14 January 2014

Why Gold Can Never Be In A Bubble

I have a post up on the corporate blog discussing a Harvard Business Review blog which attempts to get to the bottom of what constitutes a bubble.

If a bubble is when price exceeds an asset’s fundamental value, and according to people like Barry Ritholtz gold doesn’t have a fundamental value, then its price doesn’t have anything to exceed and hence it can never be in a bubble.

That is a bit of a flippant argument and and click baitish, but it was an intro in a quote by Eugene Fama from the HBR blog that I was more interested in:

“During the dot-com era … the high prices of startups like Amazon.com and Pets.com could be justified as rational gambles in the face of great uncertainty. It wasn’t crazy to think that a couple of these companies might end up as big and as profitable as Microsoft, and since it was hard to tell which ones it would be, high prices across the board made some sense.”

Isn't gold just a “rational gamble in the face of great uncertainty” about whether a country (or the world) can get itself out of its financial mess without unintended inflation or some other economic blow up?

Therefore arguing that gold is in a bubble is just arguing that people are paying too much for the insurance against uncertainty as they see it. That IMO is just a judgment call and who can claim they know their judgment is right and another’s is not?


  1. "6. The Danger of One-Way Trades: What would make you reverse your biggest present holding? What facts or situations would force you to change your views and sell?"

    THAT is my biggest concern, if I honestly question myself about gold. Now, this in mind, I like to reverse that problem by changing "asset" to "money". Is fiat money an asset? Appearently people hold it, they prostitute themself for it, they rob and torture others to get it, but it gives no income, cant eat it, cant drink it.....that in mind, can we call it an asset as well? I think so. When is it time to get out of that one?

    So at the end of the day Barry Ritholtz is perfectly right, but with his generalisation he misses the point to explain where to hop in. Because to hop out of your "conventional asset", just means hopping into fiat. Then what?
    Greets, AD

  2. Gold is the standard of quality. There is nothing else whose quality remains constant through time. Diamonds maybe the exception, but not all diamonds can be purified to the same specification, unlike gold.

    Since it is quality, not quantity, that describes value, gold is the standard of value. As the standard, the thing you measure the value of everything else against, it is the most precious.

    Can the most precious thing be overvalued against something of lesser value?

  3. @Justin,
    when I hear stuff like yours, I wanna run as far away from gold as possible.
    Value is what others are willing to give you for it in return, PERIOD. This applies to EVERYTHING (incl.legal tender fiat) throughout time and universe!!!

  4. Ritholz confuses terms. There is no such thing as fundamental or objective value. We give things value through mental association.

    FOA explained it like so: For example: say I take a bowl to the mint and place an official government money stamp on the underside. The bowl now is stamped at $1.00. Then I take one tiny piece of gold to the mint; one 290th of an ounce or at today's market a dollar's worth. They stamp that gold as $1.00. Which
    physical item would be money? Answer; neither.

    Using ancient historic reasoning and the logic of a simple life; the bowl could be taken to the market square and bartered for another good. Perhaps a dinner plate. In that barter trade, we would most likely reach an understanding; that the "bowl for plate trade" imprinted our memory with what a digital, numeric dollar concept is worth. Again, the 1.00 unit was only stamped on the bottom for reference. While the dollar concept is only a rateable unit number to compare value to; like saying a painting is rated from one to ten when judging appearance.

    We could do the exact same thing without 1/ 290th ounce piece of gold as with the bowl above. In the process we again would walk away with the knowledge of what a $1.00 unit of money value was worth in trade. The physical gold itself was not the money in trade; the value of the barter itself created the actual money value relationship. Again, the most important aspect for us to grasp here is this:

    ----- The use of physical gold in trade is not the use of money in trade. We do not spend or trade a money unit, like the dollar, to define the value of gold and goods: we barter both goods and gold to define the worth of that trade as a remembered association to the dollar money unit. That remembered worth, that value, is not an actual physical thing. A dollar bill nor an ounce of legal tender gold represent money in physical form. Money is a remembered value relationship we assign to any usable money unit. The worth of a money unit is an endless mental computation of countless barter trades done around the world. Money is a remembered value, a concept, that we use to judge physical trading value.

    FOA again: Still think we have come a long way from trading a gallon of milk for two loaves of bread? In function, yes; in thought no! Aside from the saving / investing aspects of money, our process of buying and selling daily use items hasn't changed all that much. You use the currency as a unit to value-associate the worth of everything. Not far from rating everything between a value of one to ten; only our currency numbers are infinite. Now, those numbers between one and ten have no value, do they? That's right, the value is in your association abilities. This is the money concept, my friends.

  5. FOA: Naturally, for gold to advance as the leading tradable good it had to have a numerical unit for us to associate tradable value with. We needed a unit function to store our mental money value in. In much the same way we use a simple paper dollar today to represent a remembered value only. Dollars have no value at all except for our associating remembered trading value with them. A barrel of oil is worth $22.00, not because the twenty two bills have value equal to that barrel of oil: rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 22 units. Money is an associated value in our heads. It's not a physical item.

    The first numerical money was not paper. Nor was it gold or silver; it was a relation of tradable value to weight. A one ounce unit that we could associate the trading value to. It was in the middle ages that bankers first started thinking that gold itself was a "fixed" money unit. Just because its weight was fixed.

    In reality, a one ounce weight of gold was remembered as tradable for thousands of different value items at the market place. The barter value of gold nor the gold itself was our money, it was the tradable value of a weight unit of gold that we could associate with that barter value. We do the very same thing today with our paper money; how many dollar prices can you remember when you think a minute?

    This political process of fixing money value with the singular weight of gold locked gold into a never ending money vs gold value battle that has ruined more economies, governments and societies than anything. This is where the very first "Hard Money Socialist" began. Truly, to this day they think their ideas are the saving grace of the money world. It isn't now and never was then.

    When investors today speak of using gold coin as their money during a full blown banking breakdown, what are they really speaking of?

    In essence, they would be bartering and trading real goods for real goods. The mention of spending gold money is a complete misconception in Western minds. Many would bring their memories of past buying with them and that is where the trading values would begin. Still, it would take millions of trades before the "market place" could associate a real trading value to the various weight units of gold. It took mankind hundreds of years to balance the circulation of gold against its barterable value. Only then could a unit weight value become a known money concept. In that process, in ancient times, gold had a far higher "lifestyle" value than it has seen in a thousand years.

    This value, in the hands of private owners, is where gold is going next.

    If you are following closely, now, we can begin to see how easy it is for the concepts of modern money to convolute our value and understanding of gold. It is here that the thought of a free market in physical was formed. Using the relationship of a free physical market in gold, we will be able to relate gold values to millions to goods and services that are currency traded the world over. Instead of having governments control gold's value to gauge currency creation; world opinion will be free to associate the values of barter gold against barter currency. In this will be born a free money concept in the minds of men and governments. A better knowledge and understanding of the value of all things.

  6. With that, Bron, do you see your error in calling gold an investment? A wise man once said 'if one can only see value in paper currency terms then one cannot see value at all'.

  7. All this ANOTHER,FOA,FOFOA stuff is just braindead, because it assumes that "value" is something equally inherent absolute across all individuals. Something might have "value" to you, but to me the same thing doesnt, now what?

    The last 15 years have proven that physical gold is no such focal point (and dont gimme that "but paper gold suppresses stuff").

  8. So evidently you have no gold AdvocatusDiaboli? Why are you frequenting a gold blog?

    Value is given by quality. The only reason others are willing to give you something in return is because of the quality of whatever it is you are talking about.

    And Barry Ritholtz is full of shit.

  9. Please AD, run far away from gold so I never have to hear your inane whining again.

  10. http://finance.yahoo.com/blogs/breakout/gold-unsafe-price-dicker-135904756.html


    I do have gold (the proclaimed "quality") and I bet you, I have more physical than all those duchebags from your favorite braindead blog together. Besides that I have enough "evil dumb chasing fiat yield" bearing assets that I can comfortably live from.
    Now taken that into consideration, please explain me, why should I buy more?
    Seriously why should I buy more, you tell me. I wanna understand why I should consider "more quality&value" than the alleged "quality&value" that I already have.
    Greets, AD

    That should be much easier for you to explain to the audience than this wooly "value" and "quality" blablabla...

  11. @AD

    There are assets (money if you will) and investments. The spectrum encompassing these concepts spreads from the units you need for immediate survival (food, shelter, water, etc.) to investments that rationally (largely in the eye of the beholder, but there is a clustering of agreed upon vehicles) will provide the basic needs (as well as enjoyment items since I think this is a large part of why we exist) for medium term existence to gambling and speculation of all types (in a rational world).

    The reason I hold physical gold and silver is that from my observations, the current government and financial powers are abusing their stewardship of what we commonly call "money". Runaway government deficit spending (personal as well in some cases) resulting in debts of monumental proportions cause me a great concern. Gold is A standard of value (I agee with you) that historically shown "persistence" as a secondary (versus straight barter of basics) trade-able unit of value.

    I would argue that gold "understands" money as it is constituted now, but money is having difficulty (or perhaps refuses to) understand gold.

    Now, as to why or even if you should "buy" more.... it is up to you and how you are viewing the current and future financial and economic situation. As Bron has stated (and I agree with him) that gold is insurance and the value (don't blow up on me about the word....... it means what it means to me, not necessarily you) can never really be in a bubble. In your view I may mis-pricing my insurance, but that is another matter and largely my business.

    The question is whether a company or a government(s) can keep issuing new stock or money (currency) in what looks to me in unlimited quantities when their underlying economic fundamentals do not support such issuance? The dilution of the stock will at some point need to be contracted (10 to 1, 100 to 1, whatever). This probability should be part of the "why should I buy more decision" of something whose supply is increasing at 1 to 2 percent per year (over a period of centuries) versus 10 percent per year (and more in many cases). Furthermore, this stock issued is used as a the denominator for nearly all other classes and perceived valuations become "sticky" over not only short periods but also long periods.

    That's why I own gold. I'm to old for this shit and I don't trust the casino anymore.

  12. @JohnM,

    that is the typical goldbug narrative, and for some of those arguments I hold gold as well (together with a smaller portion of platinum, palladium & silver).
    BTW: But your narrative might as well fit perfectly to any other point of time over the last 40yrs, so why do you think this time is different?

    What I heavily disagree upon, is the common assumption that money printing/QE has any natural law influence on the price of gold. I know, that is always repeated by the goldbuggery, but it makes no sense whatsoever.
    Just to give you an abstract example: I call up the Bernank and ask him to gift me 10trillion$. Fine, the helicopters are on their way and he will balance that somehow over some wallstreet bad bank account.
    Fine. Now what? I have the paper sitting in my backyard, why for some magical reason, do you think that therefore the price of gold rises accordingly?
    With all my new fresh paper in my backyard, why the hell do you think that your gold is suddenly worth more?
    And to make this example even more extreme let's add the fact: Did I mention, that under the fresh paper I already had 100,000t of gold just sitting there? With that stash of gold, why the hell do you think that I give a sh!t about your few coins?

    Greets, AD

    Regarding gold & bubbles: Everybody should read the book of Dimitri Speck, he makes a strong case why and how gold tends to be in a negative bubble.
    But IMHO nobody knows that much about negative bubbles and how far and long you can blow those, maybe longer and harder than all of us live.

  13. @AD

    I don't look at the narrative as being framed in the last forty years. Government mismanagement of their finances is as old as history. And the cycles are far, far longer than forty years. Whether they did it with paper (see Tang, Song, Yuon and Ming dynasties or Persia in the late 1200s), or with outright metallic debasement as Rome did doesn't obfuscate the fact that this is what they do. Hence, gold as insurance. Where did I say that this time was different???????

    Printing currency to infinity influences the price (value) of the currency. Whether you relate currency price/value to basics, stocks in the South Sea Bubble or the price of rice in China doesn't matter. The idea that you have 10 Trillion in $100 bills sitting in your back yard is irrelevant to the price of gold. The effort that was been extended to amass this mass of printed paper versus the effort to amass 100,000 tons of gold is more relevant but that is just a side note.

    The main thing I care about is preserving my purchasing power into my retirement years. I see the alternatives as increasingly dodgy flim flam games run by computer algos and sociopaths who seek to part me from my hard earned savings. I bought the vast majority of my PHYSICAL gold and silver in the late 90's and early 2000's. I don't trade it. I don't give a sh!t about the stock market or futures markets and I certainly don't give a sh!t whether you give a sh!t about my “few coins” LOL. I have a steady "currency" income that covers my needs and will sell portions of the metals when I want to.

    This talk of bubbles is besides the point. Gold is insurance. The financial markets have morphed into high tech casinos. In the end we are all going to be dead, but that doesn't mean that I should mainline Heroin in the meantime. Have some self respect.

  14. yep, 100%ACK I see it basically just the same, except that I dont see the printing/inflation, but rather the stealing (excuse me, the correct term is "debt restructuring" aka as to cypress somebody or just taxing the living .... out of you).
    With that in mind: Gold does not guarantee you your purchasing power, but for sure at least you dont loose everything.
    Anyway, Armstrong just brought up a good new post on that:
    Greets, AD

  15. 'With all my new fresh paper in my backyard, why the hell do you think that your gold is suddenly worth more?'

    True as long as it sits in Tbonds, I mean your back yard. But what good is it sitting in your back yard, and what happens when the fresh paper circulates? Let's just call you China instead of AD. Ok?

  16. @anonymous,
    about what amount of paper are we talking about? You got some figures? How much is that per person (Chinese/American/RestOfTheWorld)?
    Why do you think it will circulate into general price discovery anyway? Why should it? Buying what? For what reason?

    All data point to the opposite, which IMHO does not mean that it could not change, but there are no data to support such assumption.

  17. Chinese AD has about $2 trillion in their back yard. They don't seem to be stacking higher? Maybe they are stacking something else?

    What would you do with $2 trillion? You can't spend it without destroying it. What will you do?

  18. "They don't seem to be stacking higher? Maybe they are stacking something else?"

    Apparently not. And besides that, $2 trillion is a piss in the ocean. Daily turnover at international forex markets/banks = $5trillion.

  19. LOL who will buy your $2 trillion on the forex? :) Douchebag americans run a deficit with you so you can't spend it on their stuff and they keep sending you more $.

    China figured out how to get out of the trap, but AD didn't. AD would do this:


  20. "China figured out how to get out of the trap, but AD didn't."

    whatever you say, happy stacking, byebye.

  21. @AdvocatusDiaboli: You cannot see a main cause of price inflation in money supply, but even a very prominent central banker would possibly disagree with you (see: King, Mervyn, No Money, No Inflation - The Role of Money in the Economy. Bank of England Quarterly Bulletin, Summer 2002. Available at SSRN: http://ssrn.com/abstract=708265).

    As for gold in relation to fiat money: What are the assets that a central bank holds? What happens if you cancel all the fiat currency assets and liabilities against each other? My fear is that what is left over in real assets that stands against the leftover fiat claims is dilapitated wood sheds in Detroit and Flint, and: gold. And now you think that gold and fiat money are not connected?

    As for bubbles: The long term averages gold takes against other real (i.e.: limited) assets can tell us something. So can the money supplies. From what I can see, we are far from bubble territory.

  22. @AdvocatusDiaboli: One more thing, you wrote: " Something might have "value" to you, but to me the same thing doesnt, now what?"

    Simple Answer: Sell it to me for something of value to you (e.g. for currency). Now it suddenly has some value to you, too. It's called a market.

    I totally agree that if you want to get rid of something, it is only worth what someone is willing to give you for it. But let's also not forget that gold is a fairly rare metal with some really nice physical properties. It is not just a "token" as some paper bugs want to make you believe.

  23. True,
    "And now you think that gold and fiat money are not connected?"
    was not my basic point and your right on that one (despite, everything is connected to "money", that's what we call pricing), still does not tell you how much bread you will get for your gold. And if you cancel all that stuff like you mentioned in the real world not just theoretically, I personally rather have the bread and lots of guns&ammo than gold.
    See, in Germany we have a long experience in the last century on how to do currency reforms (something the anglosaxons have not experienced themself so far), so if history should be some possible guide.
    And at least the IMF&EU announced lately on how people will be screwed in Europe, in your jurisdiction it might vary.

  24. Of course physical gold and silver can NEVER be "in a bubble". I'm not sure why this post was ever necessary unless you are referring to its paper equivalents.

    Physical gold and silver are money. Thus, they will always be exchangeable for the amount of labor required to produce the goods and services the holder needs according to a free non-manipulated market place.

    If you are referring to paper equivalents of gold and silver such as futures, options, mutual funds, ETF's, stocks or comex receipts, then why would anyone need to post this bubble question in the first place?

    Derivatives are by definition speculative instruments controlled by those who would collect fees, interest and commissions as a result of their transactions. Thus, are subject to bubblization.

    As a side note, the distinction between physical and paper forms of gold also defines whether one can "invest" in gold and silver.

    Because gold and silver can only preserve purchasing power for the future labor required to produce goods and services, investing in physical gold and silver is not possible as there is nothing to "collect" as a result of holding it.

    Those who call themselves "investors in gold and silver" must be able to collect fees, commissions and/or interest. Currency devaluation/appreciation makes the so-called "price appreciation or depreciation" of gold and silver a well documented illusion.

    Therefore, "investors" are those who must hold paper gold and silver equivalents and/or derivatives and are subject to third-party shenanigans.

    Only dealers or wholesalers can "invest" in physical as they can buy at the bid and sell at the ask. Thus, they can collect the "spread". The rest of us accumulate.