Bubble Alert: Gold and Silver ruled 2012!

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As the mania of Bitcoin continues (although it is down 33% from its highs as of December 22nd), I deliver to you the most recent bubble, precious metals. Ironically I’m writing this on a day where Gold is currently 30%+ off of its highs five years later and Bitcoin was down the same amount in one day!

Gold and Silver:  The last forty years.

Did I find this at the end of a rainbow?

Gold experienced its last peak in 1980, a seven year rapid price increase that was a result of the United States eliminating the gold standard, the growth of wealth in the middle east, and those countries/families converting oil wealth to gold and gold reserves. Stagflation had set into the United States and silver experienced a similar increase, but was prolonged a bit with the Hunt brothers attempting to corner the silver market.

Gold bottomed out below $300/oz in the early 2000s and experienced a sixfold increase over the next 11 years. Silver experienced a ninefold increase over the same period of time.

After the housing bust in 2007, empty retail storefronts began filling with “we buy gold” stores. Advertisements on CNBC and FoxNews were filled with stores offering to sell gold bullion. Sales at online sites like APMEX and Provident Metals took off. Gold and Silver for security was all the rage. Gold/Silver prices started reporting on the bottom left of the CNBC ticker. Ron Paul and others sounded red alerts about the federal government “printing money” through quantitative easing. (An argument that has some legitimacy, but we’ll save that thought). Other arguments for gold included:

“Gold has been the standard of money for centuries”
“The price of a barrel of oil measured in gold has been about the same”
“This will protect me against inflation”

Warren Buffet was criticized by many for saying he’d rather just own an equivalent number of shares in Exxon than all of the gold in the world.  He did note that both metals had some underlying industrial value (which is slightly more than one can say for Bitcoin)

The most curious moment for me was when the owner of a window blind company who was having a rough time with the housing bust tell me “This time I’m all in on silver!”

What was the human impact?

A relative of mine bought these arguments.  After taking losses in the stock market (and subsequently selling, saying “I can’t afford another drop”), so this person started acquiring metals.  Gold bullion, silver bullion, and scrap silver.  Online sales, yard sales, deals with coworkers.  Gold and silver was all they could talk about.  Every article I was being sent was confirming this belief, never a contrarian article.  Stock “investments” consisted of penny stock mining companies and every conversation was about this next great mining company and extraction cost per ounce.   I would hear about slick deals these mining companies had cut with third world nations and how this stock was the one.  Talk about fundamentals!

In 2012, the market corrected.  Gold and Silver quickly retreated from its high and reverted back to a very narrow range of around $1200/oz.  A 40 year chart now closely matches the rate of inflation, even though the commodity had wild swings up in 1980 and 2012, then was likely higher than average due to the elimination of the gold standard and the upward correction from the mid-2000s.  Like most bubbles, it got overheated, prices quickly fell, and many of the lovely “we buy gold” shops closed up out of local strip centers.   The damage wasn’t as public as the housing crash from a few years earlier, but it impacted those who bought into the fear

What was the financial pain?

Lets assume that person in their early 50s purchased $100,000 in Gold and Silver between 2011 and 2013.  (I don’t know the exact amount, but I believe I’m close).  Today they would have roughly $80,000 worth of physical metal.   The same investment made into VTSAX would be worth $225,000 today.   Now they are in need of a monthly income.   The best example of how to convert this into income is in Fidelity’s Annuity Calculator.

VTSAX Option converted to an Annuity:  $1,028

Precious Metals converted to an Annuity:  $373

What a difference!   If someone is just relying on social security plus this nest egg, the almost $700/mo is a huge difference.   What could the difference of $700/mo in retirement mean?

That’s the difference between affording and not affording at home help.

That’s the difference between living in a joint room home on medicare vs. affording a private pay facility.

The ability to afford 3-5 nights of travel a month in retirement.

Someone to outsource cleaning the house and mowing the yard to weekly.

This is the result of fear and risk aversion.  Always be cautious when you hear “this time is different”.  Be cautious if an advertisement talks about losses in the stock market and offers an alternative.   Read competing opinions and force yourself to defend the opposing point of view.  Diversify, both in different types of assets and in different cash flow streams.  There are important lessons to learn from history, bubbles will repeat themselves but often in a slightly different way.

What do you think?  Please leave a comment below!



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