Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Gold Bubble: Written in the Stars

Commodities / Gold and Silver 2011 Mar 26, 2011 - 02:22 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleOh lordy! Gold investing is being tipped in tabloid horoscopes...Sell!

"ARE YOU available for an interview this afternoon? I'd like to discuss the possibility that we're in a gold bubble!"


So asked a journalist's email we got here at BullionVault...back on 30th January 2009. Such bubble talk has only grown louder since then.

Yet gold has risen a further 56%. Which over two and more years is hardly the stuff of bubbles, however you define them.

Gold investing used to be seen as a contrarian move, of course – a rejection of the happy-clappy bullishness pervading the late-20th century's credit-fueled stupidities. So what about mass participation – that frenzy of Joe Public buying as the mass media urges him on?

Well, "My esteemed colleague, the astrologer Christine Skinner, says in her latest financial newsletter that over the next few months, 'precious metals should hold their value and, indeed, increase'..." wrote the UK's Jonathan Cainer this week in mass-market tabloid The Daily Mail.

Oh lordy! Gold investing is being tipped in tabloid horoscopes...Sell!

But what's this? "Generally," Mr.Cainer goes on, "precious metals rise when international insecurities rise. I too foresee a bumpy few months on the world markets...but the further into the future I gaze, the more I like the look of the global economy. For Japan in particular, the financial outlook is surprisingly rosy."

So here again, gold's bubble finds its pin all too soon. Christeen Skinner – source of the gold tip – "has studied space and time for over 40 years," according to her website, but doesn't currently have a million-strong following. Unlike Jonathan Cainer, who takes instead what you'd have to call the contrarian line, if only gold investing really were all the rage today. Which it's not.

1. It's the wrong shape
Compared with undeniable bubbles, gold's recent climb just isn't steep enough. Gold prices rose 85% for UK investors in the last 3 years, but US stocks rose 160% in that length of time in the 1920s, and Germany's Neuer Markt rose over 1600% starting in 1997. The South Sea Bubble in 1720 rose 9-fold in 5 months! What makes gold remarkable today is the longevity, not speed, of its bull market – now delivering positive, inflation-beating returns to savers pretty much everywhere worldwide each year since 2000.

2.  Investment "mania" still missing
The financial pages might be packed with gold comment, but actual participation by both professional and private investors remains low. In the early 1980s, private-bank clients were expected to hold 3% of their wealth in gold, many times the 0.5% allocation seen in the finance industry today. Even in the bullion market itself, three-quarters of the 500-plus analysts and traders attending last autumn's LBMA conference in Berlin said they held as little as nothing ("Between 0% and 10%") of their savings in precious metals. Saturation is a long way off.

3. ...as is true "bubble" psychology
A speculative bubble, by definition, needs the mass of investors and analysts to ignore its faults until it's much too late. As late as summer 2007, for instance, and with US home prices already falling fast, housing was called a "serious national bubble" by only 29% of professional business economists, up from just 14% two years earlier.In Jan. 2011, in contrast, over half the 1,000 Bloomberg terminal users answering the newswire's quarterly survey called gold a bubble. Just this week, Barclays Capital's latest institutional survey found no one – not one! – who thought gold would be the best performing commodity in 2011. With prices hitting new all-time highs vs. the Dollar right alongside, does that sound like bubble behavior to you?

4. Gold's far from over-valued
All the gold outside central-bank vaults today (jewelry plus bars and gold coins) is now priced around £3.7 trillion – barely 3% of the world's total private wealth and far below the 15-30% estimated  for the 1930s and early 1980s, the last two global financial crises. It's only just climbed back to one-fifth of the value of G7 government debt, a level last seen in 1990 and well below the near-parity of 1980. And on a risk-adjusted basis, calculated as an actuary would price insurance, fair value for gold could now be nearer $3800 per ounce than the $1440 being asked in the market. That's because the market continues to discount to zero the risk of a severe, even hyperinflation, such as the rich West hasn't seen since WWII. Which could no doubt prove the correct view, if only it weren't so complacent.

5. Money-crisis insurance still needed
It's always hard to accuse gold buyers of "over-optimism " (Charles Kindleberger's definition of bubble mentality), but this market will only switch to "irrational exuberance" (Robert Shiller's phrase) when its key driver – loose monetary policy – ceases to be true. That's what happened as interest rates began rising sharply at the start at the end of the 1970s. In the early '80s, cash in the bank started to pay double-digit returns over and above inflation, so inflation defence just wasn't needed. Whereas today, in contrast, real interest rates in the UK are worse than at any time since 1978, with our record peace-time deficits – plus the loose money consensus which continues to dominate both monetary and fiscal policy  – capping any hope savers might have of earning a decent yield on their cash.

To recap: Nothing has changed fundamentally. Ultra-loose monetary policy is chipping away at the value of official cash, only it's now locked in by record peace-time deficits which have hamstrung central bankers' ability to respond to rising prices. As an aside, emerging-market demand continues to grow, but mass participation in the rich West is a very long way off.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules