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Gold, Tulips, Guns, and Salt
In 2005 gold was about $430/oz (about the same as in 1986). Six years later, it ran over $1,800/oz: 350% more expensive. But enough about gold, let’s talk flora.
In 1593 Tulips were introduced in Holland. The rare flowers became the vogue and prices mounted. In one amusing exchange a single bulb was traded for a bed, complete suit of clothes, and a thousand pounds of cheese among a longer list of items.
At the height of the mania, bulbs sold for $1,250 in U.S. dollar terms. Deemed too valuable to risk planting, they were displayed ungrown at the risk of being mistaken for food and eaten by visitors.
One day a buyer failed to pay for bulbs ordered. Panic ensued and within a short period Tulip bulbs were worth practically nothing. So what does a tulip bulb and an ounce of gold have in common? More than you might think.
You can’t use either for anything other than display or selling at the going price (“Show or Sell”). Neither create more of itself on its own (pay dividends/interest). And both have experienced dramatic increases in price relative to their usefulness as assets. I’m not arguing either is without value. I’m introducing a misconception over the presumed value/safety of certain assets.
First, in recent years advertisers selling gold frequent the notion: "gold always increases in value". This is as far from reality. Just as it was when we heard this about real estate and technology stocks. As prices of any asset bubble, the presiding premise is that it won’t go down, it has always gone up. Our emotional bias toward recent events make this seem real, though intellectually we know "no tree grows to heaven." Most assets have ballooned and been busted before.
In 1980 the price of gold went from $200/oz to over $800. On a percentage basis this is similar to the recent run up. Then gold went down, way down, and stayed that there for 25 years. Interestingly, consumers purchasing gold recently are not focussed on the future market price as much as having it on hand after the end of the world.
A supposition exists that if the worst happens gold will still represent currency. I disagree. If the global economy collapses, our worries will extend far beyond worthless stocks. We won’t have ready access to electricity, transportation, safety or food. In that event, things of value will be usable items such as candles, horses, guns, and salt (the original currency). Frankly, I doubt bling will rank high on anyone's "I wish I had," list. A box of bullets, on the other hand...
Shortly after hitting $1,800/oz gold started acting differently. It has tottered back and forth displaying what is now considered uncharacteristic price dissimilarity with stocks. Over the last 5 days the dow dropped about 5%. Gold has dropped about 12%, an unusual event during a bad week for stocks.
I cannot say that $1,800 is the top for gold, but I can its value is fluctuating differently than in the last 6 years. I can say I’ve heard gold traders using terms like “a classic top” in relation to recent price movement. I can say, like it or not, anything quadrupling in price over a short period has always been a bubble. And I can say, even before the internet, bubbles take days, not decades, to pop.
I welcome comments and questions.
Warmly,
Marc Becker
If you would like to read more about the Dutch Tulip Bubble - http://www.damninteresting.com/the-dutch-tulip-bubble-of-1637/
Gold prices since 1970:
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