Gold prices have soared over 400% during the latest multi-year run, and there’s now a heated debate as to whether or not gold is a bubble.
Thing is, even if gold is a ridiculous bubble, human nature can push bubble prices much, much higher.
400% is nothing…
Crazy fact: It required an Act of Parliament to authorise a new railway, but since so many politicians were railroad investors themselves, a whopping 272 Acts of Parliament were passed in 1846 alone allowing new start-ups.
How high it went: 100%
The beginning: In 1830, Britain opened the Liverpool and Manchester, the world's first modern inter-city railway system. In the mid-1840s, after suffering from a slowed economy, the Bank of England cut interest rates, which encouraged people to invest in new railways since bond yields were terrible. Sound familiar?
The Industrial Revolution had also created a ton of rich Brits and in 1825 the government repealed the Bubble Act which had been implemented after the South Sea Bubble. Oops. Railways were popping up everywhere, promoted as a foolproof venture.
The crash: You could say it all ended just as it started -- with the central bank. The Bank of England hiked interest rates, which suddenly made government bonds attractive again, especially in comparison to the host of far-fetched railways ventures looking increasingly tenuous.
Railway share prices plummeted and many of the new middle class lost their entire life's savings. Still, at least the UK had lots of spare track, and in fact many of the railway corridors created then are still around today.
Source: Global Financial Data, Inc.
Crazy fact: Miami's coast is still scarred by the remains of concrete pilings standing 5-10 feet out of the water, the remains of 1920s island-like housing projects never completed.
How high it went: 400%
How the bubble began: With its warm weather and economic prosperity, Florida became a top tourist and home investors destination in the 1920s. There was a good bit of positive publicity-- including a lighted billboard in New York's Times Square stating 'It's June in Miami'-- that sparked people's interest in the Sunshine State. Property prices rose based on speculation and development plans began.
How it crashed: But by January 1925, the press turned negative. Forbes magazine put out an article that warned Florida land prices were based on the expectation of finding a customer and not on any real land value. Would be investors began to consider the entire investment a sham and speculators began having trouble selling any realty. A few more things happened that contributed to specifically Miami's less than glamorous image, including the sinking of the Prinz Valdemar, a schooner that was to become a floating hotel. The railroads were raising shipping rates and the sea route to Miami had been blocked, which caused the cost of living to skyrocket. The 1926 Miami Hurricane first ripped through development projects, followed by the 1928 Okeechobee Hurricane, the 1929 Wall Street Crash and the Great Depression finally putting an end to the land boom.
Crazy fact: Some have estimated that when Tokyo real estate hit a peak of $1 million per square meter, the Imperial Palace in Tokyo became worth more than all of the real estate in California combined.
How high it went: 500%
The beginning: This should sound very, very familiar to readers.
Like many bubbles, Japan's started on the basis of excellent economic fundamentals -- the Yen was surging, helped by an amazing trade surplus , and an emerging banking system with a willingness to lend.
The crash: Obviously, as noted in the prices above -- $1 million/square meter -- things got insane, and in many cases, prime real estate settled at a price 99% below peak.
A BOJ white paper listed the following contributors to the bubble. See if they sound familiar:
- Aggressive behaviour of financial institutions
- Monetary easing
- Pro-real estate tax policy
- A concentration of business activity in Tokyo
Crazy fact: In 1999 while clubbing with his model girlfriend, founder Stephan Paternot was quoted by CNN saying, 'Got the girl. Got the money. Now I'm ready to live a disgusting, frivolous life.' The young CEO, who was sporting shiny leather pants and dancing on a table, became known as 'the CEO in plastic pants'.
How high it went: Up 606% on its first day of trading, which is the best 1-day IPO performance ever.
How the bubble began: Inspired by a basic chatroom on their school's computer, two Cornell students named Stephan Paternot and Todd Krizelman raised $15,000 to buy an Apple Internet Server and create a more advanced social site. TheGlobe.com still labels itself as one of the 'first social media websites'. Kind of like a Facebook way too early for its time.
TheGlobe.com went live on April Fools Day, 1995, and it had 44,000 visitors on its first day. Then in 1998 it IPO'd, opening at $9 and hit a peak of $97 mid-day before settling at $63.50. Paternot and Krizelman were worth close to $100 million each, eventually prompting the infamous Paternot quote above.
How it all came crashing down: As the Dot Com boom unravelled, theGlobe.com saw its share price drop to less than 10 cents, from a high of $97. Eventually the company was taken over by an early version of Skype, a company called GloPhone, and Paternot and Krizelman were forced out. To add insult to injury, GloPhone eventually failed and TheGlobe.com became merely a URL re-direct to the '.travel' domain name company Tralliance Corporation.
Even this ultimately that failed and today TheGlobe.com is a shell company with no material operations or assets.
Crazy fact: There was such ridiculous demand to invest in the South Sea Company -- a UK chartered company -- that it actually launched one venture with the description: For carrying-on an undertaking of great advantage but no-one to know what it is!! And yet people still snapped it up.
How high it went: 750%
The beginning: In 1720, the South Sea Company was granted an exclusive charter by the UK government to trade in the south seas. The company also underwrote the government's public debt, with a promise of 5% guaranteed interest. Investors went nuts for shares in the company. Shares surged 10x right off the bat, increasing from £100 to £1,000. And the company was only too happy to oblige the public, issuing more and more shares to meet the insatiable demand.
The crash: The company issued shares for many different ventures, all promising great riches. The most famous of being the one noted above. When it all came tumbling down, the executives were arrested, hundreds of members of the government saw their fortunes evaporate, and suicides became a regular event.
Crazy fact: The bubble was likely instigated by the flooding of a major Canadian mine which wasn't even producing any uranium yet.
How high it went: 1,844%
How the bubble began: In 2007, the price of uranium shot up exponentially after having risen for many years. One possible cause was the October 2006 flooding of the Cigar Lake Mine in Saskatchewan, which has the largest undeveloped source of uranium in the world. Another was the growing support for nuclear power as a solution for 'global warming'.
Also, according to the New York Times speaking with David Miller of Strathmore Minerals, 'nuclear plants had, until recently, been living off a huge uranium stockpile from the 1980's. That stockpile was created in anticipation of an onslaught of new U.S. nuclear plants that ended up never being built because of Jane Fonda political, regulatory, and public pressures.' After the stockpile was depleted, there as a search for new uranium.
Short-term supply concerns send the price of uranium to $300 per kilogram. Just in 2002 the price had been around $20. The stock prices of many uranium related companies soared in tandem and, of course, a flurry of uranium companies came to the market via IPOs, with tiny exploration companies such as Southern Uranium being over-subscribed or larger companies with uranium subsidiaries spinning off their uranium businesses as 'pure play' investment opportunities, capturing soaring prices in the process.
How it crashed: For all the hype, it takes a long time to build new nuclear power capacity. In addition, most nuclear power facilities have already secured their long-term supply needs. Thus when actual demand didn't meet expectations, and the Cigar Lake Mine flooding ended, uranium prices dropped to under $100 per kilogram. The sharp decrease in prices caused a whole host of exploration and mining companies to go out of business. It should be noted that the Cigar Lake Mine is now expected to begin production in 2011.
Source: Infomine (Image), Sharelynx
Crazy fact: According to Charles Mackay's famous book 'Extraordinary Popular Delusions and the Madness of Crowds', the following was the amount paid for one single tulip root: Two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns of beer, two tons of butter, one thousand lbs. of cheese, a complete bed, a suit of clothes, a silver drinking cup.
How high it went: 5,900%
The beginning: Though there are a few different accounts of 'Tulipomania' that affected 16th century Dutch markets, the Tulip Bubble is generally considered the first recorded bubble in history. The Ottoman Empire introduced tulip bulbs to the market in the mid-16th century. They became wildly popular in the Netherlands during the Dutch Golden Age because of their bright, vibrant colours and their ability to withstand the harsh cold. British journalist Mike Dash wrote, ''It is impossible to comprehend the tulip mania without understanding just how different tulips were from every other flower known to horticulturists in the 17th century. The colours they exhibited were more intense and more concentrated than those of ordinary plants.'' The number of tulip buyers increased, but the supply stagnated mostly due to a tulip's biology-- the flower takes seven years to grow from a seed.
The crash: Speculators entered the market in 1634, three years before the Tulip Bubble would burst. As the bulbs became more popular and expensive, traders began to sign contracts to purchase bulbs at the end of the season, creating likely one of the first known futures markets. The Dutch referred to this market as 'windhandel,' or 'wind trade' because no bulbs were actually being traded physically. Tulip mania saw its peak toward the end of 1636 and beginning of 1637 at an auction. The profits were to be given to seven orphans whose only asset was 70 tulips left by their father. The flowers sold for close to a total of 53,000 guilders. Soon after, someone refused to pay for the tulips he had bought at an auction, and the bubble burst.
Crazy fact: The geologist likely responsible for Bre-X's massively fraudulent gold claims mysteriously fell to his death from a helicopter, but his body was never properly identified. Is he still out there?
How high it went: 13,305%
The beginning: Bre-X Minerals goes down in history as one of the worst corporate frauds ever, and it happened in Canada. A man named David Walsh started Bre-X in 1989, but by 1993 him and his wife were declared bankrupt. Y
Yet in March 1993 Bre-X said it had purchased a site named Busang in the East Kalamantan province of Indonesia. Employing a man named Michael de Guzman to explore the site, in March of 1994 Bre-X reported that it had found a spectacular gold deposit, which by October of 1995 was said to hold 30 million ounces of gold. Then in October 1996 Indonesia's Mines and Energy department upgraded the find to 40 million ounces. Jackpot!
Bre-X shares exploded, breaking above $200 each, before they were then split 10-for-1 in May 1996. Analysts from the U.S. went to check out the site, even though an unfortunate fire on January 23rd 1997 destroyed many records at Bre-X's Indonesia facility. Regardless, gold estimates continued to rise. Bre-X's find was upgraded to 71 million ounces, and then the company announced some truly unbelievable news in February of 1997 -- the site actually had 200 million ounces of gold!
The big boys couldn't resist. Barrick Gold teamed up with the governing Suharto family and tried to get a piece, though it was Freeport McMoran who instead won a stake with the help of a Suharto associate, along with local Indonesian companies.
The crash: Then it happened. Michael de Guzman, the geologist responsible for exploring the site, mysteriously fell to his death from a helicopter while on his way to the Busang site. His body was however found extensively decomposed and with a questionable dental match. Soon after, Bre-X shares were suspended after a Freeport report found that tests of the site only found traces of gold. It was suspected that even these traces were caused by alluvial gold from a nearby river being added to samples. The moment Bre-X shares began trading again, they immediately lost $2 billion of market value. Boom.
On June 4th, 1998, the man behind Bre-X David Walsh died of a major heart attack in the Bahamas. 'I am not a geologist' he swore in May 15th 1998 affidavit. He was suspected of having made $45 million trading in the shares of Bre-X.
Source: Futuro Financial Services
Crazy fact: As the Jatukam craze got bigger and bigger, some extremely creative versions of the amulet emerged such as one that was supposedly blessed by a monk while being flown in a fighter jet. I, the author, was also there to witness the frenzy and had blinged-out colleagues walking around my office.
How high it went: An estimated 15,000%
The beginning: It all started when Thailand's Police Major General Phantarak Rajadej died in 2006. He died at the advanced age of 103 and had been a man long believed to possess mystical powers. He was famous for having solved a tough murder case supposedly via the guidance of a god named Jatukam Rammathep, 20 years before his death.
Thus somehow, even though the first Jatukam amulet was made back in 1987, it was his death which sparked one of the most peculiar asset price bubbles the world has seen in recent history -- the Jatukam craze. When the police general's body was cremated, tens of thousands of people flocked to the location just to get their hands on one of the blessed Jatukam amulets distributed there, apparently motivated by the reputation of Mr. Rajadej's powers and the auspicious occasion of his burning.
Right after, the craze took off, with the city of Nakohn Si Thammarat, the location of a holy site built by the police general, becoming the centre of a booming Jatukam trade. The first Jatukam amulets cost just 39 Thai baht, which is about $1.30, and each one looks like an over-sized piece of vaguely hindu/buddhist bling that you wear around your neck.
The true hardcore believers would wear multiple amulets kind of like a Thai Mr. T. The amulets came in all different types, were blessed by monks, and most promised to bring their wearers' enormous wealth based on their magical powers with names such as Super Rich to the Heavens and Eternally Wealthy.
Thing is, even though the magical amulets were being created by Thai monks, they had no basis in either Buddhism or Hinduism as Thailand's Nation newspaper has explained:
'The talisman features a divine being called Jatukam Ramathep, unknown in Buddhist or Hindu sacred literature. He seems to be the invention of a confused imagination, and most intelligent commentators condemn this new cult as indicating a corruption of both Buddhist morality and Thai animistic spirituality.'
Regardless, prices sky-rocketed for the amulets, partly due to Thais uncertainty about the future. They had just experienced a military coup and economic slow-down which, according to the Wall Street Journal, made many Thais seek spiritual and financial support from these mystical amulets. Amulet culture runs deep in Thailand, with some believing that certain amulets will protect the from bullets or disease, but nothing like the Jatukam craze had been seen before. Prices ranged from $10 upwards, with thousand-dollar amulets common and at one point an amulet selling for $75,000 at the peak. These amulets evolved into a multi-billion dollar industry whereby the revenue department began to consider a Jatukam tax and Seven Eleven was selling the amulets as well.
The crash: Oddly enough, at some point logic set it. There were just too many people producing the amulets and suspicions grew that many hadn't been blessed properly by Buddhist monks. Some also probably wondered why they hadn't become extraordinarily rich yet wearing five amulets a day. Many unfortunate Thais were left with huge debts especially when amulet dealers they left deposits with went bust or disappeared.
Even the authorities were asked to intervene:
Ms. Saranya's husband wants talisman experts to try to rescue the market by talking up the magical properties of the amulets to attract yet more buyers. 'Governments bail out banks when they get in trouble,' he says. 'The talisman experts should do something to restore people's faith.' The experts are reluctant. 'Too many people got too greedy. They were producing and buying talismans purely to make a speculative profit,' says Wiwat Nilnawee, a Bangkok-based amulet trader and national authority on talismans. 'Better the market finds its true level.'
Amulet prices utterly collapsed, and we can only estimate that prices went up as high as 15,000% at the peak based on anecdotal prices. The $75,000 peak price for a special amulet vs. the $1.30 price for basic amulets at the beginning says that some prices might have inflated even more than this.
Crazy fact: When miner Poseidon's share price shot from $0.50 to $35 on reports of a tiny nickel sample, the London Times warned its readers, 'In sober fact, all the company has to offer in support of this is a hole in the ground.' Nobody cared, and the shares were bid up to $280 thereafter.
How high it went: 34,900%
The beginning: There was a surge in the demand for nickel during the Vietnam War as the United States began to build more sophisticated weaponry that required nickel-hardened steel. But when the workers of Inco, a major Canadian supplier of nickel, went on strike, there was a worldwide shortage of nickel and the price of the increasingly valuable mineral grew.
Conveniently, Ken Shirley, a prospector for Poseidon-- a tiny Australian mining company-- found some promising nickel sources in Western Australia during September of 1969. Drilling on a 1,100 piece of leased desolate land, Poseidon announced assays of 3.5% nickel. rumours about Poseidon's nickel find began to spread like wildfire as more speculators entered the market and the stock shot up as described above.
The crash: Once the Poseidon stock became too pricey, investors turned to other nickel and mining stocks. realising the opportunity, new companies--some without mining leases or any viable mines--listed their stocks and investors continued to pour money in. But once people realised these investments were worthless, it created bad press and mining stock prices began to fall.
To make matters worse, when Poseidon actually started producing the nickel (This nickel craze happened before Poseidon had ever produced anything!) they found it was a lower grade than originally thought, so extraction costs were higher. Money was lost by all.
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