Gold Bubble Blather

Here comes the rain again
Falling on my head like like a memory
Falling on my head like a new emotion
--Eurythmics

After reading articles like this Bloomberg piece, it's easy to conclude that gold prices still have a loooong way to go. The basic thesis of the article is that gold is in a bubble and that the primary driver of higher gold prices is retail investor speculation via the various gold ETFs such as GLD.

First let's consider the 'bubble' claim. Bubbles are sometimes defined as prices that rise significantly higher than fundamentals would suggest. The problem with definitions such as this is that there is no agreement on what the fundamental price 'should' be, or what constitutes 'signficantly higher.'

Another approach is the technical one--examining price increases over time. Bubbles in asset classes tend to occur when prices increase at eye-popping rates in relatively small periods of time.

The chart above was borrowed from a Buzz posting at the Ville made a couple months back. It includes various series of asset classes widely thought to have acted 'bubbly' over the past 13-14 yrs, including the NASDAQ, housing, Chinese stocks, and crude oil. While a better picture would have been to index each series to a relative 100 value for comparison purposes, it should be apparent that asset classes that have exhibited bubblish tendencies went thru a 2-3 yr period where prices spiked 5-10x before giving it all back in similar 2-3 yr fashion.

Gold (pink line) has yet to show such tendency. The 10 yr bull market has taken gold from under $300 to over $1400 in pretty much steady march higher fashion.

The article's other argument, that gold is being driven higher by uninformed speculation in various bullion ETFs is also laughable. Large chunks of GLD, for example, is owned by so called 'smart money' players. Even George Soros owns about half a billion dollars worth of GLD. The percentage of all 'dumb money' that has exposure to gold is still tiny. Compare that to the tech bubble runup of the late 1990s.

Moreover, the article fails to mention the very real fundamental and structural reasons for gold to be increasing in price. Gold is viewed as a hedge against currency debasement and against general disorder. It is hard not to argue that such conditions have becoming more prevalent.

I fully believe that, before the bull market in gold is over, we'll surely trace out wild action like bubbles past. While gold seems due for a pullback, perhaps a big one, articles like this suggest we're no where near THE top in bullion.

position in GLD