Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

Copyright Notice

Everything that appears on this blog is the copyrighted property of somebody. Often, but not always, that somebody is me. For things that are not mine, I either have obtained permission, or claim fair use. Feel free to quote me, but attribute, please. My photos and poetry are dear to my heart, and may not be used without permission. Ditto, my other intellectual property, such as charts and graphs. I'm probably willing to share. Let's talk. Violators will be damned for all eternity to the circle of hell populated by Rosanne Barr, Mrs Miller [look her up], and trombonists who are unable play in tune. You cannot possibly imagine the agony. If you have a question, email me: jazzbumpa@gmail.com. I'll answer when I feel like it. Cheers!

Friday, January 7, 2011

What The Hell?!? Friday - - What the Hell is up with Gold ?!? Edition

Ever since Auric Goldfinger we've wondered who put the Au in the Aura of GOLD.

Certain varieties of Neanderthal consider the barbarous relic to be REAL MONEY.  Well - remember the functions of money.  It operates as -

A medium of exchange
A unit of account
A store of value
A standard of deferred payment

If you think we live in a Lepriconomy where gold functions as money, try to pay for your next trip to the grocery store with a chunk of bullion, or a shiny American Eagle.

The Colbert ReportMon - Thurs 11:30pm / 10:30c
Gold Faithful - Ron Paul & David Leonhardt<a>
Colbert Report Full EpisodesPolitical Humor & Satire Blog</a>March to Keep Fear Alive

One might reasonably consider gold to be a store of value, but it is inadequate in fulfilling the other functions of money.   It's more reasonable to think of gold as what it actually is - a physical asset with uses in industrial applications and as jewelry.  Gold is a great thing to hold onto during inflation, and especially hyper-inflation.  Other times it's usually as dead as any other rock.  Right now, we're on the edge of deflation, and holding gold will make little sense.

What has happened in recent years is a series of rolling bubbles, effecting stocks, real estate, oil, and other commodities during the great reflation. 

Wow, gold sure has had a great decade, and especially a great last couple of years.  Let's look at gold compared to other commodity prices.  Gold charts from kitco.com, commodities from Dow Jones.

Dow Jones Commodity Index

The axes don't quite line up, so you'll have to make a mental adjustment to the visual  Not exactly lock-step, but generally pretty similar.  Since mid-year, the commodity index actually has a greater percentage price increase.

Let's zero in on the present.

Gold has gone nowhere in the last month, and has done especially badly  this week.  Here is the worst day.

Meanwhile, what's happened to the dollar?

It seems to be having a rather good week.  What about the last year?

 Not surprisingly, it moves pretty much counter to the commodity index.

In my humble opinion, gold is basically just one more commodity, despite its Aura, and is close to the end of a classic asset bubble. Whether the recent pull back is a pause before a new top or the beginning of the end is hard to say.  There's really no telling how high a bubble might go.  But after it bursts - and they always do - it's usually not too hard to guess the end point - back around where it started.  For gold, that's somewhere on the short side of $400.

Remember -  you heard it here first - unless you're an Elliott Waver.


nanute said...

I'd say gold has been defying gravity the past year. It is bound to come back to earth sooner or later. It is interesting to look at how major economies suffered during the Great Depression with regard to the gold standard. The longer a major industrialized country waited to de-couple from the metal the longer it took to climb out of the hole.

Jazzbumpa said...

Yes. I think that has to do with the ability - or not - to inflate the currency, which is absolutely vital in getting out of any recession.

The Fed is trying now with QE II, and many economists think it's working. I'm skeptical, but we'll see . . .

Hoping for the best,

BadTux said...

As I'm fond of telling gold-bugs, "you can't eat gold." Beans, on the other hand...

- Badtux the Snarky Penguin