Gold Bubble Evolution

Includes: AEM, AU, AUQ, AUY, GG, IAG, NEM
by: Markos Kaminis

It seems it was only just yesterday that I could buy a can of coke for two bits and an ounce of gold for $250. Can you imagine that? A sign of the times, gold quickly dusted more than that much value off on its way to a greater than 30% rise to date in 2011. After boldly taking 6.4% last week alone (14% this month through Friday), I think it’s safe to say that gold is officially in bubble-mania mode, but I also believe it has the thrust to surpass $2000 an ounce at least before an eventual horrific burst at some future date.

The rush to gold is not lucky happenstance, but the result of simple relative analysis. Man has naturally tended toward the usage of gold as currency. In years past, economic crises of all sorts have driven short spurts in gold demand and a resulting price rise, but never to as high a point or for as long a span of time as now. Gold and a handful of other securities and assets have historically attracted capital in the so-called “flight to safety” trade. In times past, and in part today as well, the yen, dollar and U.S. treasuries have also attracted capital in desperate times.

What’s different today versus in years past is that there are mounting concerns about the developed world’s most important currencies, the dollar, yen, euro and pound. In fact, all fiat currency is in question within a scenario where the world’s most important consumption economies seem to face uniquely deep and difficult downturns. It is a situation where currencies have been diluted by unsustainable public debt loads, and the solvency of sovereign states never before questioned are now debatable. Once supremely confident G-8 leaders, are finding warnings (and worse) whaling down on them from the rating agencies like a storm of hellfire.

In a world where Japan’s footing seems unstable, within which the shadow of a new dark ages covers Europe, and the latest greatest empire, the United States, seems about to fall, the choices for safekeeping wealth are few. Markets are so befuddled about what to do, that the downgrade of American credit by Standard & Poor’s (NYSE: MHP) was followed by a rush into U.S. treasury securities on the global turmoil that developed. Demand for the doomed assets, should Moody’s (NYSE: MCO) follow S&P’s lead, has been so great that this week’s auction could allow the United States to borrow at a zero or negative interest rate. In other words, people don’t know where their money can be safely kept, and so are near willing to pay for its safekeeping.

Relative analysis of the “flight to safety” pool of investment options has investors seeing just a few, with the first being gold. In times of trouble, we return to what we trust. As the gold bubble expands and concern about its bursting intensifies, though, I believe we’ll see more and more money flowing into alternatives like silver and the Swiss Franc, and then gold will lose some of its luster.

At the same time, what drives all bubbles is pumping this one up as well; greed, and greed is a powerful force. In Asia, and across the globe, people are seeing one asset, which is within their reach or around their neck, rising in value while everything else is threatened. This has everyone with the opportunity, from the man in Mainland China to the pompous president of Venezuela, trying to get their hands on more gold. There is, after all, only two Olympic sized swimming pools worth of gold currently available on the open market. For this reason, I don’t see the bubble bursting just yet, but I would look for the silver bubble to start moving toward $50 alongside gold’s targeting of $2000.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.