Is Gold a Bubble?

[bodidley]

You've probably seen commercials on tv encouraging you to invest in gold because it is like investing in a stable currency and will offset inflation. Some people even advocate going back to a gold standard or investing all of your money in gold because paper currency will soon turn into monopoly money.

Some analysts say gold is a bubble, some no.

Here are some sources saying it's bubblicious:

http://www.forbes.com/sites/feeonlyplan ... le-or-not/
http://www.bloomberg.com/news/2011-08-1 ... ys-1-.html
http://www.cnbc.com/id/44251472/Dennis_ ... s_Bursting

Here's one that says no way Jose:

http://www.businessinsider.com/is-gold- ... not-2011-8

You can check the index yourself here:

http://goldprice.org/

Personally I think gold has all the tell-tale signs of a bubble. Prices have skyrocketed in the past ten years and the investor mentality is that it's a fool-proof investment that will always rise, much like real estate. Speculation is definitely rampant. The problem is that gold is marketed as a currency or a back-up to currency but it is NOT traded as a currency, but rather as a commodity. If world currencies go into hyper inflation I don't think owning stock in gold will help a whit because currencies aren't tied to gold. Maybe if we go into an apocalypse scenario and you have a vault full of gold and jewels, then yes, but in that case I think owning lead would be more valuable than gold.

[WeiWenDi]

My sig says it all.

Here is the full quote from St Sir Thomas More's Utopia:

So that it is plain they must prefer iron either to gold or silver; for men can no more live without iron than without fire or water, but nature has marked out no use for the other metals, so essential as not easily to be dispensed with. The folly of men has enhanced the value of gold and silver, because of their scarcity. Whereas, on the contrary, it is their opinion that nature, as an indulgent parent, has freely given us all the best things in great abundance, such as water and earth, but has laid up and hid from us the things that are vain and useless.

For a more thoroughgoing opinion, I would actually recommend reading John Médaille's book Toward a Truly Free Market, which I believe has as sound a theory of money as you're ever likely to find in any economics text. Because money is itself a measure of value for commodities, treating it itself as a commodity - no matter whether it is made from gold or paper - is not sound policy. In order for a market to be healthy, the money supply needs to match the productive capacity of the body amongst whom it is used. Deliberately using goods as money whose scarcity prevents them from matching productive capacity will lead to disastrous 'price' distortions, just as surely as using a good with no restraints on scarcity whatever.

[Ratzalot]

It can be, but not at the moment. It might be a bubble when the central banks stop printing/digitally creating obscene amounts of fiat. The global economic crisis is only in its adolescent stages, so gold and silver have an excellent path ahead of them. The recent down-turn in gold and silver can be attributed to liquidity issues. A necessity to increase liquidity in Dollars sparked a sell-off of gold and silver holdings. Those firms had to do whatever necessary to stay afloat. Additionally, the Dollar's value is rising against the Euro, causing a drop in gold and silver prices against the Dollar. This is only a temporary deflationary effect as the Dollar itself will come tumbling down should the U.S. and global economy/monetary policy maintain its present course. I could also go into the topics of gold and silver price manipulations by governments and central banks as well as ever-changing inflation calculations.

Although the value of gold and silver are a perception of worth (as WWD has alluded), man has deemed them money for thousands of years. Under Thomas More's thinking, things such as water, land, and iron should be valued highest. Obviously that isn't the world we live in, except for maybe land. Although the housing market collapsed, land is still very much intact. You can create houses, but (in general) you really can't create more land. The intrinsic value of gold and silver is much greater than the intrinsic value of cotton paper. Keep in mind that central banks store gold in their vaults. You also can't create more gold or silver as they are star metals.

All in all, I like gold and silver even now at its higher prices. The recent price drop was nothing more than an opportunity for me to acquire more at lower prices. There may come a time to exit the monetary metals, but I don't believe that time will come for a while. As I've pointed out here previously, I also recommend a strong portfolio in brass and lead as well as barreled instruments to properly utilize said brass and lead.

[James]

It can be, but not at the moment. It might be a bubble when the central banks stop printing/digitally creating obscene amounts of fiat.

I would be inclined to disagree. Gold has increased in price disproportionately to historic trends and other precious metals or commodities. It seems to be associated as much with propaganda and marketing campaigns as for any other practical reason. Some considerable increase is to be expected as we are in a recession, but what we see today can hardly be described as practical, or expected to any extent. Add to that the fact that the bottom can (and has) fallen out of gold, and I think it is safe to describe it as a bubble in ways.

[bodidley]

It can be, but not at the moment. It might be a bubble when the central banks stop printing/digitally creating obscene amounts of fiat. The global economic crisis is only in its adolescent stages, so gold and silver have an excellent path ahead of them. The recent down-turn in gold and silver can be attributed to liquidity issues.

Actually right now the banks aren't printing huge amounts of money because A. We are paying for government expenses with debt, rather than by printing new money B. the debt exitst in the form of treasury securities, so the amount of currency put into circulation is a zero-sum game. C. The cash money doesn't actually exist, money only exists because we agree it exists. If you've got $30k in the bank that cash doesn't exist anywhere. The Fed. only prints enough money for general use in circulation. When the money becomes unusable it's destroyed. Look in your wallet and see how many dollar bills you have from the 1970s. Probably none, right? Inflation isn't as bad right now as it was in the 70s 80s and 90s.

You make a very good point about liquidity issues. When investors suddenly decide they need cash, they'll sell their gold stocks and bonds, and the price will quickly deflate and cause a panic. Gold does has some stability oweing to the fact that it doesn't deteriorate, and illicit trades many times must be made in commodities rather than through banks. Organized crime and rogue states like many sub-Saharan military movements, N. Korea, Iran or formerly Qaddafi's Libya, or even western nations funding clandestine operations are ally gold or diamond buyers. Of course land doesn't disappear either and it can bubble as well.

Although the value of gold and silver are a perception of worth (as WWD has alluded), man has deemed them money for thousands of years. Under Thomas More's thinking, things such as water, land, and iron should be valued highest. Obviously that isn't the world we live in, except for maybe land.

It isn't the world we live in where gold is a currency! It isn't even traded on the currency market it's a commodity and has to be sold as such in exchange for currency. We can't go back to the gold standard because the net wealth of the U.S. is about 58 trillion and the U.S. only has 595.68 billion in gold at current prices. If you want the currency to devalue by 99% overnight gold standard is a good idea.

You also can't create more gold or silver as they are star metals.

Not true. People are mining more gold all the time and adding gold to the market. Gold prices weren't even stable when it was used as currency. In 1492 gold to silver prices were about 1 to 16, after the Spanish conquest of the New World and the wars of religion new gold going on the market devalued gold to 1 to 4 in relation to silver. It's one reason the Spanish Empire went bankrupt and lost power in Europe.

[Ratzalot]

I would be inclined to disagree. Gold has increased in price disproportionately to historic trends and other precious metals or commodities. It seems to be associated as much with propaganda and marketing campaigns as for any other practical reason. Some considerable increase is to be expected as we are in a recession, but what we see today can hardly be described as practical, or expected to any extent. Add to that the fact that the bottom can (and has) fallen out of gold, and I think it is safe to describe it as a bubble in ways.

There was a rather direct correlation between the price of gold and QE1/QE2.

Add to that the fact that the bottom can (and has) fallen out of gold, and I think it is safe to describe it as a bubble in ways.

When did the bottom fall out of gold? I wasn't aware of this. Regardless, we'll have to wait and see. I follow the major technical trend lines for gold as well as the fundamentals. Depending on the chart you want to consider, there are trend lines calling for further declines in gold prices, stabilization in prices, and increases in prices for the near future. The current trend line shows a channel for gold between $1550 and $1580. The price of gold entered this trend line recently and has been stable, steadily increasing above the $1600 level. Other moving average charts indicate a decline into the $1450 area or a major correction back to $1100. Regardless of corrections, these charts indicate possible bottoms clearing the path for new highs in gold prices.

[James]

There was a rather direct correlation between the price of gold and QE1/QE2.

A connection which explains its pricing in full? In addition to the other issues I suggested?
I'm not biting on that one. Care to elaborate?

When did the bottom fall out of gold?

Last time what I would consider to be a gold bubble popped was in the 1980s.
It should still show up clearly on the various 30-year gold price histories.

I wasn't aware of this. Regardless, we'll have to wait and see. I follow the major technical trend lines for gold as well as the fundamentals. Depending on the chart you want to consider, there are trend lines calling for further declines in gold prices, stabilization in prices, and increases in prices for the near future.

This is the problem. The price assigned to gold is about as market driven as most other things. In fact, I think the biggest problem facing gold pricing today is presented by the internet and improved communication. Tell enough people that they need to buy gold because 'it is going to double in price', or 'because it will save us when the economy collapses' and people will start to buy more and more gold, and gold will start to grow in price disproportionately to other commodities which once held standard. We're seeing this today. Will the 'bottom fall out'? I expect it will someday, but who knows, maybe today's hype will create tomorrow's standard price. I don't believe we'll see a bottoming out like we've seen in history for reasons similar to the above.

[Ratzalot]

Actually right now the banks aren't printing huge amounts of money because A. We are paying for government expenses with debt, rather than by printing new money B. the debt exitst in the form of treasury securities, so the amount of currency put into circulation is a zero-sum game. C. The cash money doesn't actually exist, money only exists because we agree it exists. If you've got $30k in the bank that cash doesn't exist anywhere. The Fed. only prints enough money for general use in circulation. When the money becomes unusable it's destroyed. Look in your wallet and see how many dollar bills you have from the 1970s. Probably none, right? Inflation isn't as bad right now as it was in the 70s 80s and 90s.

We can call it semantics, but Quantitative Easing 1 & 2 served the same purpose. Additionally, currency is printed as well as created in cyber space. Those digital zeros are literally worth nothing intrinsically. The recent audit of the Federal Reserve found $16 Trillion in secret international bailouts. It's easy for the Federal Reserve to keep the world's bad banks afloat when they can create infinite amounts of money and shroud it's distribution in secrecy. Just take a look at some U.S. monetary base charts to clearly see the insanity. As for inflation, it depends on which iteration of which index you want to believe. If you use an older, more honest index, inflation is closer to 10-30% annually recently. I completely agree with your statement "money only exists because we agree it exists". I prefer to believe gold and silver are the closest thing to "real" money as evidenced by thousands of years of such practice. I don't trust the Great Keynesian Experiment happening in our world right now. I prefer holding a majority of my "liquidity" in gold and silver rather than fiat currency, especially with interest rates failing to keep up with inflation. I can hedge myself against the counterparty risk keeping some cash on hand as well as holding physical gold and silver.

It isn't the world we live in where gold is a currency! It isn't even traded on the currency market it's a commodity and has to be sold as such in exchange for currency. We can't go back to the gold standard because the net wealth of the U.S. is about 58 trillion and the U.S. only has 595.68 billion in gold at current prices. If you want the currency to devalue by 99% overnight gold standard is a good idea.

There are gold and silver coins minted in the United States meant to serve as bullion but are legal tender. The face value of a Silver American Eagle coin is one dollar. The face value of a (1 oz) Gold American Eagle/Buffalo is $50. I'd be more than happy to take any of these off your hands for face value. Gold and silver are no longer everyday currency because the metals got too expensive. Keep in mind the U.S. was on a gold standard until 1971 and central banks still hold gold in their vaults. If you believe Ben Bernanke that it's "tradition" central banks hold gold rather than gold being "money", we're going to have to disagree fundamentally. I believe gold and silver ARE money and fiat currency is nothing more than a trust system forced upon the people. I don't agree a gold standard would devalue a currency; instead it would be deflationary. I would have no problem with a dollar being able to purchase what 45 Dollars would purchase today. Sure, the amount of currency people held would be reduced, but the purchasing power of their reduced currency would increase.

Not true. People are mining more gold all the time and adding gold to the market. Gold prices weren't even stable when it was used as currency. In 1492 gold to silver prices were about 1 to 16, after the Spanish conquest of the New World and the wars of religion new gold going on the market devalued gold to 1 to 4 in relation to silver. It's one reason the Spanish Empire went bankrupt and lost power in Europe.

Perhaps I wasn't specific, but mining the Earth's gold supply is not the same as creating more gold. Gold, silver, platinum, etc. are believed to be distributed to celestial bodies via super nova. These metals will not naturally form on Earth, thus the current supply on/in Earth is all we'll ever have (unless we mine another celestial body or a gold space rock impacts Earth). The believed amount of gold in/on Earth has already been taken into account. One of the biggest concerns is for miners keeping up with demand. Gold/silver extraction is becoming increasingly difficult, even with advanced technologies as quality ground supplies diminish. Although gold and silver never really disappear, their consumption in electronics effectively removes that gold and silver from the global supply. Some companies are trying to buy old, used cell phones and such to capitalize on their gold/silver contents, but it's hardly a large enough industry to make a significant impact. For those speculating on silver, the big belief is there will be a major silver shortage by 2020. Global silver supplies are diminishing at an alarming rate. Silver mining activities aren't even close to being able to keep up with the recent annual trends. If/when this shortage comes, we'll see a true supply/demand concept in addition to it's supply/demand as a long-time traditional store of value. Unless we come up with a good technology to extract molten gold and silver from the Earth's core, I believe gold and silver will continue to rise steadily and eventually skyrocket beyond anything we can imagine.

[Ratzalot]

A connection which explains its pricing in full? In addition to the other issues I suggested? I'm not biting on that one. Care to elaborate?

Obviously there are near infinite market factors to account for, with some having more weight than others. This is why I don't contest a possible correction of gold down to the $1100 trend line. The chart below suggests gold is about where it belongs with room to rise.



If you believe the global sovereign debt crisis is under control, don't invest in precious metals. If you believe the global sovereign debt crisis is out of control, give precious metals a consideration.

[WeiWenDi]

I prefer to believe gold and silver are the closest thing to "real" money as evidenced by thousands of years of such practice.

That is wishful thinking. Perhaps you've never heard of Emperor Musa I of Mali, whose extravagant pilgrimage across North Africa to Mecca caused a catastrophic devaluation in gold, which the Emperor could only correct by borrowing all of the gold he could as he passed through Cairo at great personal expense. Gold as currency has historically proven as illusory and as un-'real' as any other form of currency humankind has yet come up with.

Unless we come up with a good technology to extract molten gold and silver from the Earth's core, I believe gold and silver will continue to rise steadily and eventually skyrocket beyond anything we can imagine.

We already have the technology to create gold artificially, Rutherfordian transmutation. It is quite costly... for now. But the high demand for new energy technologies makes it inevitable that the potential 'cost' of creating gold from mercury will decrease; if this is matched by a rise in the 'price' of gold to the proportions you describe, transmutation could become an economically viable way of inflating the gold supply.

At the end of the day, fetishising gold as 'real' currency is foolishness, and a good way to bring down the divine wrath (though the plague that comes of such idolatry is likely to be that of revolution - not one I want to see happen, either).