Sunday, April 19, 2020

Whatever happened to Gold?

Over the years, gold has generally gone up in price, or at worst, held its value.  But depending on when you bought or sold, you could end up losing your shirt on this mineral.

When I started this blog, we were in the midst of the last recession (I think it is safe to call today's market as the next recession now).   And back then, people were freaking out about the economy, and a lot of folks were hawking "gold" as an answer to their problems.   A lot of nonsense was batted about, as well.  One fellow said that gold was valuable basically because it was and everyone knew that.  Another routinely said that gold would go to $5000 an ounce "soon" but of course it never did.   It will, though, someday, I can accurately predict that.

The problem with gold, for the small investor, is that it is rarely a "safe haven" but mostly a speculative investment, being sold by sketchy characters who hype it.  Today, they hype it on the Internet, which is why the gold bubbles are even more dramatic than in the past.

When I was a kid, gold was regulated in price by the Government - $35 an ounce!   Under Nixon, the price of gold was allowed to "float" and almost immediately people bid the price through the roof.  By the way, we had to get off the gold standard - it simply wasn't working.  Since gold was worth more overseas, foreigners were demanding payments in gold, depleting our gold reserves at an alarming rate.

The first gold bubble happened almost immediately after Nixon took us off the gold standard.  The second bubble burst when Reagan took office.

The bubble burst in in 1975 or thereabouts, peaking at about $176 an ounce, and then crashing to $109 in 1976.  Doesn't sound like a big swing, but if you invested $17,600 in gold in 1975, the next year, it would be worth $10,900 - losing over a third of its value.  Meanwhile, the guy who bought at $35 an ounce and sold to you more than quintupled his money.  And when you sold in a panic, he probably bought it all back.

That's the way it works with gold - the small investors get in on the bandwagon, just as it is going over a cliff.  Why were people buying gold?  The Arab Oil Embargo - and the economy going into the tank.   People were scared, and fear is never an emotion to be trusted.  So out of fear, they bought gold, and many of them lost their shirts.

The next bubble was around 1981 as the immediate chart above illustrates dramatically.   Back then, everyone was buying "Gold Krugerrands" from South Africa, as politically incorrect as that was.  The economy again was in the tank, with stagflation, even-and-odd gas days, hostages in Iraq, and President Carter declaring a "national malaise".   Reagan was elected and it was "morning in America" and the price of gold dropped and remained flat for the next two decades.

This time around, the bubble was bigger - or at least proportionally larger in price terms.  At the peak, Gold briefly hit $675 in 1980 before dropping to the $300-$400 range for the next two decades.  Once again, if you bought at the peak, you lost 1/3 of your investment overnight.  Meanwhile, the guy who sold you the gold in 1975 (and bought it back in 1976 For $100 an ounce) more than quintupled his investment in a short period of time.  If he was smart, he got out of the business, at that point.

Gold stayed dormant for two decades mostly because the economy was stabilizing.  Interest rates fell, government budgets started to be balanced.  Even after 9/11, prices remained somewhat stable, but started to climb as the economy approached the meltdown of 2008. The top chart illustrates that bubble - Gold Bubble Number Three - as well as Number Four today.

During bubble Number Three, gold flirted with $2000 an ounce, but never consummated the marriage.  With a production cost of only $500 an ounce, that pricing made no sense.  And as the economy recovered (does this sound familiar?) the price dropped back to nearly $1000 an ounce.

This sort of "ratchet mechanism" of gold was enough to convince me not to "invest" in it.  It is just speculating on the price of a mineral.  It is like buying stocks based solely on share price, and not looking at other data, such as dividends or profits.  You just have to hope that someone perceives gold to be worth more in the future.

Recently, gold has shot up in value yet again - hello Bubble Number Four!  Already some are arguing that this new bubble is "running out of steam" - but never doubt the true believers.  The fools who believe the ends times are near and are digging bunkers and filling them with ammo and buckets of dried corn will always buy - at the peak of the market of course.  I am sure The Odious Glen Beck or the Inforwars people are shilling for gold right now.

It is possible that if the economy doesn't recover quickly, the price of gold may ratchet up yet again to a new peak - before falling back down. And I suspect this could happen, as the fundamentals underlying the economy were bad before the virus hit - we were due for a recession, and in fact, headed for one, before this latest crisis.

So, an opportunity to make money, eh?   Well, if you think of playing the slots in Vegas as an opportunity to make money, yes.  Myself, I call it gambling.  Because the problem is all in the timing.   You have to know when to get in, and when to get out.   You miss the timing, even by a day or two, and you lose your shirt.   You miss the timing in other ways, and you end up breaking even.  Even if you "make money" in gold, if your timing is off, you might make less than the DJIA or other stock indices, which was the case the last time around, for many gold-bugs.

It is only if you hit the timing just right, that you can double or triple your money in a fairly short period of time.  And by short period, I mean years, not days or weeks.  That is the problem with bubbles of all sorts - they take years to build up slowly, over time, and then collapse in a weekend.

The last time around, the prognosticators said that gold would hit $5000 an ounce sometime soon.   They have conveniently forgot about that boner of a prediction and are back again today, a decade later, claiming it will hit $10,000 an ounce (!!!) as shown in the video accompanying the article link above.   Do not these people have any sense of shame whatsoever?

They hawk gold - like any other shitty investment - by selectively choosing start and end points, blowing up graphs to exaggerate trivial changes, and then try to argue these are "trends".  It is the same old gag for any con-artist based investment.

It is the same deal as the last time around.  The nervous small investor, seeing his stock and mutual funds tank in the last few weeks, desperately looks around for something to throw money at to recover his losses.  So he sells his mutual funds - locking in his losses - and buys gold at the peak.  When that bubble bursts, he sells again at a loss.

Buy High, Sell Low - the surefire way to bankruptcy!

After four bubbles, not only is this ratchet mechanism clearly in place, but also the pattern of these odious folks who create these bubbles, by hyping and promoting gold, and getting airtime in the media to promote their harebrained ideas and blatant shilling for the mineral.

Sure as shitting, some idiots are going to lose their shirts on gold again - maybe to make up for their losses on Bitcoin.  How did that work out?  Funny thing, the Bitcoin chart looks just like the gold chart, except it only has been around long enough for one ratchet - so far.