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Is there a bubble in gold?

By now, the price action in the precious metals has caught the attention of nearly every financial writer. Some of them say the price rise is just a bubble, some say it's part of a long-term uptrend, and some say there's no trend, it's just very volatile.

We can dismiss the last of these without much difficulty. Some of us old-timers can remember when gold was $35/ounce. There's a trend, all right.

The claim that it's a bubble has more merit. We've seen gold bubbles before - in 1980. Look at the price charts, for example at The big spike in 1980 was clearly a bubble.

So why should this time be any different? It is different because the demand picture has changed completely. In 1980, gold buyers were mainly in Europe, with some in the US. The typical investor would put maybe 2% to 5% of his/her investable net worth into physical gold and/or mining stocks.

Today, the community of investors in gold is much larger, with a significant part of investment demand coming from Asia, mainly the rapidly-emerging economies of China and India. These are still poor countries, but with rapidly-growing middle classes. Incomes are still a fraction of incomes in Europe and the US, but they make up in population for the lower wealth per person, so that the Chinese economy is projected to overtake the US within the next few years. Newly-mined gold does not come anywhere close to the increased investment demand from Asia, and unless some totally unexpected economic disaster throws China and India off course, gold-mining will fall even further behind investment demand. At the current price, there simply will not be enough gold for even a small fraction of the world's investors to be 2% in gold. Either the gold price must increase, or investors must switch to other precious metals.

Full disclosure: I hold significant positions in both gold and silver.