Gold bugs bug me

As it happens I have an amount of my savings (the wanky name is 'investment portfolio') in Gold. I keep an eye on the prices (out of interest) but I'm not really able to buy right now (lets not go into that, but here is a good start for you).

Today I was reading about Gold rocketing up ... "yeah yeah" I thought. Looking at the 30Day picture its a sky rocket

WOW ... go girl go (say the stokers and the fools). Shit like "these new heights are a testing point", "haven't been seen since..." (... last time)

To quote from Magic Roundabout "boing" said Zebedee...

Zooming back out to the last year ... reveals a different picture

where todays "bull run" is just a little piddle. What is wrong with these wankers? Oh ... right ... King Wang doesn't even have one eye. Get a grip folks (and no, on the facts, not your oldfella)

They say you catch more people with sugar than vinegar. Bullshit seems to work too.

The fact is far more claim to predict than can. If you look at the above graph you can find just as many "up turns" that went nowhere as you'll find downturns (well more downturns really). If you can predict the future then good for you. Myself, I'm just in for the long haul and sell if I need to (like because of life issues).

gold in the market context

I'm no economist or trader, but I was looking at some graphs today and wondering.

Looking at gold trends for available and worthwhile data I see some interesting historical matches



the first blue rectangle is where the USA phased out its relationship with gold.

• By 1971, the money supply had increased by 10%
• inflation-wary West Germany was the first member country to unilaterally leave the Bretton Woods system [the agreement to allow the USA to be the central money for world trade], unwilling to devalue the Deutsche Mark in order to prop up the dollar.
• Switzerland  redeemed $50 million of paper for gold in July.
• France, repeatedly made aggressive demands, and acquired $191 million in gold, further depleting the gold reserves of the U.S.
• By March 1976, the world's major currencies were floating

So this led to people purchasing gold (and increasing demand on a highly limited resource) pushing prices up.

The next area which is interesting to observe is the period between 1990 and 1999 when gold started to fall over a sustained period with no spikes. Interestingly this corresponds to the period of the dot com (.com) revolution where people were convinced you could make money from investing in software and communications. Its interesting to note that Microsoft did not register their own domain till 1991

By 2000 this had settled down and people were returning to examine other avenues of investment / money safe haven.

By 2004 it had become reasonably clear that the USA was in financial and military trouble and was not actually winning any wars on terror or gaining traction against those who attacked them on Sept 11 2001

Looking at the falls of the last 30 days in broader context it seems that the rise up to $1800 was just a spike. Its interesting to note that all spikes have eventually been met by the line of average growth in time.



The olde rule of thumb of "buy on the lows" would seem to be the best strategy still.

So with gold "falling" now in the short term the question in my mind is where is the bottom at the moment to pick the best time for buying before the next raise?

PS

Some other quick thoughts came to mind: first if you plot the changes in a LOG curve you get a much more stable looking thing from the early 70's till now

Now if we add to that the DOW in the same manner

It would seem that things have been pretty quiet over at the DOW house since about 2000. Strange that gold has 'gone up' a bit from about the time that the DOW has gone quiet.

financial relativity

If you've ever sat on a train at a station you may have noticed sometimes that its hard to know if the train beside you is leaving or your train is leaving (well ok, not in Australia where trains never depart so smoothly).

People who look around for investments occasionally point to Gold as a good investment option (some people call them gold nuts). Its easy to see why when you look at the basic data (say on goldprice.org or kitco) as it seems that Gold has gone high lately.


Well an important question to ask yourself here is:

"has gold gone high or has money gone low".

Its a difficult question to answer and I reckon that it can only be done by comparing things relatively. After all, money "floats" these days and its creation is regulated by the government.

If you're a property owner in Australia (and certainly in Queensland) you get occasional notifications of the value of your property from a State Government agency (the name varies from state to state and often from year to year). This seems like a nice service, but in essence its a harbinger of taxation as land value is used as one of the basis of taxation.

I just got my notice the other day and noticed that our value had gone down (again). I pulled out some previous notices and found something interesting over the period from 2001 to now.



First thing which was obvious was that between 2001 and 2004 the value of my land doubled. Thankfully (for my local government taxes) this trend settled down and has now started to reverse.

Got to love all that property speculation back in that period. People got locked into loans over 20 years and the only real beneficiary seems to have been the banks and the real-estate brokers.

Now lets look at my property with respect to the price of Gold.



I've put them in separate scales for ease of comparison, but you can see that property prices peaked at about 2007 (no data for 2008 I'm sorry) and interestingly Gold kept climbing.

To a casual eye this would tend to suggest that Gold was a better investment. There is another interesting view. If we consider gold itself as a currency of exchange (as would have money been if it was not floating and was still pinned to Gold) what would be the house prices in gold: how much gold would you need to buy a my land? This graph is perhaps a little confusing as the Gold columns show how many Oz are needed to buy while the Land Valuation column is just the money. So the amount of gold needed to buy my land has actually gone down between 2001 and 2012.


So in 2001 it was just over 150 Troy Oz to buy my land and in 2011 it returned to just over 150 Troy Oz of gold to buy my land.

So it would seem that if we are trading commodity for commodity that the value of my property has remained stable from start to end of that period and that only the relative exchange in the middle period has changed.

There could be quite some argument as to just why this happened but looking at the curves on those trend lines, the value of property rose faster than that of gold (seen in the price of property vs gold earlier) and that gold has just "caught up" as people realised that one commodity was moving faster in value than another.

You will note that in the 2nd figure I only have data to 2011, while in the 3rd I've inserted a value for 2012 in property value. I don't actually have valuation data for 2012 so I 'extrapolated it' which is of course guess work. I do have data for Gold in 2012 (like spot prices right now) so we can sort of see something.

If property prices do not stabilise (or go down) then we'll see that the price of real estate was over valued (based on the other trading commodity of Gold) in the period from 2001 to now. If it goes down further we will know that land was really over valued in that period.

Fellow blogger Bullion Barron has an analysis of this topic in full house prices over a longer period over here. Where he produces this graph:



Suggesting that whole house land prices were well under this valuation being less than 100 Troy Oz back in the 1980's (when Gold was just recently uncoupled from the US Dollar and that the Australian Dollar was at record highs against the US Dollar).

Makes me wonder how much further it has to fall yet. Perhaps my "estimation" on my land value is too low, and rather than staying static (as I 'estimated') it will continue to fall. In that case even with modest rises in the price of Gold we could see house and land back in the 1980's value with respect to Gold.

So getting back to the original question (is Gold an investment), I don't think it is. You don't easily make money out if it (which is the purpose of an investment) but it sure seems a safer hedge than money in the bank ... or bricks and mortar (well often pine and gyproc these days anyway).

gold wages and houses

NOTE: the following has been struck out and indented because his blog is removed. I leave it here for historical reference only.

A blogger called Bullion Barron has done a nice (well researched) piece on the relationship between wages expressed in gold (here) and house prices (here),I recommend you toddle over and have a quick read of that.

Mean time I was ruminating on some of the data and wondered if I could do a quick and dirty shift of some of his graphs to fit the same axis of time scale. So here is his data of wage to gold overlaid with house prices in gold



to me the peaks and falls seem to be related. Although there was a period where our salary buying power went up in these units but there was a lag in house prices until 2003. I would wonder if this was when fiscal policy became looser and people began buying with "all that cash" they now had ... bears further investigation that does.

none the less, then the wages (in gold) fell there was a bit of noise in the system before that followed the same logic. Perhaps we need the quivalent of a Schmitt trigger on the logic systems to work that one through?

I hope Bullion Barron doesn't mind me working his data like this....