Is Gold a Bubble?

[MachineGhost]

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[MediumTex]

That's an interesting graphic.

The declining ore quality suggets that many gold miners may not be as profitable going forward as the price of gold would suggest they should be.

[Ad Orientem]

The United States has a $15 Trillion national debt.  Additionally it has somewhere (depending on who is doing the calculating) between $60-$100 Trillion in unfunded forward projected obligations.  The base money supply has roughly tripled in the last three years.  And we have government run by two political parties who could not make up their collective minds to take a bathroom break.

Is gold in a bubble?  I don't think so.  But who knows?  I could be wrong. 

[moda0306]

Unlike Ad Orientem, I am not really worried about the deficit/debt, and "the base money" expanding is really a tool to expand credit (which is contracting due to fundamentals regarding the housing market and credit card debt), not an actual printing of money (the ST bonds they bought back are about the closest thing to cash you can find).

However, I could see real interest rates being negative for a few more years at least, pushing gold to $2,500-$3,000.

...and of course, even if I'm right about my assertions about Ad's analysis (which I may not be), the rest of society is unlikely to see it that way, and more Glen Becker's piling into gold could be insanely bubble-icious beyond what we currently have.

I like the infographic, but every time information is presented in too convenient and pretty a way I automatically become skeptical of it.

If I'm wrong... well bfd... I have the PP.

[AdamA]

I like the infographic, but every time information is presented in too convenient and pretty a way I automatically become skeptical of it.

Me too.  Especially when it comes to investing.

[moda0306]

I like the infographic, but every time information is presented in too convenient and pretty a way I automatically become skeptical of it.

Me too.  Especially when it comes to investing.

Especially when gold bugs... nay... Inflationista Profiteers, may be involved.... you know, the ones that will take your confetti for their gold and/or financial advice?

[clacy]

Gold doesn't have to be in a bubble to provide horribly negative returns over the next decade.  Just because something is low, doesn't mean it's about to explode to the upside, and just because something appears extremely high it's destined to crash.  Anything could happen with gold over the next 1-10 years, and that's why we hold the PP I guess.

[Gumby]

The United States has a $15 Trillion national debt.  Additionally it has somewhere (depending on who is doing the calculating) between $60-$100 Trillion in unfunded forward projected obligations.

Since all dollars (except coins) come from either public or private debt, this makes perfect sense. Debt and credit is where our money supply comes from and there is never an issue of the US government being insolvent (it's impossible).

Video: 'US debt is a myth!'

Anyway, Gold is not in a bubble. Apple is in a bubble.

[AgAuMoney]

there is never an issue of the US government being insolvent (it's impossible).

I wouldn't say "impossible."

Solvency of the U.S. gov requires two decisions.  The first decision, by the US gov, is to create sufficient dollars to pay the bills.  The second decision, by everyone else, is to accept those dollars as payment.

The first may be a foregone conclusion, but I still wouldn't bet my life on it.  The second is sometimes required, but current U.S. (legal tender) law only requires it in payment of a debt already incurred and does not require anyone to accept dollars otherwise.  And U.S. law does not apply internationally.

[Gumby]

That's correct, AgAu. Excellent clarification.

[MediumTex]

there is never an issue of the US government being insolvent (it's impossible).

I wouldn't say "impossible."

Solvency of the U.S. gov requires two decisions.  The first decision, by the US gov, is to create sufficient dollars to pay the bills.  The second decision, by everyone else, is to accept those dollars as payment.

The first may be a foregone conclusion, but I still wouldn't bet my life on it.  The second is sometimes required, but current U.S. (legal tender) law only requires it in payment of a debt already incurred and does not require anyone to accept dollars otherwise.  And U.S. law does not apply internationally.

If we think of the world as a tough Italian neighborhood with no legal requirement that its businesses accept any particular form of currency for business transactions, isn't the U.S. government and its "associates" in the U.S. military sort of like a local organized crime family that has decided to start printing its own money and is "requesting" that local businesses start conducting their transactions in that currency only?

While it's technically true that no one outside of U.S. borders is required to accept U.S. dollars when doing business across borders, as a practical matter is there really that much discretion? 

It has always seemed to me that one of the purposes of the second Iraq war was to make an example to the other thugs of the world that the U.S. may tolerate the development of nuclear weapons (see Pakistan and North Korea) and it may tolerate the slaughter of huge numbers of innocent people (pick your third world country--there are plenty of choices), but it will not tolerate anyone messing with the status of the U.S. dollar, as Saddam Hussein did in 2000 when he stopped taking dollars for Iraq's oil.

[smurff]

It has always seemed to me that one of the purposes of the second Iraq war was to make an example to the other thugs of the world that the U.S. may tolerate the development of nuclear weapons (see Pakistan and North Korea) and it may tolerate the slaughter of huge numbers of innocent people (pick your third world country--there are plenty of choices), but it will not tolerate anyone messing with the status of the U.S. dollar, as Saddam Hussein did in 2000 when he stopped taking dollars for Iraq's oil.

Thanks for mentioning it.  None of the talking heads on TV news programs seem to get around talking about this.

[smurff]

wasn't Gaddafi in Libya threatening to jump ship and start his own African (possibly gold related) currency in the years just before the invasion there as well? it seems like a pattern if he was...

I remember he was talking with members of the African Union (which he used to lead) about starting a gold-based currency, the gold dinar or the African dinar, in the months before the revolution/civil war that ended his control of Libya.  Like Saddam's currency, it would be used as an alternate payment for oil and was intended as a direct challenge to the US dollar and the Euro.

I don't think Libya was invaded(?) by NATO airstrikes because Gaddafi wanted to start a gold currency.  His talk of a gold currency might have been an excuse to allow extra-judicial procedures (beaten, sodomized, shot) take their own course, however. 

[AgAuMoney]

If we think of the world as a tough Italian neighborhood with no legal requirement that its businesses accept any particular form of currency for business transactions, isn't the U.S. government and its "associates" in the U.S. military sort of like a local organized crime family that has decided to start printing its own money and is "requesting" that local businesses start conducting their transactions in that currency only?

While it's technically true that no one outside of U.S. borders is required to accept U.S. dollars when doing business across borders, as a practical matter is there really that much discretion?

I'm inclined to think that is an essentially correct analysis, and a very good question.  I'd expect nearly every nation outside western europe is asking themselves the same thing, and I'd be surprised if it hasn't been at least mentioned thruout western europe as well.  And given that the question is being asked, and the apparent reaction in the past, I'm sure the powers that be in the U.S. have considered it extensively.

Originally the world powers agreed in Bretton Woods that the U.S. dollar was as good as gold (and it was until suddenly it wasn't) and agreed to take it on that basis.

Since some started to wise up in the 1960's, until Nixon abrogated the redemption clause in the Bretton Woods agreement, the U.S. and other signatories were fairly open about their attempts to manipulate the gold market.  Each time they paid heavily yet failed to suppress the price.

GATA has evidence (I find it compelling) that manipulation did not permanently end in 1971.  In light of other current and recent events the U.S. appears willing to use extreme measures to remain the world supplier of reserves and trade currency.  However it looks to me like now the cracks are spreading further and faster than they can be stopped and patched over.

So to answer your question, I believe there was no discretion in accepting U.S. dollars as recently as 10 years ago.  Even with the speculation surrounding the creation of the Euro the U.S. dollar wasn't significantly threatened.  I think that has now changed, or is at least in process of changing.  Unless there is some radical shift I don't believe we have another 10 years of being in a super-majority position as a reserve currency.

In other words, 10 years ago there were no reserves or a trading currency of any significance other than the U.S. dollar.  Even gold reserves were insignificant in value compared to U.S. reserves and gold was essentially never exchanged as currency between countries.  But today the U.S. dollar is no longer the only reserve/trading currency.  Significant powers and significant markets are shifting to hold reserves and do trading beyond the U.S. dollar.  Probably the dollar will still be the majority of reserves for many years to come, but I believe within 10 years there will be another contender (or amalgam of contenders) composing a significant fraction (>=34%) of world reserves and trading needs.

I don't know whether China will step in.  Or if the Euro can recover.  Or if it will be an amalgam of China/Euro/AUS$/CAN$/Gold/???.  But I think I'm correctly reading the writing on the wall.

[smurff]

the official NATO story was human rights violations, but talk of starting of an alternative to the us dollar/oil buying currency by middle-eastern country's sure does seem risky.... i suspect i will never know for sure what TPTB are really thinking or up to, but this kind of stuff sure does make me wonder..

After his friend Muammar al-Gaddafi was killed, Hugo Chavez in Venezuela demanded his country's gold from overseas storage (I think it was mostly in London), but I don't believe he talked much about starting a gold-based currency.  Maybe he figured there might be sanctions against him one day (if he survives his bout with cancer) and overseas assets frozen, so he had the gold shipped home under much criticism of him being paranoid. So no air strikes for him.

The next megalomaniac who talks about a gold currency as a substitute for the dollar (or the Euro) might have serious NATO trouble on his hands, especially if he's talking from an oil-producing state.  I don't know how much oil Syria has, but if the Syrian protesters want an intervention to help get rid of Bashir al-Assad, they might want to think about tricking him into some trash-talking about uniting the Arab world--by starting a gold-based currency.

As for the OP, no, I don't think gold as an investment is anywhere near a bubble.  Prices have increased, but they haven't skyrocketed.  And besides, there don't appear to be enough frauds, scams or major scandals in gold underway yet.

[FarmerD]

It’s extremely difficult to judge if gold is overpriced since you have to compare gold performance to  some other asset class that acts “gold-like.”?  I noticed this article when I was researching farmland as an investment.  Farmland is traditionally seen as a hedge against inflation so in some rough sense you could compare farmland to gold prices.  If so, it would appear that gold has run quite a ways ahead of farmland meaning that gold may be overpriced.  (Sorry, I don't seem to be able to post the chart from the article)

“These things tend to correct themselves, and would do so either by the price of gold coming down or the price of farmland going up. Given the various forces at work in the financial world, I don’t see the price of gold coming down. Which leaves farmland to go up (particularly here in Saskatchewan, where it is still undervalued relative to its productivity).  “With gold held at $1,500, the price of Sask farmland would need to move to $865 per acre just to get back within the normal historical range. The current price is $526 per acre, representing upside of 65%. Of course, we expect gold to move higher too, dragging all other real assets along with it.”?

http://dailyreckoning.com/buy-gold-or-farmland/