Comments (20)

• Saturdaynightspecial

• I can't say what the price of gold was in 1980 - probably $400. Because the cost for VietNam was still being paid off by the government.

  Gold becomes expensive during crisis, so why does anyone believe gold is so high today ? (Iraq and inflation) Only a fool would buy gold today - right?

  Problem with gold is even when you have it and it's market price is high, you really don't want to let go of it because you know uncertainty awaits around the corner and you never know when good times are coming back.

• Published: November 27, 2006 2:51 PM

• RMurphy

• Just to clarify, I'm not asking about the gold price in 1980. I'm asking what the futures price of gold was (ideally for 1990, but I don't know if they sell/sold 10-year-futures contracts) back in 1980. I.e. I'm wondering if the rest of the market agreed with Simon, and Ehrlich was just a moron, or if Simon could've profited not only vis-a-vis Ehrlich but also in the commodities markets.

• Published: November 27, 2006 3:10 PM

• Person

• Thank you for making this post, Robert_Murphy. This is actually something I've wondered about. Even if you didn't buy into efficient markets/random walk theory, you'll have to accept that, just as investors can in the aggregate overestimate the future scarcities of natural resources, they can also underestimate them. Do all natural resources fall in price over every ten-year period? Probably not! So you don't have to be a doomsayer to believe that maybe Simon just got lucky.
  
  That said, I still think the bet demonstrated a huge error in Ehrlich's analysis, which is to neglect that entrepreneurs have access to the same information Ehrlich does and are making long-term plans based on these upcoming scarcities. We only see now, the choices entrepreneurs decided on. We don't see what entrepreneurs are capable of doing, but choose not to because current factor prices (including factor futures) don't justify it.

• Published: November 27, 2006 4:27 PM

• tarran

• I have a question: how did they measure inflation?

  This bet has always bothered me; in the absence of a stable money supply, how do they calculate that the price of a good has fallen?

  In a free-market for moneys, one would be comparing the price of one commodity to another. So, in Rothbard's example of a primitive economy of two goods, the two gentlemen would have a choice between betting whether the price of a barrel of fish in terms of horses would rise or fall, or making a similar bet involving the price of horses in fish.

  So when they say that the price of these commodities fell, I ask, in terms of what?

  (Incidentally, I am not defending Erlich - no member of my family has gone to bed hungry for years with the exception of my son when being taught a very memorable lesson concerning basic table manners)

• Published: November 27, 2006 8:25 PM

• John Hall

• If I remember correctly, my companies' Bloomberg terminal will only give futures data up to a year old and even then it is kind of a pain. You might want to check some of the other financial databases out there, but I don't know which one provides that for metals.

• Published: November 27, 2006 8:50 PM

• M E Hoffer

• I wouldn't be too surprised if http://www.kitco.com could rustle up the #'s you seek. If not directly on the site, then through their query port.

• Published: November 27, 2006 9:11 PM

• Artisan

• Here’s an interesting link too for metal:
  http://www.sharelynx.com/chartstemp/FreeCharts.php

  I don’t know if anybody here has heard of the famous Hungarian essayist and speculator born in the 1900s named Kostolany. I’m not sure his investment books are published outside Germany however.

  It is interesting to read in his writings (which are quite entertaining really), that he condemns the political correctness of the West saying endlessly: let us redeem the 3rd world debt! In the same time, our politicians claim they worry about inflation at home.

  Indeed, Mr Kostolany identified the sure fact that those poor countries won’t ever pay their debts as precisely being a large part of today’s inflationist pressure. Those countries of course are quite rich in terms of natural resources. Mr. Kostolany recommended to stop lending money thus…
  The odd thing though, is that he described elsewhere inflation as a thoroughly positive occurrence. Between the lines, he repeatedly assumes it’s the speculator’s best friend! He never mentions the fact that it is a debasement of monetary power.

  It strikes me because this guy, though being fully involved in the financial stock exchange, made the same sort of bet against gold in the early 90’s thus. He hated gold in fact! He died unfortunately before he could see the gold price these last years, but it seems everybody got convinced that natural resources would never come up again at that time.
  

• Published: November 28, 2006 4:02 AM

• gene berman

• I also do not know what the futures-market price of gold was at any time in 1980. But the futures market usually follows a loose pattern reflecting expectations based on the spot (present) market and there I can tell you, without hesitation, that gold reached its highest-ever price of just over $850 per Troy oz. some time during Feb. of 1980.

  There are two thing I remember about that particular day. The first is that Ed Yardeni, the chief economist for a major brokerage house (by his own admission as a highly-paid financial columnist) rushed out and made his first-ever investment in gold by buying a whole slew of Krugerrands. The other is that I was forced to buy gold at that price by our two Pemon (Indian) guides in Venezuela (where we were gold prospecting) in order to keep their services (They wanted to go downriver to sell--which would have cost us nearly two days of their time.). The matter was solved by buying the "dust" in their pokes @ $850--a transaction amounting to about $45. We got the news at our overnite campsite from a woman peddling bananas from a canoe--she'd gotten it from someone with a short-wave radio.

  During those few years preceding the high point, the average gold price (I was in the business.) was about $630--right about where I think it is now. And, from that point, it was fairly steadily downhill.

• Published: November 28, 2006 7:01 AM

• David White

• Most of the gold that has ever been mined is still in circulation (roughly 155,000 tons), its use as money having been relagated to the dustbin of history (or so its opponents have hoped) by today's fiat currencies. The same with silver, which, unlike gold, is being used up at an ever-accelerating rate.

  Since all fiat currencies are doomed to go down in flames, however, the time is not too far off when precious metals will constitute a "Nash equilibrium" (think "A Beautiful Mind") whereby "an ideal financial strategy for everyone on Earth is to buy as much gold and silver as they can, as soon as possible" ( http://johnlaw.wordpress.com/2006/05/19/why-the-global-financial-system-is-about-to-collapse ).

  How much will these metals then sell for? Well, here's an anecdote from the Weimar Republic in the 1920s: An old woman is crossing the street with a wheelbarrow full of reichmarks in hopes of buying a loaf of bread. A thief accosts here . . . and steals the wheelbarrow.

• Published: November 28, 2006 8:08 AM

• David White

• Oops, I meant to say that the thief accosted the woman, dumped the reichmarks out on the street, and THEN stole the wheelbarrow.

  Get the point now?
  

• Published: November 28, 2006 9:18 AM

• Daniel M. Ryan

• Prof. Simon may have used the futures prices at the time of the bet as an indicator, but I know of no futures market that streched out ten years ahead - not even oil - as of 1980. I believe that the largest lead time of any futures market back then was only a few years.

• Published: November 28, 2006 10:34 AM

• ed

• To calculate the futures price is fairly easy, unless I am mistaken. In essense you take the price of gold at the present time and increase it by the 10 year risk free rate (10 yr US bond is the standard) As an example if P@ time0 = 800 and r = 6% then P @ time10 = $1430.

  This is why futures are ALWAYS higher that current prices. A good way to understand this is to think of the arbitrage that won't exist in todays market. P of gold today = $800 but the futures market says P next year is $900. Risk free on 1 year is 4%. If I have $900, what do I do - buy the ounce of gold or invest it and enter a futures contract? If I buy the gold today and hold it for a year, I have gold and $104. If I enter a futures I only have an ounce of gold plus $32 from my interest. Therefore the Futures on 1 year will be $832.

  Notice that today P = 638 and P at 5 months = $653 or a little above 5.5% very close to the going rate.

  Here's a link though the data changes daily.

  javascript:NewWindow('http://www.nymex.com/gol_fut_cso.aspx%

  The assumptions here are, no default risk and no lease rates on gold. This in fact is not the case as gold always has a lease rate. Todays 1 Yr is about 0.10% and a ten year could be assumed to be about the same. I don't know what the lease rates were 10 years ago but they were probably minimal relative to the risk free rate.

  Bottom line is that the 10 year futures back in 1980 would have to be double or triple the Price at 1980. Simon could not have hedged his bet but Ehrlich could have by going short gold on a futures contract (wins bet if P goes up, wins futures if P goes down)

  As an aside. Inflation hasn't been accounted for here. Assume the inflation rates are accurate (dubious I know). Since the bet had the commodities adjusted for inflation the bet was really a commentary on population using up the commodities faster than the market system replenishing them. The root of the bet is if you think we move more towards free/efficient markets or away from them at the specific moment in time. The former will result in more commodity output per $1 of capital input and thus falling prices after inflation.

  The decision to invest in gold or other commodities today is the same. If we are moving away from the free markets we have today then gold should rise above inflation rates. The other case for gold is an outright breakdown in the dollar. Normal inflation is not a case for gold as money can be invested at short term interest rates. You can argue those are incorrect today but thats a different bet altogether.....

• Published: November 28, 2006 11:17 AM

• ed

• I take it back Simon could have arbitraged the bet by going long the gold future. Gold goes up he wins the future and loses the bet (and vice versa). If they enter the futures market with each other then its a total wash and they are only out the trading costs.

• Published: November 28, 2006 11:22 AM

• Vince Daliessio

• David White said;

  "silver, which, unlike gold, is being used up at an ever-accelerating rate."

  Disagree slightly - the largest single market for consumption of silver is consumer photo, which is, in the west, collapsing in the face of digital photography.

• Published: November 28, 2006 10:33 PM

• M E Hoffer

• ed,

  with this: "This is why futures are ALWAYS higher that current prices."

  see: backwardization, contra to the supposition of 'always'

  + http://www.riskglossary.com/link/backwardation.htm

• Published: November 28, 2006 11:09 PM

• M E Hoffer

• Vince,

  you may care to enter: Silver, nanoparticle, filtration into your search parameters and see what you land.

  if that was interesting, swap 'filtration' for 'clothing' in the cycle.

  Many uses for Ag, as more of the world becomes relatively wealthier than they have been, more and more Ag will be consumed.

• Published: November 28, 2006 11:18 PM

• David White

• Vince & M E:

  Yes, my understanding (via Ted Butler, Jim Puplava, et al.) is that new industrial uses for silver are more than offsetting its reduced use in the photography industry.

  See, for example:

  http://www.goldsilverbullion.com/SilverBullMarket.htm

• Published: November 29, 2006 9:42 AM

• Vince Daliessio

• David said;

  "Yes, my understanding (via Ted Butler, Jim Puplava, et al.) is that new industrial uses for silver are more than offsetting its reduced use in the photography industry."

  We are looking at a chicken-egg phenomenon. Many of the new uses for silver are only economic because of the depression in price that followed the collapse of consumer photo, and the rise of digital imaging across all markets. For example, the antimicrobial properties of silver compounds are well established, yet they have been relegated to second-and-third-tier uses due to cost disadvantages. Recently there has been a resurgence in the marketing of these compounds, due solely to price.

• Published: November 29, 2006 12:51 PM

• M E Hoffer

• Vince,

  As you may know the 'price' of Ag has ~tripled since the turn of the Century.

  The "price sells cars"-phenomenon, you are driving, is non-existent.

  The greater marketplace acceptance of the example you site: antimicrobial properties of nanoparticle Ag, while, partially, due to lower price, that lower price has about from marked enhancement of manufacturing efficiency( of nanoparticle Ag) http://www.thefreedictionary.com/dichotomy

• Published: November 29, 2006 1:29 PM

• Marc De Mesel

• Great discussion!

  I have searched intensively to find someone comenting on Julian Simon in relation to the recent commodity price rises.

  Although I believe Julian Simon has the fundametals right and learned us a lot about how, in the long term commodity prices must and will continue to go down, it is quite clear by now that he seriously underestimated the duration of a possible rising commodity cycle.

  He was so certain that a 10 year bet would give lower commodity prices. However, if Ehrlich would have done the bet with Simon between 1993 and 1998, a 10 year bet he would have lost! Chromium, copper, nickel, tin and tungsten are all higher, REAL inflation adjusted compared to 10 years ago. The same is true for all energy related commodities.

  By agreeing to a bet that only lasted 10 years, he has proved today to have underestimated the possible duration of a rising commodity cycle as any 10 year bet he would have made between 1993 and 1998 he would have lost.

  Nonetheless, for all people investing in commodities, beware! This rising commodity cycle started due a shortage will end some day when oversupply hits the market. At that point Julian Simon will again have proved right:

  In the long term commodity prices will continue to go down. If a shortage crises occurs prices will rise. Thanks to rising prices the profit motive will engage people into creative solutions. When all is done we will come out of this crises better, with commodity prices thus lower, than the situation was before the crises occured.

  Long live Julian Simon, The Ultimate Resource

• Published: March 2, 2008 3:13 AM