Has Gold Reached Bubble Territory?

The recent pullback in gold prices has many commodity bears calling for a major correction in gold prices, possibly another $50 or more per ounce. While I certainly can’t rule out the possibility of a minor correction, the upward trend should continue over the next few years for the same reason is has been steadily trending upwards for the past several years — inflation.

Gold is not an investment, it’s money. As U.S dollars continue to depreciate against foreign currencies and all currencies depreciate against many commodities, central banks and wealthy individuals around the world will choose to preserve their capital by building or increasing gold reserves. I can’t help but laugh every time I hear some analyst on TV bragging about how good it feels to be in cash when the market drops, why anybody would choose to maintain dollars as a store of value is beyond me.

We’re nowhere near the top of this gold bull market. Inflation adjusted, gold is not even half way to its all time high. Many other commodities have shot way past their all time records and there is every reason to believe gold will follow.

You will know gold is approaching bubble territory when individuals start pawning their jewellery to pay for groceries, which is not a far fetched proposition given current economic conditions. Until then, the shiny stuff is where you want to be.

Disclosure: Author holds position in gold

Comments

[jt]

FMB...you state "We’re nowhere near the top of this gold bull market. Inflation adjusted, gold is not even half way to its all time high."

I agree we're nowhere near the top, but the fact is that "inflation adjusted" we're not even at 1/5 the way to the high. The CPI was changed during the Clinton administration for the sole purpose (for any non-totally brainwashed by governmentspeak thinking person) of understating inflation. Using the CPI from the Carter administration and before, gold would have to hit $5000 to match its 1980 high. On the other hand, that's just looking at PRICE inflation, which is of course the governmentspeak alternative for what inflation TRULY is, which is the expansion of the money supply (ie, the devaluation of your dollar). By calculations of a number of sources (eg, shadowstats...JohnWill... website), that money supply has been going up closer to 12% since 1980, and over the past three years closer to 15-17%. So that would have to be thrown into the mix. But you still haven't counted the DERIVATIVE inflation of the dollar...which is in the neighborhood now of $600 Trillion!!!!

And I could go on...but the bottom line is that, throw all that into the mix, and the dollar value of gold has barely lifted off the ground, held down there by those who profit most from the present fiat currency fraud--the Fed and the other Western Central Banks using their bullion bank lackies, esp GoldmanSuchs and JPMorgain4Elites. Anyway...you might want to investigate further. But beware...you'll be told you're looking into "conspiracy theories." But I will tell you this, if it looks like a duck, quacks like a duck, flies like a duck, has a bill like a duck...it certainly CAN'T be a duck, can it??

[Hutch]

"Gold is not an investment, it’s money." I believe it should be, and perhaps it will be in the future, unfortunately, right now it is not. Belief trumps reality.
Belief always finds evidence to reinforce Belief, until something real destroys it.
That something real may well have arrived to create the new Belief.

[misterchan]

jt - Very interesting, knowledgeable and well written.

[HumbleBee]

I still think gold is on a bullish trend, given the US dollar, inflation, and other economic issues.
So I bought some calls lst month (e.g. Barrick Gold $40 Jan 09 at $16, and Yamana Gold $15 July 08 at $3.9).
Prices have pulled back in the last few weeks, and now in loss situations.
Any gold experts understand why? Thanks.

[ussmls7]

No expert here, but the Federal Reserve & other investment banks, work to keep the prices surpress, but they have used up all the tools to continue to hold on must longer! Some fine reading for understanding why, GATA.org & you will be happy!!

[HumbleBee]

Thanks for the tips!
Great information on GATA.org.
Just wonder how long this holding gold prices down would continue?
Would not want to hold these gold calls too long before expirations.

[Leonard]

Free Market Bull,
Thanks for getting some gold juices flowing... Newbie be me. Any thoughts (anyone?) on the efficacy/value/potenti... - good or bad, of GLD, for example? Anyone trust it?
Thanks!

[Proud Canadian]

HumbleBee,
Why do you prefer investing in Canadian sock, instead of American one like Newmont ?

[GoldBuyer]

We "top out" when people sell jewelry to buy groceries? I advertise to buy gold jewelry..........peopl... are doing that now! Ladies are removing their wedding rings to pay bills........Hellooooo...

[Proud Canadian]

HumbleBee,
I'm not an expert in gold. But here in Canada, mining companies have to deal with higher cost and higher dollar. You have better opportunity with junior. Take a look at Aquiline resources (AQI:Toronto). I'm doing very well with it. It's more Silver than gold, but huge deposit...

[Mr. G]

I think the biggest driver of gold price lies in FED activity.Increasing the amount of money(Printing more money) severely damages the dollar. When inflation is rising, the FED should raise the rate but they arent! Gold, like other commodities is dollar denominated. Ex Fed Chief Volker defined inflation as too many dollars chasing too few goods. These are the drivers I see in commodity price increase, as well as global growth. AS big firm money managers perceive this risk, the market psycology will strongly support the price increase in gold. As far as gold prices going up and down, you are witnessing profit taking. Notice golds recovery in price after the last sell off. Traders love this pattern.