Saturday, July 30, 2011

Is Gold in a Bubble?

I have mentioned this before, but I thought I would share some more thoughts on this subject.  Gold is at an all-time nominal high.  As of this writing, it is near $1,630 an ounce.

There are some who are saying that gold is a bubble that will pop.  They are trying to say that gold right now is like real estate was in 2005 or 2006, or like technology stocks were in 1999.

While gold has made a consistent run for the last 10 years, I do not think it is in a bubble.  I think this may be the case in the future, but we are not there yet.  I am not making any predictions on how high gold will go, but I think a more reasonable analogy is to say that gold right now is like real estate in 2002 or technology stocks in 1997.  Again, this is not a prediction that gold will peak in 2 years.  It is a prediction that gold will go higher.

During a mania or bubble, people are trying to buy.  Because there are so many interested buyers, it drives the price higher.  When people expect higher prices in the future, nearly everyone wants to buy in the hopes of selling later on for a profit.  In 2005, you didn't see a lot of recommendations for selling houses.  Most of the stories in the press talked about buying houses as an investment.

I do not see the same situation for gold yet.  There is a lot more advertising than in the past.  In fact, if you listen to conservative talk radio or if you watch some of the cable news channels, you may hear advertising for gold.  These ads are telling you that you should have gold as part of your portfolio.  I have to admit that these ads have become far more common than they were just 5 years ago.

At the same time though, there seem to be just as many ads telling people to sell gold.  I have heard commercials on the radio saying that gold is at an all-time high and that now is a great time to sell.  There are also ads telling people to take their jewelry and scrap gold and mail it in.  In return, they will send you a check based on the weight of the gold.  This does not sound like a bubble.

There is still a very small minority of the population who own gold, outside of small amounts of jewelry. It is becoming a little more common for investors to put a small portion in their portfolios, but even here it is still a minority of investors.  Again, this does not sound like a mania to me.

Gold has gone up in the last 10 years for good reason.  There have been multiple wars.  The national debt is over $14 trillion now.  The Fed has more than tripled the adjusted monetary base in the last 3 years.  If the banks decide to lend out their new reserves and the Fed does nothing to stop them, we could see serious price inflation quickly.

The dollar has done very poorly compared to the other major currencies, even though gold has gone up against all of the currencies of the world.  Or perhaps more accurately, the currencies have gone down against gold, due to central banks inflating.

I think we may see a gold bubble before it's all over, but we are not there yet.  There are good fundamental reasons for gold going higher and I don't see the mania there right now.  The other point to remember about bubbles too is that they always seem to go on longer than they should.  We are going to see big ups and downs over the next several years, but I expect the overall trend for gold to be higher.

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