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scepticus

Gold A Screaming Buy

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Interesting post on gold by Ritholtz.

Executive summary:

Gold still well off historical highs when valued vs US monetary base

Gold still well off historical highs when valued vs SPX

Gold still well off historical highs when adjusted for inflation

So get buying! Oh, read this first.

http://www.ritholtz.com/blog/2010/10/gold-hits-our-1350-target-now-what/#comments

I see some flaws in this analysis.

Discuss.

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Interesting post on gold by Ritholtz.

Executive summary:

Gold still well off historical highs when valued vs US monetary base

Gold still well off historical highs when valued vs SPX

Gold still well off historical highs when adjusted for inflation

So get buying! Oh, read this first.

http://www.ritholtz.com/blog/2010/10/gold-hits-our-1350-target-now-what/#comments

I see some flaws in this analysis.

Discuss.

James Turk was in CNBC ]earlier discussing the reasons behind the rise, worth a watch before discussion commences, click here for link

Edited by goldfever

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Interesting post on gold by Ritholtz.

Executive summary:

Gold still well off historical highs when valued vs US monetary base

Gold still well off historical highs when valued vs SPX

Gold still well off historical highs when adjusted for inflation

So get buying! Oh, read this first.

http://www.ritholtz.com/blog/2010/10/gold-hits-our-1350-target-now-what/#comments

I see some flaws in this analysis.

Discuss.

How about: there is no reason whatsoever to value gold according to the above 3 metrics. There are really no meaningful fundamentals for gold, so there is nothing fixed upon which to base any valuation.

Regarding the US monetary base, that would only be a relevant metric if the US decided to re-introduce the gold standard/Bretton Woods* without changing the current monetary base. They are never going to do that, so it is irrelevant.

I'm not saying that this necessarily makes it a bad idea to buy gold, but it is a purely speculative asset to purchase.

* I'm on shaky ground as to exactly how the Bretton Woods system worked, but I think I know enough to understand my own point, and for it to make sense.

Edited by WageslaveX14

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How about: there is no reason whatsoever to value gold according to the above 3 metrics. There are really no meaningful fundamentals for gold, so there is nothing fixed upon which to base any valuation.

Regarding the US monetary base, that would only be a relevant metric if the US decided to re-introduce the gold standard/Bretton Woods* without changing the current monetary base. They are never going to do that, so it is irrelevant.

I'm not saying that this necessarily makes it a bad idea to buy gold, but it is a purely speculative asset to purchase.

* I'm on shaky ground as to exactly how the Bretton Woods system worked, but I think I know enough to understand my own point, and for it to make sense.

Cant agree with you less.

There is an underlying demand for gold, in jewellery and decorations. I think that there are electrical uses too, and fillings for teeth and stuff, it does have practical uses.

It also benefits from scarcity, and being pretty much uncorrodable.

The knowledge that you can sell gold in exchange for things of value, and that if you just hold the gold, it wont rust and it maintains itself, leads to the demand for gold as a money too. That can improve its value even more. If you need money to transact, that makes the money itself worth something.

For many years we have been able to use paper and electronic money with which to transact. Now though, as the banking system has defrauded millions of people and corrupted the financial system, there is once again a demand for gold as money. It is mostly coming from speculators and those seeking to store value as they see the huge risk of the paper/electronic money system collapsing.

If gold has to once again take its place as the base for which all money is created, based on the trust inherent within its scarcity and inability to be debased to any meaningful extent (so far at least 7000 years or more and counting), then its value in terms of other things, can only appreciate.

Gold can only be sunk if faith can be restored in the paper currencies of the world. That means balancing budgets, higher interest rates, and a fraud free financial system. I dont see much action by governments anywhere to make that happen.

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My thoughts on your points are as follows:

"There is an underlying demand for gold, in jewellery and decorations. I think that there are electrical uses too, and fillings for teeth and stuff, it does have practical uses." If these are the fundamentals on which you are to determine the gold price, then it is grossly overvalued. That's what I meant by saying there are 'really' no fundamentals for gold, as demand for the above uses doesn't explain the price.

"For many years we have been able to use paper and electronic money with which to transact. Now though, as the banking system has defrauded millions of people and corrupted the financial system, there is once again a demand for gold as money. It is mostly coming from speculators and those seeking to store value as they see the huge risk of the paper/electronic money system collapsing."

I realise that this is the reason why everyone is buying gold. This doesn't give any real basis for even a vaguely accurate valuation, however. My point is that unless countries re-introduce a gold standard in some form - which they won't - gold will not be used as money. People will not resort to using physical gold to pay for things. If they ever did, you would have more to worry about than your investments.

My further point about valuation based on the US dollar base is that, if the US/anyone else were to introduce a gold standard, why would it necessarily be based on the current US dollar base? The dollar base has tripled in the past three years. The gold price hasn't tracked this expansion (both have gone up, yes), and there is no reason for it to do so without the imminent re-introduction of a gold standard.

Apologies if the above is written in a manner which appears abrupt - not my intention.

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Cant agree with you less.

There is an underlying demand for gold, in jewellery and decorations. I think that there are electrical uses too, and fillings for teeth and stuff, it does have practical uses.

A demand which will vanish as alternatives are found for a vastly overprice commodity.

The only reason to buy is to gamble on the price of Gold, which will only increase if large numbers of people continue to buy Gold in the belief that its price will rise. Eventually the Ponzi scheme will crash like it always does.

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My thoughts on your points are as follows:

"There is an underlying demand for gold, in jewellery and decorations. I think that there are electrical uses too, and fillings for teeth and stuff, it does have practical uses." If these are the fundamentals on which you are to determine the gold price, then it is grossly overvalued. That's what I meant by saying there are 'really' no fundamentals for gold, as demand for the above uses doesn't explain the price.

"For many years we have been able to use paper and electronic money with which to transact. Now though, as the banking system has defrauded millions of people and corrupted the financial system, there is once again a demand for gold as money. It is mostly coming from speculators and those seeking to store value as they see the huge risk of the paper/electronic money system collapsing."

I realise that this is the reason why everyone is buying gold. This doesn't give any real basis for even a vaguely accurate valuation, however. My point is that unless countries re-introduce a gold standard in some form - which they won't - gold will not be used as money. People will not resort to using physical gold to pay for things. If they ever did, you would have more to worry about than your investments.

My further point about valuation based on the US dollar base is that, if the US/anyone else were to introduce a gold standard, why would it necessarily be based on the current US dollar base? The dollar base has tripled in the past three years. The gold price hasn't tracked this expansion (both have gone up, yes), and there is no reason for it to do so without the imminent re-introduction of a gold standard.

Apologies if the above is written in a manner which appears abrupt - not my intention.

Wageslave,

no government I can think of, would wish to reintroduce the gold standard.

The worry is that because the US and other countries cannot balance their books, they will either default on their debt, or print.

If they print, then in double quick time, the currency could become worthless.

If a nation manages to hyperinflate its currency, it can have great trouble in reintroducing a new one, after all, would you trust a new currency from an issuer that had just debased the last one robbing millions of people?

So what would happen if a country hyperinflated its currency away? People still need a money to trade. It is very likely, that they would turn to gold to do that.

So a new currency is foisted upon the nation, one that cannot be debased by the government. A gold backed currency is the obvious choice.

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Wageslave,

no government I can think of, would wish to reintroduce the gold standard.

The worry is that because the US and other countries cannot balance their books, they will either default on their debt, or print.

If they print, then in double quick time, the currency could become worthless.

If a nation manages to hyperinflate its currency, it can have great trouble in reintroducing a new one, after all, would you trust a new currency from an issuer that had just debased the last one robbing millions of people?

So what would happen if a country hyperinflated its currency away? People still need a money to trade. It is very likely, that they would turn to gold to do that.

So a new currency is foisted upon the nation, one that cannot be debased by the government. A gold backed currency is the obvious choice.

I appreciate entirely that these are the arguments in favour of buying gold.

I am not saying that buying gold is a bad idea - it may well increase in value from here - it probably will.

What I am saying is that none of the above gives any remotely accurate basis for valuing gold. It is a purely speculative punt on the price increasing, and continuing to increase, and any valuation which purports to be based on anything other than speculation will be flawed.

I don't think there is any way to ascribe a 'fair value' to gold.

Also, the dollar used to be backed by gold, but because they issued more dollars than was backed by the US gold reserves, Nixon unilaterally decided that the dollar was no longer backed by gold.

For that reason, there is no reason to trust fiat currencies any less than a gold standard, because governments are always free to change the rules when the going gets tough.

Again, though, I'm not saying that gold is a bad investment, necessarily.

Edited by WageslaveX14

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I appreciate entirely that these are the arguments in favour of buying gold.

I am not saying that buying gold is a bad idea - it may well increase in value from here - it probably will.

What I am saying is that none of the above gives any remotely accurate basis for valuing gold. It is a purely speculative punt on the price increasing, and continuing to increase, and any valuation which purports to be based on anything other than speculation will be flawed.

I don't think there is any way to ascribe a 'fair value' to gold.

Also, the dollar used to be backed by gold, but because they issued more dollars than was backed by the US gold reserves, Nixon unilaterally decided that the dollar was no longer backed by gold.

For that reason, there is no reason to trust fiat currencies any less than a gold standard, because governments are always free to change the rules when the going gets tough.

Again, though, I'm not saying that gold is a bad investment, necessarily.

gentlemen,

let me remind about the point of the OP:

Ritholtz suggests these three points:

Gold still well off historical highs when valued vs US monetary base

Gold still well off historical highs when valued vs SPX

Gold still well off historical highs when adjusted for inflation

These points all have empirical validity, but are they useful? Let me start off by asking, what is the 'historical norm' for gold on all three charts? Is gold overvalued against these historical norms? If we judge house by a historical norm that stretches back only 30 years should we do so also for gold? If not why not?

Versus SPX, what is different about SPX and the market in which it trades today, and back in 1979?

Versus inflation, what were the demographics in 1979 when prices hit all time highs and what are they now?

Is the monetary base a meaningful measure in times when economies appear to be demand constrained?

Lastly, the previous high on all these measures was impressively high. However it was exceedingly short lived. The spike is very, very narrow.

Just some thoughts. I ask because I actually have a good allocation of gold, definitely overweight actually.

I'm nervous - what say you?

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I don't understand how you can say the following - I would genuinely like to know:

"These points all have empirical validity, but are they useful? Let me start off by asking, what is the 'historical norm' for gold on all three charts? Is gold overvalued against these historical norms? If we judge house by a historical norm that stretches back only 30 years should we do so also for gold? If not why not?"

Why do they have empirical validity? The difference with assets which provide some form of income or which are largely in demand for industrial uses is based on somethin gtangible which can be used as an anchor for a valuation. This is not the same with gold - the above measures rely on historical correlations which may be entirely coincidental.

By contrast, people on here (and I include myself in this) talk about the long term average of earnings to house prices to determine when a house is overvalued. This is because, when houses are not behaving as speculative assets (query that point separately), based on long-term average interest rates, an unacceptably high amount of a person's monthly wage would have to go on mortgage payments if they had to borrow more than 4 times income. The questions regarding relying on this metric then become - 1. will the interest rates in place over the last 10 years remain in place, meaning the above justification for the long-term average earnings multiple is no longer valid and 2. does the existence of speculative demand for housing, which has increased massively over the last 10 years, mean that this is the wrong metric to rely on.

Similarly, with shares, long-term p/e averages have been consistently higher since the mid-80s than they were previously, but it is still possble to value shares based on dividend yields, book values etc. However, you can do all the painstaking valuation work you like, but analysts always apply a 'multiple' as the last part in their valuation, and this is just 'finger in the wind' stuff, which pretty much makes every other part of their analysis a bit of a waste of time. However, what the relevant 'multiple' of the p/e or price/book should be depends on the prevailing attitude at the time, and there is a question about how reliably you can look to histroical values, when the underlying political and social structure has changed.

In the case of gold, you don't have any of the fundamentals mentioned about in relation to housing or shares to provide a starting point for a valuation, and you are just left with the completely immeasurable latter part of each of the above valuations - namely the prevailing attitude at the time.

Because of this, there is no reliable metric bby which to value gold. Any justification I have heard is flawed - in my opinion.

This doesn't mean gold won't go higher. It does mean that no one has any idea how to work out what the long term average will be based on fundamentals, because there are none.

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Why do they have empirical validity?

only because the chart clearly shows gold is a long way off that previous high. That is all. The data is OK, the interpretation maybe not.

By contrast, people on here (and I include myself in this) talk about the long term average of earnings to house prices to determine when a house is overvalued.

This is because, when houses are not behaving as speculative assets (query that point separately), based on long-term average interest rates, an unacceptably high amount of a person's monthly wage would have to go on mortgage payments if they had to borrow more than 4 times income.

Clearly much of land prices are based on speculation, as is gold. So is it not the case that both gold-as-money (opposed to gold for industrial or perhaps jewellery use) and the portion of house prices which are pure speculation should be treated the same. Both lend and gold speculators use leverage.

The questions regarding relying on this metric then become - 1. will the interest rates in place over the last 10 years remain in place, meaning the above justification for the long-term average earnings multiple is no longer valid and 2. does the existence of speculative demand for housing, which has increased massively over the last 10 years, mean that this is the wrong metric to rely on.

the earnings multiple is not 'long-term'. People seemed to have picked up on a period 1950-1987 as the 'long term' average, however when looking at the really long term (since end of 18th century) , 1950-1987 appears to be a secular low-point.

Similarly, with shares, long-term p/e averages have been consistently higher since the mid-80s than they were previously,

as have house prices.

In the case of gold, you don't have any of the fundamentals mentioned about in relation to housing or shares

true - but the shares and housing related 'fundamentals' would appear on closer inspection to actually be relatively recent trends (picked from whatever arbitrary period of recent history) extrapolated in a straight line.

Because of this, there is no reliable metric bby which to value gold. Any justification I have heard is flawed - in my opinion.

This doesn't mean gold won't go higher. It does mean that no one has any idea how to work out what the long term average will be based on fundamentals, because there are none.

perhaps the inability to value gold explains the very sharp spike in inflation adjusted gold 1978-1981, with a meteoric rise and equally quick collapse?

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I don't think we're actually disagreeing about much.

I agree that both house prices and shares have been higher than their long-term (dodgy phrase, yes) multiples in recent times - shares since the '80s when the 'cult of equities' seemed to take hold, with house prices being more volatile over the same period.

I disgree that the portion of land prices attributable to speculation is equivalent to the proportion of the gold price attributable to speculation. Land speculation over the past 7 or so years added a lot to the price, but I still think the main driver in the UK, US and Australia was the amount of credit supplied to owner occupiers.

The gold price, on the other hand, is almost entirely determined by speculative demand. In this respect shares are more similar to gold than land is to gold, but at least you have some fixed measures of value on which to hang an overall valuation of a share. There are no fixed reference points for gold, at least not meaningful ones (industrial demand is so far removed from explaining the gold price that it is not worth taking it into the equation).

My point about the 'underlying social and political structure having changed' was intendd to mean that you can't compare valuations now with valuations in Victorian times - the World Wars led to people realising that they were not prepared to fight for the interests of a landed elite (at least that's my take on it), leading to greater social mobility, welfare, education for the masses etc. The question now is whether we have gone through a structural change which has genuinely seen financiers and the global banker class replacing domestic gentry. I don't think it has.

For this reason, looking at long-term averages for housing since WWII is fairly valid. Looking at average p/es since the early '80s is also valid, but due to the changes to financial structures in the '80s, looking at earlier equity values is misleading.

I still don't agree that those 3 metrics mentioned on your OP are empirically valid. My accustomed usage of the word 'empirical' is in a scientific experiment context, so the disagreement may come down to semantics.

Edited by WageslaveX14

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  • 261 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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