Home » Money » Gold Down for the Long Run?

Gold Down for the Long Run?

“The long run is a misleading guide to current affairs.  In the long run we are all dead.”
– John Maynard Keynes

A step back can be very illuminating, especially in economics.  History teaches us an awful lot when we are willing to pay attention to what it says to us (which is almost never).  The long run is also a good way to get away from current fashions, trends, and all the ways that everyone can fool themselves.  Of course, as Keynes tells us, you run the risk of making a completely different mistake in the process.  At least no two economists ever agree on anything, so there’s plenty of wiggle room.

It’s the bigger version of your typical financial reporting – “Stocks fell today on news that blah blah blah …”  when in fact it was just a drippy grey April day in New York and everyone felt lousy.

A decade-plus trend, the increasing price of gold, is coming to a spectacular end.  This may mean something very important – if it’s not the last gasp of the last bubble to work its way through our system.

We’ll start with the basics of the story, the amazing run of gold from 2000 on.  The chart below, from our old friends at the St Louis Federal Reserve, shows that investors have been buying up the shiny stuff for a very long time and not pausing until the end of 2011:


Why gold?  The price generally runs up to the extent that the “Full faith and credit of the US Government” starts to look like a pretty thin promise to back a currency with.  Increasing gold prices mean a loss of faith in the US and/or its future.  The price went up smoothly from about $280 an ounce to a peak of $1,895 over a period of 11 years, an annualized rate of return of nearly 19%!

Yes, I take this long run as another sign that the recessions of 2001 and 2008 are linked in one event, a Depression.

Since that peak the price floundered and then recently fell off a cliff to $1,495 – a drop of 21%, most of that coming in 2013 alone.  It looks like a sign of renewed faith in the US Dollar, especially given how CNN’s Fear/Greed Index has moved solidly towards “Greed” lately.  It’s one more sign that the party is back on, right?

While this is quite a good sign in a series of good signs for our economy, it’s hard to be sure.  There is at least one other reason for the fall.

The tab for the debacle in Cyprus keeps rising, now up to €22B from €16B, largely because of the incredible mistakes made.  In order to raise money to cover this without doing anything stupid, again, the government of Cyprus has pledged to sell of its gold – something that people have been suggesting the US and other governments should do for some time.  More gold means lower prices, and the market has responded.

Sounds good, but it’s hard to say that it’s all about Cyprus given the long-term trend.  The future of gold is certain to drop largely because everyone has been saying it will – faith in the stuff is at a terrible low.  Faith in the Dollar is on the rise.

manufacturingNaturally the bump in the US Dollar has its downside, given that good news is bad news (and vice versa).  It’s a reflection of the US losing the currency war that is going on around the world as nations work to lower the value of their paper and thus lower the cost of their exports.  At this rate, we’ll never get our manufacturing back – unless we join the fun and do something to really trash the Dollar.

Another round of quantitative easing?  No, there is increasing pressure to end or at least taper off QE3: The REIT (one of the worst sequels ever made).  This is the program where the Fed buys $45B in mortgage backed securities every month to stimulate the economy, a program that appears to be working to keep mortgage rates low and move the housing market.

They could try something more innovative if they’re hot keep the dollar down, if they’re up for another sequel.

What we do know is that faith in the US Dollar is on the rise for the first time in 13 years, for whatever reason.  It’s hard to explain away as anything other than genuine belief that things are, indeed, starting to get better.  We’re a long way from $280 per ounce level faith, but this is one time when a step back tells us that something big has indeed changed and the trends can only be expected to continue.

Of course, in the long run we’re still dead.

11 thoughts on “Gold Down for the Long Run?

  1. Gold was a bubble and now it has burst. Give it a few months and it will be back below $1000 an ounce. That may be a flight to the dollar & a sign of confidence but it did have to happen eventually.

    • I mostly agree, but unlike a normal bubble this one took 11 years of gradual inflation. It wasn’t like bitcoin (which I left out of this piece on purpose!) There is a statement of confidence in this, I am sure. Where it winds up, I don’t know.

  2. I didn’t realize the run of gold was so long. I also think it was a bubble but for it to burst there has to be some new confidence in the US. Add that to the list?

    • I was thinking about following gold, but I don’t really know that it means a lot. There are so many external things going on. But seeing it fall can’t be bad, that much I am sure of.

  3. So far the gold bugs I know say it will come back but of course they would. The thing about gold is that it is totally a bubble because it really has no value other than what the market says it would. It is a lot like bitcoin except its rabid followers will never let it go.

    • But it has tradition on its side, and that counts for something. It’s the first last haven in a panic. Does this mean the panic is over? I’ll wait until it hits $1000 – which some of you think will be soon. 🙂

  4. Pingback: Cheers for the Underground Economy! | Barataria - The work of Erik Hare

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