Is Gold In a Bubble ... And If So, How Much Further Can It Rise Before It Pops? → Washingtons Blog
Is Gold In a Bubble ... And If So, How Much Further Can It Rise Before It Pops? - Washingtons Blog

Sunday, November 14, 2010

Is Gold In a Bubble ... And If So, How Much Further Can It Rise Before It Pops?

When everyone from Jim Cramer to Mr. T is hawking gold - and when the price has risen to all-time highs - it sure feels like a bubble.

On the other hand, the super rich - who presumably know a thing or two about investing - are buying gold by the ton.

Deutsche Bank's head commodities researcher Michael Lewis said last week that gold and agriculture are the safest long-term investments.

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 manias.”

Barron's points out:

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 years.

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

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 recently:

“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.


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.

Tyler 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 argues 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.
Many people think that the Federal Reserve's QE2 will boost gold prices. And since QE2 will continue for many months, that augers well for gold.

With all of the money printing worldwide, it is not surprising that gold has continued to rally against all currencies.

For extensive background information regarding gold, see this.

Note: I am not an investment advisor and this should not be taken as investment advice.

Even if the gold bull market has further to run, gold prices might correct sharply downward in the short-run, and you shouldn't buy gold unless you're willing to lose your investment.

In addition, if the government decides to confiscate gold like it did in the 1930s - or to heavily tax gold - this could considerably change the cost-benefit analysis.

Remember also that if the Fed raises interest rates, gold could fall rapidly.


  1. David Goldman has some interesting points:

    Gold, I argued in a 1996 paper for Laffer Associates, should be thought of as a put option on the currency; the opportunity cost of holding gold instead of interest-bearing assets (plus storage costs) are the option premium. If central banks managed their currencies well, gold would trade at its commodity value, that is, around the marginal cost of production, which is now $600 to $700 for the largest mining companies. But if there is a risk that paper currencies will devalue by some extreme margin, it is worth holding gold as a hedge. We cannot price the option using the usual Black-Scholes formula or its variants because we do not know the volatility of a currency over the long term; this is a political matter and inherently uncertain. But if we think that monetary policy is headed to a disaster (QE2 will end up like the Titanic, in short), we will pay more for gold.

  2. "The chart is below, and it's both an eye-opener and a spine-tingler."

    If anything is demonstrated by this chart -it is that there certainly is every indication that Gold is just a bubble.

    That last little wink from the giggling girl in the bikini with the golden hair certainly said something anyway. "TO GOOD TO BE TRUE!"

    Just look at the chart! LOL

    And any fool can see that the powers-that-ARE -->>can throw the switch at any time.

    And that THAT will send all the slack-jawed financial wizards who are all swooning over this sweet young thang with the beautiful smile and all the shapely curves in the right place into a tizzy trying to sell this yellow stuff into a marketplace with absolutely no buyers.

    "She's so fine, there's no tellin' where the money went..."

    Sweetheart, both Jim Rogers and Warren Buffet are small-town-boyz who made their money as financial analysts for the media -telling people when to buy what they were selling -and- when to sell what they were buying.

    That's the only common denominator in the financial markets.

    The markets are where guys like the stone-faced Louis Rukeyser make a living. Remember how he used to occasionally break out into that ridiculous grin of his, -a grin- that should have told everyone -this guy is nothing -if he's not full-of-it.

    Yeh, sure. If you want to gamble with your money, buy Gold, by all means.

    That's what bubbles are all about, and exactly why so many swear-off listening to the market-experts. It's all a lie meant to separate the victim from his money.

    The markets today, just like the markets have always been- are nothing about the real economy, nothing more than organized crime is about the real economy.

    Up or DOWN the markets are about hype, pure and simple. Up or DOWN the markets are about separating the victim from his money.

    The markets have nothing at all to do with the economy.

    Those who talk about the market as if they're economists, are making an argument analogous to telling you -they're beautiful and lovely because they've had sex with 10,000 different partners -and had their wallet stolen every time they did.

    They're not beautiful. They're desperately insane, that's all.

    The potential downside is colossal, gargantuan, staggering, and bearing a facial expression comparable to Medusa for its chilling effect upon the faint of heart as well as these bold and confident prognosticators of instant wealth.

    The weasels will come out of their holes eventually -to say- "You should have known better."


    This article is saying one thing. It is saying -trust in the markets.

    If that is not cuckoo, it's news to me.

  3. Re: Confiscation.

    A Myth Concerning Gold Confiscation

  4. Good question GW, the precious metals market is a speck compared to the bond and derivatives market, the big money banker gangsters can easily control the price; they can do whatever they want to do with the gold and silver market. They are above the Rule of Law. Keep in mind that the New World Order agenda of world governance calls for a world fiat currency; a currency that is physically worthless that the banksters can freely print and leverage.

    By devaluation, QE2 is the final coup de grace to the American dollar as the world benchmark trading currency. The Federal Reserve Central Bank (privately owned by the big four World Banksters) is buying up America’s debt (created by the World Banksters) simply by printing more money and buying US Treasury Bonds from world holders; the dollars cost them nothing.

    With QE2, the Federal Reserve Central Bank NOW effectively OWNS the United States of America by buying the fraudulent debt that they created! Sweet huh? In their benevolence, the Fed will temporarily lower our US interest rates on our US debt to them so that we can borrow more money from them! All of this National debt is at the expense of the American taxpayer who is legally indentured to the Federal Reserve Central Bank (owns the debt) for generations.

    During the transition period between the devaluation of the dollar and establishing a new world currency, gold and silver should skyrocket but once the world currency is established, the banksters will probably, by self made law, set the price of gold and silver. The World Banksters may dictate that gold and silver are illegal currency and freeze the price at $35 per ounce for gold and $3 for silver. That would be great for their manufacturing assets and reinforce their world fiat currency.

    I am always amazed when people think that there is no Big Oil and World Bankster plan for world government and that economic events just happen randomly as the gangster 20 year agenda of destroying our Democracy, Independence and Freedom and enslaving citizens to national debt moves forward! At each stage, the banksters in their charade always look so incapably and surprised at their well planned failures. Ha. Ha.

    There are American Traitors who are cheering that the Totalitarian World Banksters have finally and officially taken over the USA by criminal fraud and now officially tells Congress, President and the rest of us what to do (think austerity).

    They cheer that social services will be destroyed especially Social Security, retirement plans, Employment Insurance and Medicare. Government assets and infrastructure will be sold to the World Banksters for pennies on the dollar. QE2 is a great victory; it’s a glorious day for Totalitarian world government and Globalization!

    As a Tea Bagger squeaks “A Freedom that you have never known before, no more government on our backs, let the multinational corporations rule”

  5. Well I can't afford to buy gold, or silver for that matter, but I wouldn't even if I could.

    I've always found it amusing that gold is said to be "real money", or "store of wealth", or whatever, but riddle me this.

    Let's say we remove the dollar, or any other "paper money", how much is gold then worth?

    It's not worth anything unless you can convert into some actually useable means of exchange - after all you cannot go into a shop, get your groceries and tender gold.

  6. gerryhiles/keyhoti1 said...

    > I've always found it amusing that gold is said to be "real money", or "store of wealth", or whatever, but riddle me this.

    > Let's say we remove the dollar, or any other "paper money", how much is gold then worth?

    Gold is valuable in and of itself due to its rare nature. Historically, 1 oz of gold would buy you one of the best suits, shoes and tie, 20 ounces of gold would buy you a nice car, and 100 ounces would buy you a decent house. At $2000/oz, that'd be $2,000, $40,000, and $200,000.

    Not that far off, if you ask me.


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