The Golden Bubble
By Staff News & Analysis - October 19, 2010

Few silver linings when gold bubble bursts … Beware of bubbles. Tulips, the dotcom boom and pre-credit crunch real estate have a lot in common; they are assets that were in vogue, became overbought and eventually fell to earth. And now it's gold. Historically, two-thirds of gold demand comes from the jewellery industry and from countries like India and China. The remaining industry and from countries like India and China. The remaining demand is generated by investors, manufacturing and the dental industry. But over the last four years, gold has staged a spectacular price rise and won many new investors. Everyone from hedge funds to individuals has jumped in, seeing gold as a way to improve portfolio diversification. Today portfolios often allocate 5 per cent or more to gold. A decade ago such an allocation in sound investment circles would have been heresy. Market dynamics have changed too, with investors playing a larger part in what is driving prices higher. Now private investors hold over 30,000 tons of gold, more than the entire holdings of all the central banks on the planet. In short, gold fever has arrived on both Wall Street and Main Street. But all fevers eventually break. – Financial Times

Dominant Social Theme: Gold is just another bubble, like housing or cotton.

Free-Market Analysis: We have dealt with the "gold is in a bubble" story several times already. Initially, we poked fun at the idea that gold can evolve into a bubble, but given the persistent mismanagement of Western countries, especially the United States, it is perfectly possible at some point that gold will swell in an illogical way relative to other commodities and cash. But from our point of view a real "bubble" in gold (or silver) is far away. Stories such as this one in the Financial Times are merely propaganda, and a weak sort at that. Sub dominant social theme: "Be afraid of gold (and silver) be very afraid. The current price levels are ludicrous."

Money metals, of course, are not merely commodities; they are repositories of value and provide an alternative to paper currency. Thus their price behavior is significantly different and affected by the business-cycle itself. In fact prices can advance for years in a distinctly un-commodity like way, as they are doing now. To confuse money metals with commodities is basic investment error.

Still, gold (and silver) are often attacked for a variety of reasons. In the past, attacks have been quite ferocious. The power elite despises and fears gold, which at certain times in the business cycle (such as now) threatens the credibility and even the existence of central banks. With gold and silver rising powerfully, we have expected a concerted media attack against precious metals. The lack of such action only confirms our working hypothesis that the power elite is in some confusion. The Internet has been blowing up power elite fear-based themes with such enthusiasm that the elite, perhaps, is not sure how to counterattack.

Of course, an argument can be made that at this point the Anglo-American power elite simply wants to see maximum chaos sweep the world so that it can step in with a new solution, presumably one that might include a gold-backed currency controlled by a world-spanning authority such as the International Monetary Fund. This is the same argument that has been made regarding the EU in particular. The idea is that the Western elite standing behind the EU expected and encouraged a collapse of the PIGS so that "austerity" could be implemented, EU authority could be expanded and ultimately martial law could be imposed on Europe out of Brussels.

Here at the Daily Bell, we have presented an alternative point of view generally. We believe that the Internet, like the Gutenberg Press before it, is radically altering the balance of power between the elite and the rest of humanity. The truth-telling of the Internet, when combined with the economic unraveling of the financial crisis, is exposing power elite control and devaluing the methodologies that it uses for its command strategies. Thus, it is our argument that the elite is not being devious. It is merely in disarray.

It is perhaps the combination of the Internet and the financial crisis that has generated an unusual level of indecisiveness within the few, elite families that seem to run the West, if not the world. Once upon a time it was easy to denigrate gold, especially, as a Keynesian "barbarous" relic. Even in the 1970s, when gold and silver moved up impressively (after the central banking attacks of the earlier 20th century) the counterattack by the elites was fairly ferocious. Gold and silver were firmly hammered back down for the next 20 years.

It was only after the bursting of the Tech Bubble in 2000 that gold began to climb again from a low of US$250. Here at the Daily Bell (its forerunners actually) we estimated at that time that gold might reach US$1,000 by the end of the decade, or maybe even more. We have been on record since then stating this next bull-market in precious metals will last at least until 2015. Thus we would expect gold to go a good deal higher, and silver as well.

This is, we know, a somewhat unmathematical way of looking at it. But we are Austrian in our approach and do not believe that one can necessarily make a quantitative argument that is any better than a qualitative one. We remember as late as 2004 that Harry Dent was predicting "Dow 40,000, Nasdaq 20,000 by 2009." Dent's argument was seemingly irresistible. US Baby Boomers, the largest and most monied generation in history, would simply force the Dow up by the sheer weight of their numbers. Dent was able to muster all sorts of quantitative logic for his viewpoint, and it sounded wonderfully convincing but in the end reality did not support his logical arguments.

Our point is merely that the elite's desperate attempts to shore up the financial system have elongated its unwinding considerably. Instead of a short and sharp depression, we are entering the second leg of what is yet, perhaps, a shallow depression (but one which may deepen). The unwinding that would have allowed bad companies to go bust has not taken place. Government itself, along with the banking industry and the West's international corporations, have not been sorted out by the market. Because the elite's counterattack has been so fierce, the current distortions will probably take at least another five years or so to sort out.

For those who want quantitative reinforcement about the price of gold, we can point to numerous articles that attempt to measure gold's current price against paper currencies and other commodities to determine if gold (and silver) is in a bubble yet – and when or if such a bubble would occur. Here's an excerpt from one such (recent) analysis, as follows from "Gold Bubble? Think Again" posted at seeking Alpha:

Even using as a base gold's 1979-1980 nominal price of $600 before it spiked, gold has been up about 100%. For gold to match the growth in M1, M2, public debt and budget deficit, gold will have to reach $1,800, $2,400, $7,800 and $13,200, respectively. While I cannot imagine gold going to $13k, these numbers tell me that calling gold a bubble is a bit pre-mature. In my view, money supply, public debt and the budget deficit are in a bubble, not gold, not yet.

We recommend that one read the feedback commentary as well, below the article, because readers offer other analyses and make very cogent quantitative comments. From our humble point of view it is important to add that these numerical comparisons may soon be out of date, however. We cannot imagine that gold will get to, say, US$3,000 without some massive socio-economic changes taking place. A US$3,000-US$5,000 per gold ounce number would be an effective repudiation of Anglo-American dollar reserve system.

The elite seems to be betting on the IMF being able to introduce some of sort of worldwide SDR/bancor paper gold currency system that would effectively reconfigure the IMF as a global central bank. In order for this work, however, the Anglo-American elite needs to keep control of the IMF and there are many nations in the world whose leaders remain either angry or uncomfortable with the IMF's previous arrogance and destructive unaccountability.

The IMF's noxious approach to necessary "austerity" for client countries includes tax hikes, major budgetary cuts in social programs and "privatization" of national assets that are often purchased by Anglo-American corporations at very low prices. The IMF recipe is usually a middle-class killer. The population at large ends up suffering for the greed of the elite, which often flees with the billions that the country's citizens are then compelled to pay back to international banks.

We are not at all sure that the IMF has sufficient authority to create a new international financial system. As we have pointed out before, the Pax Americana that has thrived so far was put in place after World War II when America was literally the last country standing. Today, the Anglo-American run IMF must contend with major economic players such as China, India and Brazil. None of these countries citizens have any cause to place themselves voluntarily in a position subservient to an Anglo-American dominated IMF. And for the Western elites, creating a democratic financial structure would be an unthinkable abrogation of power.

After Thoughts

We have always suggested that the best case (though certainly a painful one) would be a full unraveling of the Anglo-American central bank economy that has bestrode the world like a psychotic colossus these past 100 years (and especially these past 50). The economic default in such cases is a private-market gold and silver system, such as one that has historically been popular around the world at least since the Neolithic era in our view. In such a chaotic environment, there would be no "smooth" transition to a money metals economy. People would simply start using them. Those who had them, of course, would be a great deal better off than those that did not.

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