Gold: The Anti-Bubble
By Staff News & Analysis - September 20, 2010

Gold Defies George Soros Bubble Talk … A bubble Soros loves … By the start of New York dealing on Friday, the gold price in dollars stood 2.4% higher for the week and nearly 29% higher from this time last year. Like George Soros (left) said again this week, it's got to be a bubble, no? Even if he is playing it with $645 million in the SPDR Gold Trust (GLD), gold is the "ultimate bubble", right? Well, not just yet. "Unambiguously…gold price developments do not resemble the statistical characteristics of past bubbles, including those of the U.S. housing market, the NASDAQ technology bubble, and the Japanese Nikkei equity market bubble," says a new research paper from the predictably bullish research and advocacy group representing gold miners, the World Gold Council. But wait, they make a convincing argument. – Forbes

Dominant Social Theme: Progress shall be made … eventually.

Free-Market Analysis: And what is the convincing argument? Gold Council research makes the point that "The gold price is consistent with its long-run average level compared with a range of different assets, including equity indices and hard assets like oil." Or to put it another way, there is a new dominant social theme emerging: "Various price pressures can explain the rise in gold, which is within the realm of prices of other commodities."

You see? Gold and silver are no different than other commodities. Everywhere, thanks to inflation, prices are going up and why should gold and silver be any different? Or so the powers-that-be would like you, dear reader, to think. And when we write of the powers-that-be, we include the Gold Council which studiously avoids confrontation with those who have sought to retard the progress of gold-as-money.

But no matter what the Gold Council and its researchers have concluded, we will humbly present some additional thoughts. First of all, gold is not a commodity. Like silver, it is a money metal and has been valued as such for thousands of years. And for just this reason, we don't think that gold is a matter of price anymore. We are even inclined to grant that both gold and silver will eventually expand into a bubble of sorts (though we do not think there is currently a bubble). The Western world's paper-money finances exist in a perpetual bubble, after all.

In the past, we've pointed out that banking is perhaps the biggest bubble, and that big banks are never allowed to fail because they are the distribution arm of central banking. And some of the Bell's infinitely perceptive feedbackers have then done us one better by pointing out that government itself is likely an even bigger bubble than banking, and they may have a point.

Thus it is, that the West is a kind of bubble machine. Fiat money is forever blowing bubbles of one sort or another and the only way we can avoid said bubbles is to recreate a free-market economy that allows the Invisible Hand to sort through supply and demand. Might there still be bubbles in a truly free-market economy? Perhaps, but they would be mild and regional as they have been in the past. The one thing that the globalization of central banking has succeeded in doing is synchronizing disaster. Today, when one country blows a bubble, you can bet that "contagion" will ensure that others do the same.

In a sense of course gold is the anti-bubble, blowing up only after other bubbles have BLOWN up. As we've long predicted, there is no reason why gold should not go to US$2,000 or even US$3,000, which would be quite a trip from US$300 where it started ten years ago. Silver might see US$150 or more at such prices. Silver is currently an even bigger buy than gold, given that the silver-gold ratio is historically at 15/1 and silver is currently trading around US$20.

The bubble factor in precious metals has to do with the fiat-injected business cycle of course. During the paper-money boom cycle, stock markets go up fast along with most everything else (except gold and silver.) Business does well and big business does especially well. Real estate does well; most commodities rise in price, cyclically anyway. But the powers-that-be have an easier time of controlling the price of gold and silver during such boom times. It is in the busts that the trouble starts.

Ultimately, the free-market takes over. The fiat-money manipulations of the power elite eventually implode. It happened during the Great Depression. It happened in the 1970s and it is happening now. Too much paper money confuses the marketplace and distortions develop that eventually cause the larger market to fail. Stocks crash and a "recession" takes hold. Gold and silver start to rise as people put the money they have left back into something tangible.

Eventually, even gold and silver overshoot. That is the way of fiat-money economies. One market or another is always blowing up because central banks never stop printing money and unbalancing the larger marketplace. But, as the saying goes, why fight the tape?

For anyone with a modicum of understanding about money, gold and silver probably provide a fairly predictable profit at this point. As physical gold gets too expensive, paper gold products, especially shares in junior mining stocks, begin to rise. Silver gradually gets more expensive as well as it is the next money metal of choice that people start to buy. At the end of the gold bull cycle both silver and paper-based metals investments are bid up hard.

That's how it works. That seems to be how it always works. It's a progression based on price. There is time yet. Of course, there are always spanners. This time the fiat money system has thoroughly deflated and is on life support. The powers-that-be could try to reinstitute some sort of gold standard, and we have no idea what that might mean for the larger gold-bull cycle we have just described. It might eventually create a ceiling – a kind of price fix that would put paid to ever-higher prices.

After Thoughts

Alternatively, the powers-that-be could try some sort of confiscation, though that might bring with it various other problems. No one has a crystal ball when it comes to these issues. But in the long term, we're fairly sure that prices (broadly speaking) will continue to rise. Or at least we would be surprised if they didn't.

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