Is Gold – Or Fiat Currency – In a Bubble?

It is easy to argue that gold is in a
bubble. But as I pointed
last month:

Deutsche Bank’s head
commodities researcher [Michael Lewis] wrote
in September:

Gold prices would need to surpass
USD 1,455/oz to be considered extreme in real terms and hit USD
2,000/oz to represent a bubble.

Lewis lists as
factors driving gold higher:

* A collapse in the
US dollar * Low or negative real interest rates * Skitish global
equity markets * Coordinated [as opposed to disorderly] central
bank gold sales * Producer dehedging * New gold investment vehicles
* Falling mine production and rising costs * Terrorism &
rising geopolitical risk

Bloomberg notes:

Myles Zyblock, chief institutional strategist at
RBC Capital Markets, said last month gold may soar to $3,800 within
three years as it follows the pattern of previous “investment

Barron’s points

Louise Yamada, the eminent
technical analyst who for many years worked at the various firms
that have coalesced into Citigroup and now presides over LY
Advisors, last week remarked in a client note that gold—based on
its current trajectory—most likely wouldn’t represent a true bubble
unless and until it gets to $5,200 an ounce (from its $1,317.80
December-contract close on Friday) within a couple of

University of Michigan economics professor
Mark J. Perry noted
in July that inflation-adjusted gold prices are lower now than in
1980: gold.jpg

Adjusted for inflation, the price of gold today
is 41.5% below the January 1980 peak of more than $2,000 per ounce
(in 2010 dollars).

Frank Holmes, the CEO of US
Global Investors said

“If you take a look at previous
cycles, super cycles, we’re far from it,” he said. “If gold were to
go to 1980 prices like most commodities have gone to, gold would be
over $2 300/oz,” Holmes commented.

WJB Capital
Group’s John Roque pointed out in May that the current gold bubble
is still
much smaller
than the bubble in the 1970s when priced
against the S&P. MSN’s Money Central noted
last month:

Brett Arends, a columnist for The
Wall Street Journal and MarketWatch, estimated that “individuals
bought $5.4 billion worth of gold, and sold about $2.7 billion,
(so) their total net investment comes to $2.7 billion” in 2010,
through early summer. Arends contrasted that with the $155 billion
they shoveled into bond funds through July. That
may be the real bubble. Arends also concluded that “if
it continues along the same trajectory (of past bull markets) — a
big if — gold today is only where the Nasdaq was in 1998 and
housing in 2003.”

In May, Arends wrote
in the Wall Street Journal:

Before we assume the
gold bubble has hit its peak, let’s see how it compares with the
last two bubbles—the tech mania of the 1990s and the housing bubble
that peaked in 2005-06. The chart is below, and it’s both an
eye-opener and a spine-tingler. [ROI_100524] It compares the
rise in gold today with the rise of the Nasdaq in the 1990s and the
Dow Jones index of home-building stocks in the 10 years leading up
to 2005-06. They look uncannily similar to me. So far gold has
followed the same path as the previous two bubbles. And if it
continues along the same trajectory—a big if—gold today is only
where the Nasdaq was in 1998 and housing in 2003. In other words,
just before those markets went into orbit.

Durden notes:

[JP Morgan’s] Michael Cembalest indicat[es] that
ownership of gold in dilutable terms (aka dollars), as a portion of
global financial assets has declined from 17% in 1982 to just 4% in
2009. And even though the price of gold has double in the time
period, as has the amount of investible gold, the massive expansion
in all other dollar-denominated assets has drowned out the true
worth of gold. Were gold to have kept a constant
proportion-to-financial asset ratio over the years, the price of
gold would have to be well over $5,000/ounce.

(Durden points out that when derivatives are
factored in, the percentages are even more dramatic). Aden Forecast
argued in
its November 12th forecast:

Debt is in a mega
trend. Eventually, the magnitude of the situation and its
repercussions will become more obvious. That’s also why the U.S.
dollar will continue to fall because more spending and money
creation makes the dollar worth less, and gold will keep rising
because it is real money. This is one main reason why they’re in
mega trends too. *** We clearly believe that gold and silver are
far from being in a bubble…. The value of the whole monetary
system is under question and until this very issue is resolved,
gold and silver will prevail.

As I noted
last year:

Nouriel Roubini quotes
a report from Merill Lynch as follows:

As for
all the talk of a ‘gold bubble,’ it would take a nearly 625% surge
in gold to over US$6,000/oz and a flat stock market to actually get
the ratio of the two asset classes back to where it was three
decades ago when bullion was in an unsustainable bubble phase.”

Merryn Somerset Webb argued
in May:

You probably think gold is in a bubble.
After all, it hit new highs in dollars, pounds and euros this week
– and has pretty much quintupled since its lows of 2001. *** But
look at the actual price of gold and it is hard to see real
evidence of a bubble. Gold may have hit new highs in nominal terms,
but it hasn’t come close to hitting its old highs in real terms.
Adjust the 1980 high of $850 for US inflation and you get a price
of around $2,400 – a level only the most bullish are predicting
even now. Then look to the last few years. The bears would have you
believe that the gold price has somehow gone “parabolic”. But, in
fact, the price in US dollars has only risen around 25% in the last
two years.

Marc Faber said
in September:

Given all the unfunded liabilities
and the money printing in the world and the size of the financial
assets in the world, I don’t think we are in a

(although he warned their could be
massive short-term corrections.) Also in September, James Dines

This currency bubble is the largest bubble of
all time in history. It is the mother of all

If you don’t have
gold… are going to be scre@%d.

The same
month, Jim Willie claimed:

Calls of a gold bubble are shallow moronic
pontifications, since the sanctioned asset bubble is the mammoth US
Treasury variety. It is the last bubble before systemic failure. .
. . The Gold bull will continue as long as the cost of money is
negative. Investors flee the conventional paper vehicles like
stocks, bonds, and housing since the system is failing and paper
money in which values are denominated is fast becoming meaningless.

In September, even Alan Greenspan was singing
from the same hymn sheet
, saying that “fiat money has no
place to go but gold. In November, Bremer Landesbank chief analyst
Folker Hellmeyer argued:

Gold is not in a bubble, silver is not in a
bubble, precious metals are in general terms not in a bubble. ***
If there is a bubble, it’s in Triple A-rated Treasury papers,
whether from Germany or United States. Precious metals are in
demand for very simple reasons: We have an inflexible supply due to
a lack of exploration and we have an increasing demand due to
various factors. One factor is definitely the debasement of the
U.S. dollar. The second aspect is that the global wealth is
increasing quickly, in particular in the emerging-market countries.
Five billion of the world population are having higher living
standards and thus are consuming more precious metals. Thirdly, and
that is very important: smart central banks start to accumulate
gold rather than accumulate printed paper from the United States.

Peter Boockvar writes
this week:

According to, the
definition of a speculative bubble is “a temporary market condition
created through excessive buying and an unfounded run up in prices
occurs.” If there is one asset that commonly gets described as
being in a bubble, its gold but let’s look at its move over the
past 10 yrs in perspective compared to other “bubble’s.” Gold at
$1400 is up 450% from the Aug ’99 low. From 1982 to 2000, the
NASDAQ rose 3000% and the DJIA rose 1400%. From 1978 to 1989, the
Nikkei rose 700%. From July ’98 to the high in July ’08, crude oil
rose 1245%. From its low in Nov ’01, copper has risen 605%. I’m not
calling a bubble in Apple but its up by 4850% since 2003 for the
obvious reasons. Thus, just because an asset is higher and has done
well for years doesn’t mean its a bubble, YET, and this gold rally
which I’ve been bullish on for many years, still has room to

And Expected Returns argues:

Gold is not the inflation hedge most people
think it is. Here is a data point that will give you some
perspective. In 1869, gold traded at $162; in 1969, it traded at
$35. How gold hedged inflation in any way over this period of a
century is lost on me. It is a fact that stocks and real estate
more closely tracked the rate of inflation. Price movements in gold
resemble price movements in stocks. Intense bear markets are
followed by spectacular bull markets, which culminate in a spike
move fueled by human emotion. The same 100% moves in real estate
that would signal a bubble of massive proportions are normal moves
in gold. While the price movement of gold in absolute
terms is important, the price movement of gold expressed in
relation to
is even more important
. A 100% rise in 5 years means
nothing, although a 100% move in 2 months means everything.
Everyone invested in gold should be more focused on time. Each
asset class moves to its own rhythm. To say that gold is a bubble
merely because it has risen 6x is just plain ignorant. Gold has
always shown that it is an asset that lies dormant for decades,
only to experience the biggest moves in the shortest amount of
time. There is no reason for me to believe that “this time is
different.” Gold has yet to do anything but trend upwards in a
classic bull market formation. If and when the trajectory of the
rise steepens, that will be the time to start thinking about
getting out.

For extensive background
information regarding gold, see this.
Note: I am not an investment adviser and this should not be taken
as investment advice. _M9tdV7dejE
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for iPhone

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