Are Gold Prices Really Rising?

The gold bubble debate is reaching a fever pitch. Many bubble believers argue that yellow-metal mania is creating a speculative bubble.  Many gold believers say no such speculative bubble exists. And furthermore, gold prices aren't really rising; the value of the dollar is declining.

What's speculation got to do with it?
Gold bulls may be onto something. As illustrated below, gold prices steadily tracked the amount of money in circulation over the past decade.

An increase in the monetary base dilutes the dollar; as a result, the price of gold (and everything else) has increased. In other words, speculation has little to do with the recent rise in gold prices.

Barrick Gold's (NYSE: ABX  ) CEO offers more evidence for a "dollar decline theory" by pointing out that gold has not appreciated disproportionately to other commodities during the past decade.

Eric Sprott, manager of Sprott Physical Gold Trust (NYSE: PHYS  ) , also rebuts the speculative stampede theory by pointing out that a mere 0.75% of all financial assets are in gold.

The next chapter in the gold debate
Many believe further expansion of the monetary base is coming, via a third round of quantitative easing from the Federal Reserve. If the gold bulls are right, this will likely cause an increase in the price of gold, assuming the price has not been bid up in expectation of more dollar debasement.

Investors looking to capitalize on the possibility of more money being printed should consider any of the aforementioned investments as well as established gold miners like Newmont Mining (NYSE: NEM  ) , Kinross Gold (NYSE: KGC  ) , and Yamana Gold (NYSE: AUY  ) , to name a few.

The bottom line
No one can say with certainty if the gold rush will continue or what is the root cause of the rise in gold prices. However, allocating a portion of your portfolio to gold could prove to be a prudent move.  

Fool contributor Adam J. Crawford does not own shares of any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (13)

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  • Report this Comment On September 09, 2011, at 1:37 PM, TheDumbMoney wrote:

    You are in the right ballpark, but hitting singles. Gold's negative corrolation with real interest rates is vastly more powerful.

    See here: http://caps.fool.com/Blogs/two-models-for-pricing-gold/63412...

    And the original Crossing Wall Street blog posts.

  • Report this Comment On September 09, 2011, at 1:43 PM, richthegeek wrote:

    Nice post. Thanks.

    Further pushing that up will continue to be the lack of confidence in equities as they slide. A 1.9% yeild to lock up your money in T-notes for 10 years is hardly much better of an option than just staying in cash. But that cash is steadily being devalued. It would seem like PMs are the only way to preserve wealth at this point.

  • Report this Comment On September 09, 2011, at 2:43 PM, reflector wrote:

    "No one can say with certainty if the gold rush will continue or what is the root cause of the rise in gold prices"

    while i would not call it a "gold rush", i can say with certainty it will continue, and it's quite clear to many people what the root cause is: a basic dishonesty, corruption, and lack of discipline throughout our financial and political system, and a lack of confidence in the system and its currency (the dollar).

    even the CHF is now being debased (pegged to the euro), all currencies are in a race to the bottom.

    if you want to preserve your money, they only way is to put it into REAL assets,like commodities, gold & silver, not promisary notes.

  • Report this Comment On September 09, 2011, at 4:08 PM, pbk100 wrote:

    "As illustrated below, gold prices steadily tracked the amount of money in circulation over the past decade"

    Really? That's not what I see in that graph. Sure, both ended the decade higher than they started, but that's not the same as steadily tracking. From 2005 to 2008 the monetary base barely expanded, but the price of gold doubled. Then in the second half of 08 the monetary base doubled and the price of gold barely shifted. And from mid 2009 to the end of 2010 the monetary base was flat and gold continued to climb.

    If an increase in the monetary base and an increase in the price of gold are cause and effect then you have to explain why the effect is preceeding the cause.

  • Report this Comment On September 09, 2011, at 4:31 PM, Frankydontfailme wrote:

    Great article, thank you.

  • Report this Comment On September 11, 2011, at 5:35 PM, ryanalexanderson wrote:

    > If an increase in the monetary base and an increase in the price of gold are cause and effect then you have to explain why the effect is preceeding the cause.

    Easy. Savvy investors and foreign central banks looked at the macro picture and anticipated the money base expansion, and bought the gold in advance. They deemed it inevitable.

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