Saturday, August 20, 2011

I like 3

At EconomPic recently, Jake showed a long-term graph of the yield on ten year treasuries. My comment on his graph was:

A peak in 1921, at just over 5%, followed by two decades of decline.

A peak in 1981, at three times the level, followed by three decades of decline so far.

If the length of decline is proportional to the peak rate achieved, we can look forward to three more decades of decline.

A peak three times as high, and a decline three times as long.

I often say I don't make predictions, but I don't often say why. It's the obvious reason: My predictions turn out wrong. But I'm going to make a prediction anyway. Even though there is no basis for any prediction in this post, other than what I said in the post title.

My prediction is about the price of gold.

I should say what everybody says to cover their butt: This is not investment advice. Anyway, as I said above, my predictions turn out wrong. But I'm thinking gold is going to peak around $2400 to $2500 per ounce. Because last time it peaked at $800, and $2400 is three times as much, but $2500 is a nice round number.

How's that for solid evidence???

What this means, for me, is that the dollar is not dead. Not yet.

This is a graph from GoldPrice:

I copied a rectangle of it for 1973-1983 (showing the $800 spike of 1980), erased the background, inverted the colors, scaled it up by a factor of 3, and overlaid it on the original graph by eye with the low points lined up, 1977 on 2001:

A pretty good fit. If anything, the recent increase has been slightly more gradual.

I'm not betting on it, but I would be surprised if the spike doesn't end soon.

Let me quote my friend Jazzbumpa here:

Meanwhile, gold has gone to an insane level. The rise from 2000 (Y2K) to almost 2000 ($$$) has been exponential - aka a bubble. This is a horribly mistaken substitute for a flight to safety. Anyone who bought gold in the last three or four years will be wailing and gnashing their teeth, unless they sell some time soon to a greater fool. The timing is unknowable, as is the ultimate high. But bubbles always burst, and this one will not be an exception. It might take years to play out, but the initial drop will probably be a terrifying panic. You can expect gold to eventually end up back at the $250 to $400 level.

Yes to all of that, Jazz, except ending up back at $250-$400. I'd go with three times that, say $800-$1200. Stabilizing there in seven to ten years. Based on nothing but fractal-like magnification of the previous pattern, and the number 3.



Jazzbumpa said...

Ahh - but 3's a crowd. There is no reason to expect proportionality in either price or time. The general shape is always the same though. Note the recovery peak in the middle of the drop on the blue line. Then look at the stock market in 1930.

I say $400, not based on any proportionality, but on the pre-bubble price which is generally a realistic expectation for the post bubble price.

Gotta run.

The Arthurian said...

"There is no reason to expect proportionality in either price or time."

I know buddy, and I agree. I think I was pretty hard on myself in the post, for not having any basis at all for what I was saying.

Still, I like the number three here. There is a memorable passage fromChaos by James Gleick, something like this: investors think in terms of cycles because that is the most complex repeating behavior they can imagine.

I probably fumbled the quote, but you get the idea.

The Arthurian said...

Maybe the peak comes BEFORE it gets to 2400 or 2500:

EconomPic of 24 August shows a "two day decline in the price of gold" and FT Alphaville is wondering if that was the top.