With gold hitting all-time highs, some are calling gold a bubble. Oh, really?
Gold is a currency. And just like other currencies, we cannot talk about gold in isolation from other currencies. For example, we do not say the yen is expensive. Rather we say the yen is expensive relative to the dollar. So when people say that gold is high or in a bubble, I say, ‘relative to what?’. To see if gold is in a bubble relative to the U.S. dollar, let us look at some historical stats:
|M1 Money Supply (Seasonally Adjusted)(Billion $) 1||409||1,718||320%|
|M2 Money Supply (Seasonally Adjusted)(Billion $) 1||1,574||8,611||447%|
|U.S. Public Debt (Billion $) 2||909||13,000||1,330%|
|Budget Deficit (Billion $) 3||74||1,700||2,197%|
|Gold Price ($)||850||1,250||47%|
From the last gold peak in 1980 to today, M1 and M2 increased 3-4 fold. During the same period, public debt (not including unfunded liabilities – Social Security and Medicare) and budget deficit increased 10-20 fold, yet gold has risen only 47%.
Even using as a base gold’s 1979-1980 nominal price of $600 before it spiked, gold has been up about 100%. For gold to match the growth in M1, M2, public debt and budget deficit, gold will have to reach $1,800, $2,400, $7,800 and $13,200, respectively. While I cannot imagine gold going to $13k, these numbers tell me that calling gold a bubble is a bit pre-mature. In my view, money supply, public debt and the budget deficit are in a bubble, not gold, not yet.
Disclosure: Author is long gold