Dear Friends,
It seems to me people are incapable of learning from the past. Doesn’t anyone think, maybe, gold prices might be bubbling a little bit? I mean come on… unprecedented run up in price, all time highs being set daily now, and most importantly people are buying gold because it is going up so fast. Isn’t that the very definition of a bubble forming?
Hard to see where a price bubble could be a bad thing… but lets look at the subject.
Real Estate bubbles are historic in that they have been happening since the middle ages and probably before. Stock bubbles are a more recent phenomenon and commodity prices are classic bubbles. Think about the price drops of some commodities that have experienced their price bubbles bursting. Think rhodium between 2004’s price buildup to 2007’s climax of $10,000.00 an ounce. to $1000.00 an ounce in 2008, (a 90% price drop). Gold is a commodity just like rhodium and is subject to the same market forces.
Another thing driving up the price of gold is that production is outpaced by demand. Demand that is largely driven by an expectation that the price will go up indefinitely. But I ask you what happens when the price of a commodity goes up drastically? Production of that commodity goes up as soon as it can be ramped up. When gold was relatively cheap many gold mines became unprofitable. They are being brought back on line as we speak. They are a source of a potential prick.
The profoundly unwise monetary policy of the US is also another factor in the gold bubble. The US government has been printing and borrowing money way too fast. This is damaging the perceived value of US caveat currency. When this happens people seek a better store for their wealth. Gold is a historic store of wealth. But if the price of gold were to drop in half, (which is not unlikely in a bubble burst), then what good that store? Once the price bubble bursts the price will be suppressed for some time.
If America’s caveat currency looses it’s value do to it’s foolish spending, do you think the US government might entertain the thought of nationalizing the gold supply, seizing personal gold held by it‘s citizens? Like has done in the past by progressives. Making a potential barb from the us government.
China is buying gold at a fast pace. As both a store of wealth and as a tool to balance it’s currency. But if the perceived value of gold were to drop for whatever reason, China could bankrupt herself, but the price would still plummet. Opinion is like that… it can turn on a dime and is as powerful as a tsunami. That is what makes bubbles so dangerous.
Coming on the heels of the financial industry’s near death experience a gold bubble bursting could send the world into depression. The caveat being the bubble could go up for several more years, (rhodium rose for three years before the fall), making it more dangerous or it could burst tomorrow, if the conditions present themselves.
By their nature bubble’s are unpredictable. The only thing that generally defines a bubble is after it has burst people claim it was obvious. The truth is few people see a bubble forming… but everyone sees it burst.
I am not saying money cannot be made in a bubble. The trick is to get out just before it bursts. Those that do make out exceptionally well. Those that don’t… Well, some try to fly.
