that it’s a pretty marginal effect on the price.
The story that’s dominating gold today in my opinion is the concern that central banks can’t be trusted not to print their way to hyperinflation, and so gold is something that is a store of value that can’t be printed. However, since 2012, the Fed looks like it really is determined to tighten things up, and so people with that point of view are less fervent about it. For those who are worried about only moderate inflation (not hyperinflation) stocks are doing pretty well, so it’s hard to convince yourself to hold on to gold when stocks are shooting up and the rest of the economy seems to be getting better.
After writing this, I think there is a decent case for an improvement in gold prices over the next 6 months, but that it’s not a super strong one.
Like bchad mentioned, even if you live in an area where hyperinflation is a true threat, gold still may not be a viable option due to government restraints. The US has done this before, and India created restrictions ~2 years ago. Although the value might rise tremendously during periods of high inflation, the liquidity and political restraints may not make it a viable option. Bitcoin and other cryptocurrencies have similar advantages to gold, in the terms that it’s an inflation hedge that can be printed to infinity, but that’s only maybe 5% of the “true” value where the rest is just pure speculation. Gold has at least be used for 5000 years as a currency, but you’re still paying a huge liquidity premium for the physical. Could be worth it though someday w/ the whole ‘gold and guns’ hedge…
This may be a dumb question but I am genuinely curious. Is it possible that gold is losing intrinsic value since the gold standard has, for the most part, been abandoned. What good is it really, if not collectively accepted at a holder of value? Other than being used in jewelry and some other random uses, what platform does it have to be trusted to hold worth. Perhaps the market for gold is slowly assimilating that.
What I understand from your post,Gold price is not driven primarily by the panic in stock market or recession in the economy.It is going up when people think there will be high inflation due to central bank’s overprinting.
My concern is; when we try to forecast the movement in gold prices,are we supposed to predict U.S. inflation only or take into account the all well developed economies?
gold has limited supply
^^Right, but being rare is only part of the equation. The other part is intrinsic value. For example, blue beach glass is also rare, but practically useless. Gold still has some legitimate use, but it seems to me that those uses are of lesser value in a modern world. That being said, reading through these post the wimpy inflation expectation makes a lot of sense for the explanation of the recent performance of gold. However, I wonder if in the long run there will be a replacement for gold as a fallback holder of value… something with more intrinsic value in the modern world.
I believe there is still gold used in some electronics/technology manufacturing as well. A tiny amount in each product but I believe its pretty important, much like the rare earth elecments.
While I agree with your general point KMD, Golds main store of “value” is that people agree its valuable. Its not like oils intrinsic value isnt limited supply its that we use it in combustion engines and the like. If stuff really hit the fan and society collapsed gold would not be worth much, people would still want things like oil and food though.
to be fair fort knox has been empty for decades
With both currency and gold, it is valuable because people agree it’s valuable. For gold, part of the value is that it is accepted as a store of value and a trade medium under virtually all circumstances (barring a few exceptional ones where the government prohibits it). I tend to think of gold in these terms as a statement of the confidence in a currency (principally the USD, but one could try to do a weighted average of major liquid currencies if you want). To a lesser extent, gold is used to finance illegal operations, like drug trafficking and terror networks like Al Qaida because it is easier to port around undetected.
There are industrial uses in electronics because gold doesn’t tarnish and therefore it is extra good for electrical contacts where tarnishing would potentially ruin a signal. However, the contribution of that use to the overall demand for gold is pretty small and the effect on the price is small.
Gold has historically been valuable because it is hard to forge, doesn’t tarnish, is portable, and comes in standard densities that can be weighed and measured. So if you need a portable store of value and don’t trust a fiat currency, gold works better than land (which can’t be moved) or a lot of other things (which have to be carted around and stored). Diamonds and precious stones can be nice too, but they have to be rated for quality and clarity and all that stuff, plus they are brittle and harder to subdivide.
I read somewhere that throughout history, a (troy) ounce of gold buys approximately 400 loaves of bread. It may vary a little bit here and there, but the implication if it’s true is that gold the gold price tracks inflation relatively well over the millenia. Certainly it suggests that the value of gold is not something that supposedly compounds the way stock prices are supposed to, but few stocks (none, really) have lasted even the 400 years that stock markets have been around. Most of the gold that was around 400 years ago is still around today, other than the parts of it that have been lost in shipwrecks and stuff or buried in that pit on Oak Island.
One shouldn’t forget however that one reason gold is valuable is that people find it pretty and it’s a nice way to be ostentatious and show off wealth and status. Men find it very useful when needing to apologize to women (a use that is unlikely to end) and many cultures also like when men adorn themselves with it. What this means is that gold demand can rise in response to ordinary economic growth as well. So part of the demand in the last 10-15 years has also been driven by - for example - the growth of India’s middle class and their penchant for accumulating gold. China too.
So it’s not all hyperinflation fears, although that’s a big one. There’s an ordinary growth dynamic too. There’s a “keep money away from system oversight” aspect. And there’s a (small) industrial aspect. And finally, there’s a fact that the stuff is pretty and quite useful for saying “I slept with that cute harlot when we were fighting and I got drunk, but I still want us to be married, ‘for the kids sake’.”
That’s a valid concern, but consider the average American. This person knows little to nothing about investing, probably doesn’t save money on a regular basis and has about $70k in retirement savings. They’re generally skeptical of banks and other financial institutions and really can’t understand why they should pay a financial advisor for their services.
This average American still understands gold. They understand that gold has always been a store of wealth and a medium of exchange (even if they can’t say it exactly as such). They know that 5,000 years ago, kings buried themselves with it. They know that gold hit an all-time high right around the time the world was about to end.
They still see the value of gold.
And, that’s just America. The real buyers of gold are Indians and Chinese folks. They love the stuff. And the rest of emerging markets do to. The less faith you have in your government, the more you’ll hoarde US dollars and gold/silver.
tl;dr - 99% of the world’s population still views gold as a store of wealth. That’s not going to change, probably ever.
Don’t forget rapper teeth, too. That’s a growing industry.
We have the same price target!
I’d stay as far away as ZH as possible. The quality of their articles is becoming increasing underwhelming. A lot of theories based on loose logic and circumstantial evidence.
I’ve traded gold off and off for 8-years and I can concluse that “investing” into gold is extremly frustrating. It goes down when it’s supposed to go up and goes down when it’s supposed to go down.
So what you’re saying is we should all buy bread instead.
At least you can eat it when it poo hits the fan!
Yeah, I don’t find myself visiting ZH as often as I used to. Fewer articles on markets and more on geopolitical tinfoil. Whenever I bring up ZH, I’m sure to throw a disclaimer out there that they’re somewhat crazy.
The problem is finding news sources outside the mainstream media. Not just about gold, but just good, solid information that doesn’t always scream BUY!
Regarding gold, check out the Berkshire Hathaway shareholder letter for 2011, starting on p. 18.
Check out my post above. Buffet is a value investor. As such, he hates gold. Incidentally, he got his ass handed to him in the silver market a few decades ago. The guy doesn’t know everything.
nobody really understands gold. sometimes it acts as an inflation hege… sometimes it protects you against increaes in money supply… seometimes it acts as financial insurance… and sometimes it does the opposite of any of those things. good luck predicting the direction of something that exhibits one type of correlation for a period of time, and then completely abandons that correlation.