Wikinvest Wire

Gold may no longer be "just another commodity"

Wednesday, September 17, 2008

We will see how things go from here, but, today may mark the day that gold bullion transitions from being just another commodity into something very different.
IMAGEDespite what you may think after the previous post (it really is a catchy song), it is highly unlikely that what we are seeing today is the end of most of the world as we've known it, but, for Wall Street investment banks and the price of precious metals, change is certainly afoot.

As shown in the chart above, one of those changes (that may or may not persist after today but, at some point, most certainly will) is that people with money are becoming more and more distrustful about what the government has been doing lately and are starting to think of gold as more than just another commodity, which, is really all it has been since the beginning of the bull market in commodities about 7 years ago.

Call it a "safe haven" bid or a "flight to safety", it doesn't matter.

Call it fear of a financial market implosion or wealth preservation ahead of what will continue to be massive government intervention in an effort to ameliorate the current (and worsening) condition - peoples' opinions about the metal are changing.

Gold may no longer be "just another commodity" anymore.

Full Disclosure: Long GLD, no position in DJP at time of writing.

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Anonymous said...

If gold traded like a commodity, it would most likely never trade over $800 per ounce.

Gold has always traded like a currency, mirroring (in general) the dollar's decline.

getyourselfconnected said...

I had thought about a story told to Conan the Barbarian by his father. If you substitute gold in place of steel we see only in gold can we trust!:
"Once giants lived in the earth, Conan, and in the darkness of chaos, they fooled Crom, and they took from him the enigma of steel [GOLD]. Crom was angered, and the earth shook, and fire and wind struck down these giants, and they threw their bodies into the waters. But in their rage, the gods forgot the secret of steel [GOLD] and left it on the battlefield, and we who found it, are just men, not gods, not giants, just men. And the secret of steel [GOLD] has always carried with it a mystery. You must learn its riddle, Conan, you must learn its discipline, for no one, no one in this world can you trust, not men, not women, not beasts, this you can trust."

Put your trust in gold, your arse belongs to Bernanke and Paulson.

Chuck Ponzi said...

Please, don't mistake an oversold bounce for a reversal.

Over $600/oz, gold is in a bubble.

Chuck Ponzi

Tim said...


Didn't know that was you over at the SoCal Real Estate Bubble Crash Blog until just now when I clicked on that little Blogger thingy.

I'm interested to know why you are so sure that gold is in a bubble that just burst (and might burst again, apparently, since it's well over your target price).

Please explain...

Chuck Ponzi said...


Here goes: economics posits that over a reasonable term that supply and demand must equal not only on volume, but also price. If the price something is demanded at is higher than the cost to produce it plus a profit to induce the risk of investment, those who produce it will produce more of it.

We had a demand shock 2-3 years ago when we were in a highly inflationary period. That demand shock is now manifested as a supply glut.

Gold can be produced for about $350/oz depending on the source, and methods have significantly improved in the last 100 years.

Kind of like houses.. remember how everyone said "they're not making any more land!!!". Yes, but they were building a shitload of houses.

My opinion is that gold is in a bubble, and I bought at $600 and sold at $900, so I'm not permanently biased, i just recognized the trend and bought/sold it. IMO, the current trend is down, the commodities bubble is over. Gold is not money, it is a bubbled commodity.

But also, I have one other question... what happened to your model portfolio information that used to be in the sidebar? Just noticed it was missing.

maurice said...

Yeah, paper is money. Paper given to the likes of an a*shole like Hank Greenberg. That's over three thousands tons of gold. And you trust these people to "print" your money? Good luck.

News said...


I was in gold deflationary camp until today, but you cannot explain today's gold rally by technicals alone. It's up over $100 for the day.


you should have taken profits in oil this summer; it was too good to be true Chuck and I warned you about it several times.

Tim said...

I took some profits in oil (DBE) when it was over $140. As for Chuck's gold logic, please note:

1. Mine production has declined over the last four years per World Gold Council stats - annual production is now about 10 percent lower than when gold was in the $400 range back in 2005.

2. Mining costs have risen dramatically in the last few years and $350 per ounce is about right for 2005 (see this Mineweb story), but that was when oil was $40-$50 a barrel. Mining is very energy intensive (think big open pit mines with big trucks running 24 hours a day) and in 2007, average production costs were $500+ per ounce (see this Mineweb story) with an average oil cost of about $75 a barrel. Today, prices below $700-$750 per ounce will cause many mines to close due to economics.

At this point, it's all about investor demand and how willing central banks are to sell because there is no glut coming from miners - not with the current prices for oil and gold.

Bubbles pop when supply far exceeds demand. In the last two months, what we've had is a sharp decline in price across all commodities due to the expectation of lower demand in the future due to the economic slowdown.

With only a few exceptions (e.g., nickel) there are no surpluses. Until production far exceeds supply in the long-term, prices will continue to rise, albeit with violent corrections.

Anonymous said...

Chuck, you have no idea.

If we get a rally (fundamentals-based or not) comparable to the one up till 1980, gold will easily leave $2,000/oz in the dust. That is just with simply inflation adjusting.

It will be real interesting with foreign central banks taking the place of small retail buyers in the US, many of whom are now broke anyways.

Besides that, you clearly don't understand *marginal* cost of production. See Tim's comment above.

And calling 2-3 years ago the "highly inflationary period" is just silly.

Boy, 20 years of fixing the bond market, the gold market, and inflation statistics sure turned people into a bunch of pansies.

Chuck Ponzi said...

OK anonymous,

It's hard to speak rationality to those not understanding that we are beginning a deflationary period.

We are now borderlining on a depression, so I don't see how we can stuff more money into the market to support higher prices. People and corporations have to have the ability to borrow, which they don't and won't for the next year or 2.

If gold were to detach from the overall fundamentals of the deleveraging market, then it could rise again. However, this is precisely the definition of a bubble... detachment from fundamentals.

Tim, you have even yourself agreed that the current price of gold was higher than the cost of oil. However, I see some issues with your assumptions. A 50% increase in the cost of oil does not translate into a 50% increase in the cost of production since oil is only a portion of the overall cost of production. I'll agree that it is somewhat energy intensive, but it is much more capital intensive. While financing is currently still favorable for profitable investments, I think your estimation of $750 is perhaps only the worst case scenario for both $150 oil in the worst of mines.

This is no slight to your analysis and research, but there were many, many brilliant analysts during the housing bubble and the dotcom bubble that could not see the forest for the trees. Too many times, people see what they want to see out of an investment, not the objective ideas they believe they are seeing.

One last thought, gold does not produce a dividend. Investing in the physical material is a security play. Once the panic is fully in the market, it would normally fall. However, bubbles are irrational. they can go on longer than any of us imagine. However, I'm not a bubble investor. I sold my house in summer 2004, perhaps too early. Once it was no longer rational, I just couldn't justify staying in it. The risk/reward just isn't there.

Chuck Ponzi

Tim said...


I don't think it's possible to advance the discussion from here.
You said: Too many times, people see what they want to see out of an investment, not the objective ideas they believe they are seeing.
I would suggest you look inward as you seem to be dismissing objective ideas in favor of your own beliefs.

Chuck Ponzi said...


Are you not interested in the discussion, or do you simply believe that you've won the argument and therefore have nothing more to say on the topic?

I may be wrong (i've stated that before), but I try to keep an open mind.

Indeed, Gold may go up, but I personally see little chance of that in the next 6 to 8 months based on my view of the fundamentals of deteriorating monetary conditions and basic deleveraging in the stock and money markets. Where it goes from there comes into more focus after the next period is resolved.

Not investment advice, I am probably wrong about this.

Chuck Ponzi

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