Gold prices: Where's a leprechaun when you need one?(Read article summary)
The Irish economy is collapsing, but the buying power of gold has never been stronger.
Cindy Miller Hopkins / DanitaDelimont.com / Newscom
The Irish foolishly borrowed too much money during the boom years. The banks foolishly lent too much money. And then the government foolishly said it would bail them outâ€¦even though the total exposure was four times Irish GDP. Yesterday, they foolishly took over Irelandâ€™s biggest bank, Anglo Irish. And now theyâ€™re going broke. The losses are probably more than they can handle.
But itâ€™s been worth it. What a ride the Irish have had! They were the poorest people in Western Europeâ€¦then, they became the richest people in Western Europe. And now theyâ€™re back to being the poorestâ€¦
It would have been better if they had had a better sense of architecture during the fat yearsâ€¦ They wouldnâ€™t have blemished the island with so many ugly buildings. Alas, the Irish will have to live with the stain of their prosperous years for generationsâ€¦
Of course, the same could be said for the USA. All those wretched suburbs and condosâ€¦ All those shopping mallsâ€¦ All those parking lotsâ€¦
Not to mention all that debt!
Yes, we will live with the bubble rubbish and residue for many years.
But Ronan said something interesting. We were discussing Irish property. Thereâ€™s a lot of it for sale. Buyers can practically name their own prices. But the choice properties are still in the hands of the insiders. When they see something go down to where it is a bargain priceâ€¦they snap it up.
This signals to us that the whole process of debt destruction still has a long way to go. The assets still have appeal. Investors still think they can make money by buying low and selling high. In other words, they still think there is a bias towards the upside.
They havenâ€™t given up. Theyâ€™re still eager to buy â€“ at the right price.
But just wait. When the end comesâ€¦they wonâ€™t be interested at any price. Some of the finest properties will go â€śno bid.â€ť Then, the playersâ€¦the insidersâ€¦the smart money will all be convinced that property is a losing propositionâ€¦and that you will never make money by buying real estate â€“ because it always goes down. Then, when the insiders have given up. Then, and only then, can you expect to make any real money.
Itâ€™s no different in the stock market. What investors want now are bargains. They think that they can make money, by buying at the right price. Then, as the â€śrecoveryâ€ť comes their stocks will go up. They think the bias of the stock market is still upwards.
Certain well-known investors â€“ for whom we have an enormous lack of respect â€“ claim that stock prices always go up â€śin the long run.â€ť These super bulls are forever predicting â€śDow 36,000â€ť or â€śDow 100,000.â€ť And theyâ€™ll probably be right. Someday, the Dow will probably hit 100,000. And youâ€™ll be able to read about it in your $50 newspaper while youâ€™re drinking your $100 cup of coffee.
This week, Jeffrey Hirsch predicted a Dow over 38,000 by 2025 â€“ a gain of about 5% per annum, without dividends. Maybe heâ€™ll be right too.
But stocks donâ€™t really always go up. Au contraire, every stock you buy will eventually go to zero. Your only hope is that you expire worthless before it does.
As for the lot of them, remember that most of their profits and share price growth is an illusion. Letâ€™s say you â€śbuy the market.â€ť You just get an ETF representing the indexâ€¦or simply buy the Dow stocks. The companies make money. Their share prices go up.
But wait. Where do their revenues come from? Where do their profits come from? Arenâ€™t they just taking money from each otherâ€¦and from other businesses and consumers (who are also their employeesâ€¦that is, a cost center)? How can they ALL go up? They canâ€™t really. They can only grow as fast as the economy itself. Competition keeps profit margins with a fairly narrow band. So, their share of the economy is limited. And since the economy is quoted in moneyâ€¦they canâ€™t really go up more than money itself.
In other words, if there were just $100 in a town, and the businesses in the town were worth half that amount, they would be worth $50. Total. No matter how much progress the town made, as long as the amount of money stayed constant, they would still only be worth $50 (though that money could be worth much, much more in terms of what it would buy).
Gold is stable money. Itâ€™s the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases. So, over thousands of years its â€śpriceâ€ť â€“ in terms of how much you could exchange in for â€“ has been more or less constant.
If stocks were really becoming more valuable youâ€™d expect that they would become more valuable against a fixed quantity of real money â€“ gold. But look at what has happened. At the beginning of the 20th century, the Dow was 66 and an ounce of gold was about $20. â€śA $20 gold pieceâ€ť was a unit of exchange. So it took a bit more than 3 ounces of gold to buy the Dow. Then, at the bottom of the bear market in stocks in the â€™30s, again it took about 3 ounces of gold to buy the Dow. And again, at the bottom of the bear market in â€™82 you could buy the Dow for less than 3 ounces. At one point, a single ounce would do it.
Currently, it takes a bit more than 8 ounces to buy the Dow. Hmmâ€¦ You could get the Dow for about 8 ounces of gold in the â€™10sâ€¦again in the â€™20sâ€¦the â€™30sâ€¦the â€™40sâ€¦the â€™50sâ€¦â€™70sâ€¦â€™80sâ€¦and now finally, once again, in 2010.
And that number is probably going down. The bear market in stocks still hasnâ€™t reached its bottom. When it does, youâ€™ll almost certainly be able to buy the Dow for 3 ounces of gold.
Stocks for the long run? Ha haâ€¦.
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