There is no doubt a bubble forming in gold prices. In my opinion, the price of gold perfectly reflects the irrationality across many major markets, most notably, the equity markets. Despite no signs of inflation gold is up over 70% in the last year. As we’ve long opined, this is nothing more than the irrational money chasing that the Federal Reserve has once again created via their magically destructive printing press. The Fed is effectively forcing investors into risky assets as they give investors no other choice to support their retirement/income needs via their ZIRP. The price of gold has gone nearly parabolic in recent weeks and I would now classify gold as the riskiest of risky assets to own. This move down in the dollar and up in gold has come to epitomize the failure of Fed policy to reflate markets back to normality. As we’ve said before, there are only two outcomes from the Fed printing policy: more bubbles or utter failure. For now, it looks like we’re in store for the former and that means there are more busts in our future. I think monetary and fiscal policy are currently making our macro problems even worse, but how bad these problems become has yet to be seen.
But maybe TPC we need to consider the fact that Gold is doing that because in the event of a total collapse, gold be the only thing worth anything… UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
TPC Reply:December 2nd, 2009 at 9:53 AM
Exactly Julius. I think the declining dollar/surging gold price is telling us that all is not well underneath the surface. I am not necessarily saying that gold will collapse here, but something is not right in an investment world where all assets trade higher in near perfect correlation. UA:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
I still fail to understand if there is deflation in most of the developed world how gold would provide much protection in the event of complete market failure. For gold to provide real protection, you must have physical possession of it (not just via the GLD since in a true market failure your shares in the GLD might be just as worthless as any other paper asset), you must be able to physically guard it, and you must be able to convert it into useful assets, goods or services (i.e. in small amounts)
In the event of a complete collapse should we assume that the US government wouldn’t outlaw private gold holding as was done during the Great Depression? Then again making possession of gold illegal might just make it that much more valuable.
Anyway, aside from inflation risk, in the long-run such protection is only needed in the event of a default by the US government on both FDIC insured bank accounts and US treasuries. Otherwise, the rise in the price of gold is speculation on the fall in the value of the dollar (as well as other fiat currencies) which ultimately means inflation. Why pay those inflated prices now?
Current gold prices seem to imply an expectation of double digit inflation for years to come, just as gold prices in the late 1970’s and early 1980’s did. Ultimately double digit inflation did not last as long as anticipated and gold rapidly declined in value. Gold is nearing triple its long-term inflation adjusted value (excluding the 70s and 80s bubble). That looks very similar to oil last summer. UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
BleakoEcobamics Reply:December 2nd, 2009 at 5:13 PM
I think gold has more properties than simply an inflation hedge. The greenback has failed in one of the essential properties of money – as a store of value. Gold still has that property, at least to a greater extent than the dollar as long as Bernanke has anything to do with it. UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
Rob Reply:December 2nd, 2009 at 5:45 PM
The dollar is a store of value to the extent that there is no inflation. It is also a store of value to the extent that you can hold a bank deposit and receive after tax interest which is equal to inflation. Gold provides no return so it must increase in dollar terms by an amount equal to inflation to remain a store of value. If you bought gold in 1980 it was absolutely NOT a store of value. You have lost money even with gold at 1,200 oz today. The price you pay for an asset (gold included) matters. UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
Marc Faber last week said that gold at these levels is probably cheaper than it was at $250 in 2001, considering to fundemental picture. I think he is right, and I think gold is behaving very rationally. For this I point to three factors: 1) Central banks around the world are heavily underinvested in gold. You have already read the article I think- Rosenberg says that China’s purchases alone could push gold to $2600. Think of what all the other CB purcharses would do. 2) I saw an interesting chart yesterday- gold exploration budgets have consistenly increased over the past 10 years but new gold discoveries have correspondingly cosistently decreased. Also a big gold mining company recently claimed we have reached ‘peak gold’. 3) The monetary situation has never been more bullish for gold than it is now. Gold is moving up because of anticipated future inflation. In this case I think it represents a leading indicator. 4) $1000 most likely established a floor in gold since the decisive breakthrough after many tests. Even if gold went down to $1000, it would be less than a 20% drop. This is not really a bubble in my opinion. UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
HankB Reply:December 2nd, 2009 at 10:07 AM
Oh come on. How many times have seen charts go straight up like this? Yeah, it could last a lot longer, but these things always revert back and usually do so in dramatic and devastating fashion. UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
Kbob Reply:December 2nd, 2009 at 9:17 PM
Hank, it’s funny you asked because I just read an article from Iacono Research that discredits the notion that this is a bubble in gold, precisely because this current upmove has been repeated many times in the course of the 10 year bull market that begain at $250- and each time people have called it a bubble…only to see it move to new highs year after year.
See the following link and notice the charts:
http://www.iaconoresearch.com/PublicArticles/public_articles.html UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
When the Dubai news hit, gold fell about 3.4%, while the dollar jumped about 1.6%. This tells me that the dollar is still perceived as the safe haven, whatever people might say about gold. UN:F [1.7.7_1013] please wait... Rating: 5.0/5 (1 vote cast)
[Reply]
TPC,
FWIW Kevin Depew @ MV used to discuss the Mr T gold sell indicator, ie, whenever Mr T made it to mainstream media a top in gold is usually around the corner; I just spotted Mr T on an ESPN commercial; don’t shoot the messenger and I don’t deal in ‘whys’. UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
Just a thought
I wouldn’t disagree that gold is dangerously overbought and I certainly would have to pass on doing any investment buying, given that the dow went from 776 to 11,700, a 15 fold increase, oil went from $10 to $147 almost a 15 fold increase and those calling it a bubble in those two cases were in a distinct minority and generally laughed at (I know as I was one of them) gold being up 4 fold may not be all that much.
Besides in light of the recent currency devaluations I suspect the people in Vietnam and North Korea sure wished they had some of their money in gold. UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
Add your comment below, or trackback from your own site. You can also subscribe to these comments via RSS.
Be nice. Keep it clean. Stay on topic. No spam.
Name
Mail (will not be published)
Website (optional)
You can use these tags:<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
This is a Gravatar-enabled weblog. To get your own globally-recognized-avatar, please register at Gravatar.
Currently you have JavaScript disabled. In order to post comments, please make sure JavaScript and Cookies are enabled, and reload the page. Click here for instructions on how to enable JavaScript in your browser.
Notify me of follow-up comments via e-mail
© 2009 pragcap.com · Login.
There is no doubt a bubble forming in gold prices. In my opinion, the price of gold perfectly reflects the irrationality across many major markets, most notably, the equity markets. Despite no signs of inflation gold is up over 70% in the last year. As we’ve long opined, this is nothing more than the irrational money chasing that the Federal Reserve has once again created via their magically destructive printing press. The Fed is effectively forcing investors into risky assets as they give investors no other choice to support their retirement/income needs via their ZIRP. The price of gold has gone nearly parabolic in recent weeks and I would now classify gold as the riskiest of risky assets to own. This move down in the dollar and up in gold has come to epitomize the failure of Fed policy to reflate markets back to normality. As we’ve said before, there are only two outcomes from the Fed printing policy: more bubbles or utter failure. For now, it looks like we’re in store for the former and that means there are more busts in our future. I think monetary and fiscal policy are currently making our macro problems even worse, but how bad these problems become has yet to be seen.
But maybe TPC we need to consider the fact that Gold is doing that because in the event of a total collapse, gold be the only thing worth anything… UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
TPC Reply:December 2nd, 2009 at 9:53 AM
Exactly Julius. I think the declining dollar/surging gold price is telling us that all is not well underneath the surface. I am not necessarily saying that gold will collapse here, but something is not right in an investment world where all assets trade higher in near perfect correlation. UA:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
I still fail to understand if there is deflation in most of the developed world how gold would provide much protection in the event of complete market failure. For gold to provide real protection, you must have physical possession of it (not just via the GLD since in a true market failure your shares in the GLD might be just as worthless as any other paper asset), you must be able to physically guard it, and you must be able to convert it into useful assets, goods or services (i.e. in small amounts)
In the event of a complete collapse should we assume that the US government wouldn’t outlaw private gold holding as was done during the Great Depression? Then again making possession of gold illegal might just make it that much more valuable.
Anyway, aside from inflation risk, in the long-run such protection is only needed in the event of a default by the US government on both FDIC insured bank accounts and US treasuries. Otherwise, the rise in the price of gold is speculation on the fall in the value of the dollar (as well as other fiat currencies) which ultimately means inflation. Why pay those inflated prices now?
Current gold prices seem to imply an expectation of double digit inflation for years to come, just as gold prices in the late 1970’s and early 1980’s did. Ultimately double digit inflation did not last as long as anticipated and gold rapidly declined in value. Gold is nearing triple its long-term inflation adjusted value (excluding the 70s and 80s bubble). That looks very similar to oil last summer. UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
BleakoEcobamics Reply:December 2nd, 2009 at 5:13 PM
I think gold has more properties than simply an inflation hedge. The greenback has failed in one of the essential properties of money – as a store of value. Gold still has that property, at least to a greater extent than the dollar as long as Bernanke has anything to do with it. UN:F [1.7.7_1013] please wait... Rating: 0.0/5 (0 votes cast)
[Reply]
Read Full Article »