Is Gold the Next Bubble?

[MNeagle]

It's been the amazing, runaway boom of the past decade. If you'd put your money into gold at the lows about 10 years ago, you'd have made a nearly 400% return. That's left pretty much everything else—stocks, China, let alone housing—in the dust.

But with gold now trading near record highs, the big $1,200-an-ounce question is obvious.

Is the gold rush over?

Some smart people wonder. "The time to buy gold was in 1999, not 2010," Harvard professor Niall Ferguson tells The Wall Street Journal—though he added that momentum might still drive it higher. Others will tell you that "the smart money got out of gold months ago." But then people have been saying that for years.

They could be right, of course: The future by definition is unknowable.

But if gold is a bubble, here's why it may not be over—and, indeed, may it may be about to go vertical.

First, the recent rise is deceptive. Yes, gold has risen from around $250 an ounce to $1,200. But that rise started at very depressed levels. Gold had been falling in price for two decades. In 2000-01, it was at the bottom of a very deep bear market. It had touched historic lows compared to consumer prices or other assets like shares. A lot of the past decade's boom has simply seen it recover toward longer-term averages.

Second, before we assume the gold bubble has hit its peak, let's see how it compares with the last two bubbles—the tech mania of the 1990s and the housing bubble that peaked in 2005-06.

The chart is below, and it's both an eye-opener and a spine-tingler.

http://sg.wsj.net/public/resources/images/OB-IP413_ROI_10_NS_20100524192106.gif

It compares the rise in gold today with the rise of the Nasdaq in the 1990s and the Dow Jones index of home-building stocks in the 10 years leading up to 2005-06.

They look uncannily similar to me.

So far gold has followed the same path as the previous two bubbles. And if it continues along the same trajectory—a big if—gold today is only where the Nasdaq was in 1998 and housing in 2003.

In other words, just before those markets went into orbit.

Maybe the smart money is out of gold today. But how easily we forget that the smart money got out of these past bubbles way too early. The really smart money knows you make the most money in a bubble right at the end, when it goes manic.

There are other reasons to think that gold is still a long way from that point.

Like the futures market. It is predicting gold will rise by just a few percent a year over the next few years. That's less than you'd get from municipal bonds.

When the market thinks an investment is going to underperform munis, it's safe to say we are not in the midst of euphoria.

And take a look at the coverage of this industry. At the peak of a bubble, the Wall Street analysts covering a sector are usually all bullish. This time around? Far from it. Of the analysts covering gold-mining giant Barrick Gold, only about two-thirds are publicly bullish, according to Thomson Reuters. By Wall Street standards, that's very restrained. Among those covering Newmont Mining and Randgold Resources, it's about half.

And on an anecdotal level, this doesn't feel like the peak of a bubble. Taxi drivers and bartenders may be talking about gold. But they aren't yet handing out mining tips.

There is, of course, no guarantee gold will turn into another mania. But the fact that we now seem to live in Bubblonia—the land of perpetual bubbles—would suggest there is a current opening for the role. And in many ways, gold may be well cast.

It has a "This time is different" story line: The world's central banks are flooding the market with liquidity. That should inevitably devalue the currencies. Gold is the only "currency" they can't just print.

It has an army of true believers behind it, ready to claim each rise as a "victory" and to mock skeptics with the words "They just don't get it."

And it's easy to untether from reality. You can't value gold by traditional financial measures, as it generates no cash flow. So there's plenty of potential to value it by other means. Eyeballs, anyone?

Dylan Grice, a strategist at SG Securities in London, thinks global conditions today could unleash another gold boom like the one in the 1970s. Then, as now, the world lost confidence in the U.S. dollar as a store of value. Back then, central banks started hoarding gold instead. Today, he notes, they are net purchasers of gold for the first time since 1988.

And although gold has risen a long way, so has the U.S. money supply. Mr. Grice calculates that even at today's prices, the bullion that the U.S. government holds in places like Fort Knox is still only worth enough to back 15% of the U.S. monetary base. That is near a record low.

At the peak of the gold mania in 1979-80, gold prices rose so far that the backing exceeded 100%. How far would gold rise if that happened again? To around $6,300 an ounce, Mr. Grice says.

Once again: I am not saying gold is going into the stratosphere. I am saying there is a good case for saying it might.

Gold is a high-risk and potentially dangerous speculation. Anyone thinking of investing needs to do some serious thinking first.

—This is the first part of a three-part series on gold, "The Gold, the Bad and the Ugly." Next up: The dangers of gold.

http://si.wsj.net/public/resources/images/OB-IP625_roi052_D_20100525095034.jpg
Gold bullion in the vaults of the Bank of England

http://online.wsj.com/article/SB10001424052748704792104575264863069565780.html?m od=WSJ_hpp_RIGHTTopCarousel

[jedemdasseine]

Helps to understand where gold has been since 1971.

Most gold bugs haven't a clue.

Here's a good introduction:

http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=11038:goldman-sachs-and-gold&catid=48:gold-commentary&Itemid=131


Goldman Sachs and Gold

Written by Jeff Nielson

A couple of weeks ago, I came across a wonderful blog post which provided a fascinating and informative account of the evolution of the gold and oil markets, as a consequence of eliminating the gold standard – and thus creating an entire monetary system where all the world's currencies were backed by nothing. [April 10th, “Gold and Money: more than meets the eye” http://www.fofoa.blogspot.com/]

I didn't do a write-up on it at the time, as there was nothing “current” about the material – despite the fact that many precious metals investors will find the content of great interest (it was posted on our bulletin board). However, in an ironic twist of fate, a reader submitted a 'new' news item to me, which was also based on material over a decade old – and in putting the two items together, it's clear that there are (now) many things to say about “Goldman Sachs and gold”.

The two dynamics which will be discussed here are the reaction and counter-measures of the oil-producing nations (most notably the OPEC producers) to the U.S. gold-default in 1971, and the subsequent campaign by multinational bankers to enslave the world's major gold miners – as part of their fraud/deception to fool the world into thinking that the (now) worthless paper which they called “money” still had some value.

With respect to the first half of this 'equation', the “FOFOA” blog did a superb job of summarizing this:

Upon the 1971 declaration by the United States that redemption of dollars for gold would be terminated, the entities in receipt of dollars for balance of trade settlements [for example, oil producers] had no difficulty recognizing this as an outright default on payment of contracts [emphasis mine]. The scramble was on to make sense of this new payment system in which the dollar was no longer a THING of value (a small amount of gold), but was now reduced to a CONCEPT of value...

In other words, Arab oil producers had few qualms about pumping out their oil, as fast as possible, and at a “low” price – as long as the currency used in these contracts was redeemable in gold, which was also fixed at a low price. However, selling their oil cheap and only getting paper in return was something which the OPEC nations would not tolerate, given that most of their own advisors had learned about economics and markets at Western universities.

Quoting from the “FOFOA” blog again, what OPEC essentially did in setting their own “price quotas” for oil was to change our system of payment so that instead of a barrel of oil being “defined” by a measure of dollars, that essentially the dollar was re-defined as representing a fixed quantity of oil. It was simply a variation of “The Golden Rule”: he who has the 'gold' makes the rules – except now the rule-makers were holding “black gold”.

Naturally, the West in general, and Western bankers in particular, were horrified by these developments, for two reasons. First, the economic sophistication of the Arab OPEC producers was making it very difficult to engage in the 'economic rape' which was the modus operandi toward developing nations by Western capitalists. Even more horrifying to the bankers was the fact that these OPEC oil producers were creating a grave risk of exposing their entire “fiat currency” Ponzi-scheme: where worthless banker-paper is exchanged for valuable, “hard” assets – ultimately ending with the bankers holding all the hard assets, while the masses held nothing but their worthless paper.

Thus began two long-term initiatives by the Western banking cabal. First, OPEC nations were suddenly flooded with new “branches” of Western banks. While these OPEC Arabs may have been well-schooled in “economics”, they (and the rest of the world) were unacquainted with the bankers' world of “high finance”. Western bankers began to 'help' the OPEC Arabs to “finance” all sorts of grandiose projects – and once again the economic rape of the oil-producing nations could continue. But that is another story...

The second initiative of the Western bankers was to preserve the illusion – at all costs – that their worthless paper did have “value”. They had only just achieved the ultimate banker-fantasy: a world where they could exchange completely “un-backed”, completely worthless paper for the wealth of the masses. They were not about to let a handful of oil-producing 'upstarts' expose their scam, through demonstrating that their paper had no value – through establishing their own exchange rate for the paper, and continuing to devalue that paper (by raising the price of oil).

Thus, the multi-decade campaign to suppress the price of precious metals (and especially gold) was born. The reason why the bankers' Ponzi-scheme (and the deception which came with it) centered upon suppressing the price of precious metals is that for close to 5,000 years precious metals have been the ultimate “stores of value”: perfectly preserving the wealth of the holder.

I have explained this concept on many previous occasions, and lack the space to go into detail about this again. Let it suffice to say that the words of a young Alan Greenspan explain both why gold is the best store of value and why the bankers are obsessed with demeaning it in the eyes of the masses (see “Young Greenspan and Gold”).

In more general terms, what the banksters were desperate to hide was “inflation”, which essentially measures the rate at which their worthless paper is losing value – and thus the speed with which their currency Ponzi-schemes were evolving toward their ending...the same “ending” which awaits all Ponzi-schemes: a sickening plunge to “zero” of paper debts/obligations.

But there was a second major ingredient to this mass-deception to hide inflation – a dynamic which has been overlooked by all other commentators. This most-despicable of all economic policies was articulated (in a foolish blunder) by former Bank of Canada governor, Gerald Bouey, who stated during an interview in the 1980's that “we are fighting inflation with high-unemployment”.

The connection between inflation and high unemployment is not immediately apparent, so I'll explain it to readers briefly, and point you toward a previous commentary – which goes into this topic in detail (“Why lying about unemployment is so important”).

The “Energy Crisis” of the 1970's set-off the most crippling wave of global inflation the world has ever seen. As always, it was the poor and middle-classes who suffered the most harm from this currency debauching – and so workers, most notably unionized workers became “militant” in the eyes of the bankers (and all the wealthy elites): they had the audacity to demand that their wages be increased as fast as their “money” was losing its value.

To counter this “militancy”, the elites did three things. First, using their corporate-controlled media, they “demonized” unions, in the most-intense propaganda-campaign which the Western world had seen (up until that time). Suddenly, “inflation” wasn't caused by soaring oil prices, and the infinite economic repercussions of higher energy prices, instead we were brainwashed to believe that inflation was “caused” by “greedy unions”. The term “wage/price spiral” was coined: a piece of bogus economic theory which proposed that the ultimate economic “evil” was for the real wages of the average worker to ever increase.

Unions were “smashed”. “Structural unemployment” (i.e. permanent unemployment) has been allowed to soar to the highest level in history. And lying about unemployment has become a way of life for Western governments.

It still may not be apparent to some how unemployment and inflation are connected, so I'll make the final “connection”. There was a 'kernel' of truth in the propaganda of the “wage/price spiral”. If Western governments could permanently suppress the wages of the average worker, then “inflation” (i.e. the falling value of the bankers' worthless paper) could be hidden. Instead of inflation being visible through steadily rising prices, it became invisible: through the steadily falling real wages of the average worker.

As of today, somewhere in the neighbourhood of 50 million Western workers are permanently unemployed due to “structural unemployment”, while those who manage to cling to jobs have seen their wages (in “real” dollars) steadily shrink for the last three decades. This intentionally-inflicted misery has been entirely dedicated to preserving the worthless paper empire of the bankers, and more generally, it has resulted in the largest (involuntary) transfer of wealth from the working class to the wealthy since the days of Louis XIV – where such “imbalances” were solved by pulling out a few guillotines, in order to “redistribute” all the wealth that had been stolen from the masses.

I have mentioned why the price of gold (and silver) has been ruthlessly suppressed for the last thirty years, now it's time to explain how the price of precious metals has been suppressed. Regular readers will be familiar with many previous commentaries which have dealt with various aspects of this price-fixing.

More generally, the entire precious metals community has learned a great deal about precious metals manipulation just in the last few weeks – thanks to the twin revelations by “whistle-blower” metals-trader Andrew Maguire, and the loose-lipped Jeffrey Christian of the CPM Group (during the recent CFTC hearings). Readers can refer to previous commentaries for more information on these issues. For the purposes of this commentary, let it suffice to say that in order for the anti-gold banking cabal to successfully manipulate the gold market over the long term, the bullion-banks needed vast quantities of bullion which they controlled.

They started with the gold-hoards of Western central banks. However, the longer that their price-fixing continued (and the more under-valued that gold became), the more bullion they required to manipulate the market. It became clear to the bankers that they would soon exhaust every ounce of gold they could extract from central bank vaults. At that point, it was obvious to them that they needed another huge source of bullion: the gold miners, themselves.

The spike in the price of gold at the end of the 1970's resulted in the greatest “boom” in gold mining of the last century. However, when that market suddenly “peaked” - and then reversed – this set-off a meltdown in the sector, which was (naturally) greatly exacerbated by the gold-dumping of the bullion banks. Even the world's largest and (previously) most profitable mines were facing certain destruction, as the banksters pushed the price of gold steadily lower, and below the cost of production for most of the world's gold mines.

Obviously no company can stay in business producing a good which they could only sell for a loss. Knowing their vulnerability, and even knowing who was responsible for their destruction, nonetheless, one-by-one the world's largest gold miners were forced to make “a Deal with the Devil” (or in this case: “devils”). They succumbed to the “hedging agreements” put forth by the banksters. While these contracts themselves are enormously complex, the intent and “mechanics” of this banker-scam are very straightforward.

The miners agreed to “forward-sell” or “hedge” virtually all of their production – at exactly the price dictated by the banksters. This allowed the anti-gold banking cabal to not only dump all their existing bullion onto the market, but to also dump onto the market gold which had not even been dug out of the ground. In return, the banksters structured the hedges to be just “profitable” enough to allow the gold miners to survive, but not profitable enough for them to ever shake-off the “choke hold” of the banksters.

Over these thirty years, the primary purpose of this manipulation has remained the preservation of the banksters' “fiat currency” Ponzi-scheme, and their entire paper-empires. However, being bankers they could never resist the other scamming opportunities which presented themselves once they had enslaved the gold miners. Enter Goldman Sachs.

CEO Lloyd Blankfein and an army of propagandists are attempting to portray the SEC's current law-suit against Goldman Sachs as an “isolated act by one individual” from a corporation which supposedly has an “unblemished” reputation. While I let regular readers recover from their laughter, I'll remind newer readers that Goldman Sachs has also been busy desperately trying to cover-up its multi-billion dollar fleecing of AIG.

While there are hundreds (thousands?) of other “skeletons” which Goldman Sachs is likely hiding in its closet – merely with respect to its recent scamming – another news item just surfaced, reminding people that scamming clients is an old “game” for Goldman Sachs.

In 1998, Ashanti Gold (based in the African country of Ghana) was the world's 3rd largest gold miner. However, in the spring of 1999, when Gordon Brown was dumping 415 tons of the UK's gold onto the market (purportedly to bail-out the massive “short” position held by none-other than Goldman Sachs), the price of gold collapsed to a post-Energy Crisis low: to $252/ounce.

According to an article which recounts these events, Ashanti Gold approached its “financial advisor” - Goldman Sachs – for “help” in coping with this ultra-low price for gold, and (surprise, surprise) Goldman Sachs “advised” Ashanti to enter into massive “hedging” agreements to forward-sell all their gold. Of course, they didn't think it necessary to inform the management of Ashanti Gold that not only was Goldman Sachs making profits for itself in selling these hedges, but it was making much bigger profits shorting gold.

Apparently, merely being a Goldman Sachs banker means never concerning yourself with the words “conflict of interest”. This also explains why former Goldman Sachs CEO, Hank “Bazooka” Paulson was genuinely mystified when people severely criticized him for using taxpayer dollar to make full pay-outs on all of Goldman Sachs' multi-billion dollar scams against AIG. He was merely acting the way Goldman Sachs bankers always behave: purely in self-interest, and without disclosing material information to partners and/or clients.

Thus, while the banksters (in general) were suppressing the price of gold, and while the banksters had already coerced the full 'cooperation' of the world's largest gold-miners, this didn't prevent them from occasionally 'whip-sawing' these “clients”.

In September 1999, shortly after Goldman Sachs had “instructed” Ashanti Gold to enter into massive “hedging” agreements – which were bets on a falling gold-price – 15 large European banks (all of whom had extensive “business” relationships with Goldman Sachs) surprised the gold market, and the world in general, by announcing that were ceasing all gold-dumping.

That announcement caused an immediate surge in the price of gold to $307/oz (a 20% rise), and in just a few weeks, the price of gold had risen to $362/oz – nearly a 40% rise. To quote the article: “Ashanti was in trouble”. In just a few weeks, the whip-sawing which Goldman Sachs had inflicted on the company had generated $570 million in losses (and that was back in the days when $570 million was a lot of money).

It had to “beg” the 17 banks which were holding the other side of these hedging contracts not to “execute” the terms of the contract – which would have instantly bankrupted the company. Thus, it essentially entered into a bankruptcy negotiation. At that point, Ashanti's “financial advisor”, Goldman Sachs was given the task of “negotiating” the terms of bankruptcy on behalf of Ashanti.

This was not a case of “the fox guarding the hen-house”. Rather, it was a case of a “fox” being allowed to blindfold and tie-up the hens, and then being put in charge of “guarding” the hen-house. Ashanti's share price (and market-cap) plummeted by almost 80% - despite the 40% rise in the price of gold. Ultimately, Ashanti Gold (the first “black” company ever listed on the London Stock Exchange), was sold in 2003, purchased by London-based Anglo Gold – at a mere fraction of its real value. Naturally, the “negotiator” of this deal (this time officially representing Anglo Gold) was Goldman Sachs.

Goldman Sachs has scammed and exploited so many, for so long, that it confuses its ability to have escaped punishment for its prior misdeeds with engaging in “legitimate business”. Much like a serial-rapist has no understanding of the concept of “consensual sex”, Goldman Sachs appears to be capable of engaging in only one kind of “relationship”. It is time for these bankers to be held accountable.

[gunDriller]

http://si.wsj.net/public/resources/images/OB-IP625_roi052_D_20100525095034.jpg

i wonder if there's a rental space in the next building over.

anybody got a jackhammer i could borrow ? 8)

[kregener]

Gold has not changed at all.

The number of FRN's it takes to buy an ounce has changed significantly...many times....up and down

[Neuro]

Excellent articles!