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  • gold bubble 0 comments
    Oct 3, 2011 1:18 PM
    This is a big topic. Is gold a bubble or not? How do you understand the fair price? Why does it trade the way it does? Is it a safe haven or not?
    I don't believe that gold is in a bubble and certainly that ''bubble'' hasn't burst. True, gold is off its 1900 price but is still smartly up year to date. How many assets can claim that? AAPL has dropped a bit but does that mean that it is in a bubble which has burst? 
    There are good reasons that push gold prices higher and why people invest in gold. It has a 5000 year history of preserving its value. Of course, many journalists claim that it is a barbarous relic of the past. Perhaps, but the good news for gold buyers is that gold doesn't need propaganda from these people to go up and go up it does. There is a limited supply of gold in the world and the annual production increases supply by only 1.5% and nobody can change that. Look at the $, EUR and other fiat currencies. Their annual money supply growth has become exponential. There is just too much paper money out there. Of course, it is not equally distributed and not every cash rich nation or person would buy gold. Still, many do and the limited supply of gold compared to the unlimited supply of fiat money means that over time gold prices go up. This will continue as I fully expect a global QE with money printing by all central banks under the sun and we are talking big money printing. Gold will shine ever so brightly.
    I will point out a couple of statistics for you. Annual world production of gold is worth less than 10% of US budget deficit and less than 30% of US current account deficit. Keep in mind that a large portion of gold's value goes into production costs (excluded from the previous statement), while politicians and central bankers (working independently but always in agreement) can print trillions of fiat money at no cost. They do print and will continue to do so in the future - just look at what they've been doing for the last 20 years. 
    Due to its volatility over the last few weeks some observers say that gold is not a safe haven. Of course, this is the ''correct'' political line. Just pile your money into ''safe'' T-bills at 0% rate and see the purchasing power of your money collapse due to inflation. This is a safe way to lose over time. Given gold's history it is likely to preserve and perhaps increase its purchasing power. There are risks and market volatility but my personal opinion is that you can ignore gold at your peril. Forget the propaganda by people saying ''even if it makes money it is stupid'' or ''barbarous relic''. Look at what makes sense and execute your plans ignoring the fools. 
    How do you value gold? How do you know that you are not buying at prices that are too high? This is a tough question. There are valuations out there. One of them can be found on bullionvault.com (I have nothing to do with the site). Apart from that I look at the growth in M0 money supply. This is published by the St. Louis Fed - go to their website for the information. I believe that gold prices are closely linked to the money supply M0 but other money supply indicators can also be useful.
    Don't sell your gold!

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