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kferrone
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My name is Kelly. I am a graduate from Salt Lake Community College and transferring to the University of Utah! My interests include investing and business management. My family is creating the first completely "Green" eco friendly home in UT and its gonna be sweet. My main goal here... More
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  • Gold a Bubble? 0 comments
    Aug 23, 2011 1:31 PM | about stocks: GOLD, GLD, UXG

     

     Over the past ten years gold has been steadily rising since 9/11. Then the unfortunate 2008 housing bubble occurred. The effect was the steady devaluation of the U.S. dollar and an alarming inflation rate. Throughout history gold has proven to be an invaluable alternative to money in general, reason for gold standard. The real question now is, could this incredible upward price movement be another bubble?
       
    The word "bubble" has been thrown around lately like a hot potato. The most likely reason being the crazy roller coaster ride and absurd volatility that the economy is experiencing.  The definition of a bubble is an over valuation of an asset from its intrinsic value due to high confidence and volume in the market that can suddenly burst and the value correct itself. We did see a very big bubble with the tech industry in the 1990's and over valuation is exactly what happened and it corrected itself but ten years later it is alive and kicking again. How can you tell if the same is happening to gold?  

    First off, to see if gold is bubbling, you can see that gold has inverse correlation to the dollar. You can see the dollar devaluating and we all know that inflation follows. The government reports inflation at around 3.2%, which it is more than likely higher because of quantitative easing. So logically if you have $10 dollars of gold and USD drops the gold will be more valuable than $10 because it takes more USD to buy it. Now with inflation the devaluated dollar gets a higher number associated with it but does not raise the actual value.  This causes the $10 dollar piece of gold to seem like it just rose in value again. Gold has true and natural intrinsic value that can only be described with a monetary amount whereas the demand for it has been around pretty much forever and it is not going away anytime soon.

    All this is not to say that a bubble can’t happen though.  The economic world is in a schism over whether this is a bubble or not, and the fact there are people that believe this can introduce a self fulfilling prophecy. Gold is at an all time high in number value from inflation and devalued USD.  The most likely scenario would be the USD finally starts to pick up again causing the inverse correlation to converge. A bear market would play out until they come more in par with each other.  This on a graph would look like normal upward and downward movement of any asset.  The idea that all of a sudden everyone with gold (physical or stock) goes on a sudden selling frenzy popping the bubble would just make gold way undervalued.  This would be the absolute perfect moment for everyone that can’t afford $1800 an ounce to roll in and scoop up as much as possible. Then, since gold is a limited natural resource with intrinsic value, it will correct its fair market value and continue being that shiny yellow stuff everyone wants.  



    Disclosure: I am long GOLD.
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