Is Gold Really in a Bubble?
By Staff News & Analysis - June 22, 2010

Gold Bugs Getting Giddy?: Yellow Metal Hits Fresh Record … Gold prices continued to march further into record territory Friday, as the metal pushed above $1,260, up about 1% in New York futures trading. Investors flocked to the metal on waning confidence in global growth prospects and currency instability, Dow Jones Newswires reports. We'll admit it. We've been skeptical of gold's run higher, as strong retail awareness of the asset, as well as the constant commercials flogging coins, makes us feel like gold has a decidedly bubbly quality to it. We may be wrong. But, even if we're right there's ample evidence that the metal wants to go higher. And bubbles often persist for quite a while. – Wall Street Journal blog

Dominant Social Theme: When will the bubble pop?

Free-Market Analysis: So gold is in a bubble, eh? How many times are we going to read this statement in the mainstream media? And as many times as we ask this question, we point out that the same media never state that stock or bond markets are in a bubble. It is taken for granted that when the stock market moves up in aggregate it is because of a "recovery" and that fundamentals are "good" and are "lifting all boats." When large numbers of government bonds are being disposed of without effort, this is seen as a sign of government's underlying health as well.

But let gold or silver begin to levitate and the mainstream media inevitably comes alive with analyses featuring "nervousness" and "fear." When investors purchase blue chip stocks, it is never out of worry, but when the same investor buys gold and silver, he or she is inevitably doing so as a result of some sort of deep psychic dissatisfaction – a kind metaphysical fugue. Here's some more from the Journal article, dated June 18:

On a year-to-date basis, gold futures are up more than 15%, while the U.S. Dollar, as measured by the oft-mentioned DXY – a trade-weighted index which is mostly euro – is up about 10%. "The ability for both to rally together speaks to gold's ability to trade as a currency, partially due to demand from central banks to diversify reserves and to general market fears," wrote Scotia Capital currency analyst Camilla Sutton in a note to clients Friday. At any rate, Friday's gold price rally is helping to pump up prices of gold stocks. Newmont Mining is up more than 3%. Barrick Gold is up 2.8%. Newmont is the top gainer in the S&P materials sector, which is the second best performer in the broad index so far Friday.

There's that word again – did you notice – "fear." For the mainstream, it is almost impossible to write about precious metals without some sort of disparagement. Investors buy large cap stocks. Speculators purchase small-cap equity. "Bugs" buy gold. It gets tiresome to cover this sort of thing if you come at markets from a free-market or libertarian perspective. Here's some apocrypha from Peter Schiff. In conversation with him once, one of us made the statement that it had been confusing to figure out that "real" economics was Austrian. "What other kind of economics is there?" he asked.

He was correct. There is "real" economics and there is everything else. Keynesian, Marxian, even Brownian (our term). Much economics today, unfortunately, depends on "econometrics" and seeks its own kind of empirical evidence. Austrian economics depends on common sense to establish fundamental principals of economics. There are fancy names for this, but what it comes down to is that Austrian, free-market economics simply asks that people come to rational conclusions about their environments based on what they observe, or know to be true.

What do we observe? We see that mercantilist central banks always overstimulate the economy with fiat money and fool people into expanding businesses and spending more than they can afford. Then, inevitably, there comes a point where the stock market and other investment indicators begin flashing red. The game is up! Too many resources have been committed while consumers are tapped out. There is a crash. Books are written. There is much breast-beating. More dysfunctional regulations are passed. People go to jail and families are ruined – basically for nothing. It is a medieval system, though most people believe they are living in a "modern" age.

The purchase of gold and silver – money metals – run in parallel to the above business cycle. While some business cycles in a mercantilist fiat-money environment are relatively mild, sooner or later the stresses and strains of torrents of debt money overwhelm the system. An earthquake results that virtually levels economies dependent on this sort of system. Greater or lesser earthquakes have taken place in the 1930s, the 1970s and the 2000s.

There is nothing magical about it. The overprinting of fiat money causes economies to break down. Then the only solution for these debt-based money systems is the printing of more money to counteract the inevitable price deflation. But when the business cycles are severe, and fiat money loses considerable and obvious value, gold (and silver) rise, relatively speaking. In fact, gold and silver, being money metals, are merely reflecting the loss of value of paper and electronic fiat money.

But at this point, after a century of mind-control, most people, including financial journalists, don't see it that way. Central banks and the power elite may hold gold and silver – and more and more of it as fiat money systems degrade – but for the larger populace gold must always be seen as an aberrant investment. When gold is going down or is flat, then it is to be seen as correct from a financial point of view. But when gold and silver are moving up relative to fiat currencies, something must be "wrong." If gold is moving up over an extended period of time, it is an indication of worry and fear. When it is has reached hitherto unheard of heights, it is in a bubble. Guaranteed.

Gold has proven one of the very best investments in the world for the past DECADE. Yet throughout this time period, the mainstream Western media has blathered on about bailouts, stock market retrenchments and recoveries and the relative health of the West's miserable fiat currencies. There is something absolutely weird and dysfunctional about a culture that celebrates middle class wealth obsessively while confiscating it with such vehemence.

Where are the complaints? People still don't get it, we guess, or not enough of them. From our point of view, the mass of middle class investors, now denuded of their 401Ks and savings generally, ought to rise up in disgust at the mainstream media and demand to know why their favorite, trusted analysts and commentators have misled them so egregiously. They ought to demand to know under what criteria various newspaper columnists have received their faux-Nobel prizes in economics for being consistently wrong. They ought to demand the reasons why someone like President Barack Obama has surrounded himself with economists whose chief distinction over the past decade is to be transparently and publicly incorrect about the economy.

It was obvious to the 1,000-person Bell braintrust (well maybe it wasn't 1,000 brains at the time) way back in 2001 that gold was going to reach at least US$1,000 over the next decade or so. And more recently we have predicted that gold could go to US$2,000 or US$3,000 before this leg of the business cycle is over – which may be sometime around 2015. (Don't take our word for it, please; do your own research and think it out for yourselves.) Of course, we do not want to be over-emphatic. Gold and silver are subject to various fluctuations (and certainly the price can travel too far and too fast – and thus be subject to a downturn, emphatic or not.). An impending war with, say, Iran, might have a distortive effect, or a major environmental disaster that threatens to raise the price of oil.

But there are larger fundamentals at work as well. We tend to believe that the fiat system itself may be irretrievably ruined and thus might not even be around in five years, or not at least in its current form. In fact, we have written many times that we expect some sort of money metals standard to emerge – formally or informally as fiat currencies continue their irretrievable descent. We think, in fact, it is already occurring.

After Thoughts

We continue to believe in the sensible observational techniques that free-market Austrian economics encourages. Unlike the Wall Street Journal (or the delightfully frantic Bill Murray in Groundhog Day) we are not surprised when we get up in every morning to see the same thing. Yes, gold remains stubbornly fixed at (or near) current prices and does not give signs of imminent collapse – so what? Overall, it is not a "bubble." It is a near-term reality.

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