Gold Never Has Been (and Never Will Be) in a Bubble

Gold Never Has Been (and Never Will Be) in a Bubble

Most serious gold investors follow a basic principle: that gold is stable in value. Changes in the “gold price” represent changes in the currency being compared to gold, while gold itself is essentially inert.

This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that “gold is money.”

From this we can see immediately, that if gold doesn’t change in value – at least not very much – then it can never be in a “bubble.” There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.

Let’s take a look at some of the great gold bull markets of the last hundred years:

From 1920 to 1923, the price of gold in German marks rose from 160/oz. to 48 trillion/oz.
From 1945 to 1950, the price of gold in Japanese yen rose from 140/oz. to 12,600/oz.
From 1948 to 1967, the price of gold in Brazilian cruzeiros went from 648/oz. to 94,500/oz.
From 1970 to 1980, the price of gold in US dollars went from 35/oz. to 850/oz.
From 1982 to 1990, the price of gold in Mexican pesos went from 8,000/oz. to 1,025,000/oz.
From 1989 to 2000, the price of gold in Russian rubles went from 1,600/oz. to 8,120,000/oz.

Each of these situations was an episode of paper currency depreciation. Today is no different. The rising dollar/euro/yen gold price is simply a reflection of the Keynesian “easy money” policies popular around the world today.

We can also see that, if gold remains stable in value, then the supply/demand considerations that affect industrial commodities do not affect gold, which is a monetary commodity. This is why gold is used as money. If its value was affected by industrial supply/demand factors, we would not be able to use it as money.

Thus, “jewelry demand” or “peak gold,” or any other such factor, has little meaningful effect on gold’s value. Day-to-day money flows will affect the price at which currencies trade vs. gold, but this ultimately affects the currency in question, not gold.

None of these historical “gold bull markets” resulted from jewelry demand or mining supply.

Any attempt to attach a valuation to gold is mostly a waste of time. Concepts like the “inflation-adjusted gold price” or the “gold/oil ratio,” or a ratio of outstanding debt or currency to a quantity of gold bullion, are a distraction. An item that doesn’t change value is never cheap or dear. That’s what “gold is money” means.

The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money.

Gold is money. Always has been. Probably always will be. This time it’s different? I don’t think so.

Nathan Lewis

Nathan Lewis was formerly the chief international economist of a leading economic forecasting firm. He now works in asset management. Lewis has written for the Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East. About the Book: Gold: The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at bookstores nationwide, from all major online booksellers, and direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada, call 800-567-4797.

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Are We In A Gold Bubble?

Are we in a gold and silver bubble? The pundits who have come out in the media and Internet lately would have you believe so. Of course, history does not support their position or they simple do not understand current events. Will gold and silver keep going straight up? Of course not, it will follow it natural course of moving higher and retracing before moving higher again.

Those that contend that it is not an opportune time to be investing in gold and silver take the position that the metals have increased in value to a point were that its is not sustainable. They fail to see that the U.S. dollar has been precipitously falling and gold and silver have gone up almost identical percentage. In another words, gold is doing exactly what it is supposed to be doing, protecting your purchasing power caused by currency devaluation.

This week the first shot in war by countries to devalue their currency was fired by Japan. The United States is preparing for quantitative easing 2. These are elegant terms that simply mean that central banks around the world are planning to print more money to get out of the economic quagmire we have been in for more than two years.

Under this scenario gold and silver are clearly winners and will continue to go up as investor seek shelter in tangible assets. The demand for gold and silver continues to increase as investors lose confidence in the ability of governments to control deficit spending and reignite the economy.

A dollar in 1913 when the Federal Reserve was created is worth a mere penny. Gold on the other hand has maintained it's purchasing power. In another ten years it almost certain that the dollar will be worth less and gold will continue to shine as it has always done.

Investors have choices, you can park you wealth in cash an pray that the unrelenting money printing finally ends. Purchase government or corporate bonds, which derive their value from the good faith of the issuer and we have seen many cases where that is not worth much. These bonds return after inflation are negative since the interest rates are so low.

Buy stocks and strap in for a ride as your wealth can disappear overnight. Stocks are simply pieces of paper that derive their value from the fact that someone is willing to pay you a certain amount for your shares. They have no intrinsic value and someone can pay you 90% less tomorrow if that is what the perceived value is.

You may receive a small dividend for holding the paper, but in most case it very little.

Lastly, you can sleep soundly by investing in gold and silver. Since they are tangible metals that have always have been considered a storage of value and maintained their purchasing power. I think that the decision is a no brainer and the participants of the gold markets have been casting their votes.

I have traded the markets for many years and enjoy writing articles about Investing in Gold and Silver And Related Topics. Please check out my other articles Investing In Gold and Silver