Skyscrapers and gold

Skyscrapers and business cycles

A popular, if not scientifically rigorous, indicator of credit bubbles is the ‘Skyscraper Index.’ It traces a link between booms fueled by easy credit; the skyscrapers being built towards the end of the boom; and the ensuing market crash. Thus we can see a link in the beginning of the construction of the Empire State Building in 1929, and the October crash of that year that signaled the beginning of the Great Depression. By the time the building was completed in 1931, the United States was in the middle of its crisis.

Other examples are:

• The 1971 World Trade Center twin towers and the 1973 Sears Tower (now known as the Willis Tower), during the 1970s ‘stagflation’ recession;
• The Petronas Towers in Malaysia, completed in 1998, during the Asian financial crisis; and
• The Burj Khalifa in Dubai, completed in 2009, just soon after the current economic crisis kicked in.

Skyscrapers and the gold price

What about skyscrapers and gold? In this article, we will be using the US Dollar as currency in analyzing gold’s relation to the various record-high skyscrapers in the world, as it remains the world reserve currency.

We can start from 1971, at the time when the dollar stopped being pegged to gold. Before this, gold had a fixed price of US$35 per ounce from WWII to 1971, even when the supply of dollars was no longer tied to gold. Even with the Great Depression, the gold price rose, from US$20/oz. during the ‘roaring 20s,’ to its Bretton-Woods price of US$35/oz. This is in spite of Americans being prohibited from owning gold from 1933 to 1974.

1970s recession

When the World Trade Center towers were completed in 1971, gold’s average price was at US$40.8/oz. By 1972, it had gone up to US$58.16/oz. The year later, it jumped to $97.32. In 1974, when the Sears Tower came along, the price was at US$159.26/oz., before stabilizing a bit with a correction to US$124.84/oz. in 1976. Gold ended the decade with an average price of US$612.56 in 1980.

The Asian storm

The 1998 Asian Crisis is more difficult for grasping the skyscraper-gold price relation. From a 1997 price of US$331.02/oz. and a 1998 price of US$294.24, the price went down further to US$278.98 the following year, as markets began recovering somewhat. It seems that the Petronas’ relevance to our discussion is in question.

How explain this drop in prices in spite of the financial crisis? First of all, we have to look at world conditions. During the 1990s, the US economy was at its most stable in decades. Of course, this is not to say that the policies of then-Federal Reserve chairman Alan Greenspan did not help feed the internet bubble of the late 1990s and the housing bubble of the 2000s, but the effects of these were not obvious at the time the Asian crisis raged. The difference the crisis today and in 1998 was that today, there is not even a semblance of a dependable lender of last resort in the European Central Bank, or the Federal Reserve.

Gold’s ensuing rise

Besides, gold’s rise just several years after the Asian crisis is every bit as phenomenal as that in the 1970s. Gold started picking up steam in 2003, averaging at US$363.38, up from US$309.73 in 2002. The gold price flirted with US$2,000/oz. just last year, after which it has since adjusted to its present US$1,700 level (as of Nov. 8, 2012).

Conclusion: What links skyscrapers and gold?

Although we can see a relation between skyscrapers and gold prices, the causality involved could not be ascertained so casually. It would be careless to suppose skyscrapers caused gold prices to go up, or for the latter to bring about the former. We would have to look for a cause of both phenomena, and this cause is currency inflation, as manifest in credit expansion or money printing. Such a policy leads to the unsustainable productive activities that also make people bid higher to acquire commodity money, specifically, gold.

When analyzing these figures and phenomena, one must be mindful of the time factor. Just because a bust inevitably follows a boom does not mean the precise date of the bust can be predicted. And just because a rise in asset prices, including gold, follows loose monetary policy, does not mean the price increases will happen within a foreseen period.

Judging by a list of record-setting skyscrapers already under construction (as of Nov. 8, 2012), what do you think can be expected to happen with gold prices?