Gold Not a Bubble? What Are You, Crazy?

The price of gold is a bubble, and there's part of me that doesn't understand how this is even a debate. I think the following chart goes a long way toward backing up that story.

Source: Kitco, inflationdata.com, and Yahoo! Finance.

In the chart above, we have the indexed performance of four things: the Dow Jones (INDEX: ^DJI) and the Nasdaq during the dot-com bubble, oil prices running up to 2008, and gold from 2001 to today. To put some numbers to it, the average annual closing price of the Nasdaq as of March 2000 had grown 22.5% per year over the previous decade. As of today, gold prices have returned roughly 21% per year over the past decade.

I don't think we'd have much trouble labeling the three things we're looking back on in retrospect "bubbles." They rose sharply over a prolonged period of time, ran up to lofty prices that made little logical sense, and then crashed.

Why is it so hard, then, to recognize that gold is a bubble?

Sizing it up
An interesting point jumped out at me in an article that my fellow Fool Adam Crawford posted last week. He noted that Barrick Gold's (NYSE: ABX  ) chairman and founder, Peter Munk, argued against the "gold bubble" theory by highlighting the fact that other commodities have risen by similar amounts. Here's what Munk said in Barrick's annual report:

"[T]he ascent of gold since 2001 has been steady, measured, and rational. What's more, when compared to other commodities such as copper and oil, gold prices have not appreciated disproportionately."

I found this a particularly interesting argument because I had done some work last year stacking up gold prices against certain commodities and what Munk said sounded, well, wrong. Obviously, it was high time to break out my spreadsheets and update my numbers.

Here are the same charts I presented previously, updated with more recent data.

Source: Kitco, National Cotton Council of America, U.S. Department of Agriculture, University of Wisconsin-Madison, U.S. Department of the Interior, metalprices.com.

With the exception of my new, fancy-pants formatting, the charts above look very similar to the way they looked like the last time I ran them. In other words, far from being reasonably priced as compared to other commodities, in the case of many commodities, the gold price ratio is at its highest level ever. Or at least back to the 1970s, which is where my dataset starts.

Now I don't want to be unfair to Mr. Munk. He highlighted two commodities in particular in his statement -- oil and copper -- and I haven't shown either one. Here's how they look.

Source: Kitco, inflationdata.com, U.S. Geological Survey, Southern Copper annual report, metalprices.com.

These charts look much more favorable for Munk's point, and even more so back in 2010 when he penned his letter for the annual report. However, we need to be careful when looking at any one commodity. After all, concluding that gold was underpriced in 2008 simply because the gold/oil price ratio looked favorable to gold would have been troublesome, since the ratio was low because oil was bubblicious.

Similarly, I think we're better served by looking at a broad range of commodities in comparison to gold, rather than cherry-picking just a couple that serve the purpose of proving a point. On that note, not shown here, the gold/iron ore ratio is currently low, but its price ratios to wheat, aluminum, nickel, and cattle are all at very high, if not historic, levels.

The problem with being a gold bear
Bubbles don't have appointment books. They don't schedule when they're going to start, hit highs, or start rapidly deflating. The fuel of a bubble is irrational optimism and speculation, and those are ingredients that can burn hotter than thermite and melt even the savviest bears in its path.

So I'm sorry to those who would encourage me to "put my money where my mouth is," but I have a firm rule of not stepping in front of charging freight trains.

What I am doing though is steering well clear. Miss Cleo hasn't told me when the price of gold will become reacquainted with reality, but when it does it won't be good news for gold miners like Barrick and Yamana Gold (NYSE: AUY  ) . It will be even less cheery for nonmining gold investments like Sprott Physical Gold Trust (NYSE: PHYS  ) .

So in my portfolio I'm sticking to reasonably priced stocks of companies that aren't selling an overpriced nonindustrial metal. This includes companies such as Johnson & Johnson (NYSE: JNJ  ) and Waste Management (NYSE: WM  ) , which provide essential products and services that are in demand year after year after year.

Looking for more stocks that have nothing to do with yellow metal? Click here to grab a free copy of The Motley Fool's special report "13 High-Yielding Stocks to Buy Today."

The Motley Fool owns shares of Johnson & Johnson and Waste Management. Motley Fool newsletter services have recommended buying shares of Waste Management and Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Motley Fool newsletter services have recommended creating a write covered strangle position in Waste Management. 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.

Fool contributor Matt Koppenheffer owns shares of Johnson & Johnson and Waste Management, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On September 14, 2011, at 10:52 AM, kariku wrote:

    How is the median relevant to anything ? Why not the average ?

  • Report this Comment On September 14, 2011, at 11:14 AM, TheDumbMoney wrote:

    I am similar to you, except I am looking to add, selectively, various growth companies during moments of weakness -- and I very strongly anticipate more weakness in September and October in particular.

    I have posted these articles elsewhere on this site, but the main problem with being a gold bear is that the "real interest rate thesis" supports continued gold increases for at least the remainder of Bernanke's term, even if we get deflation, in which case our central bank will quite rightly attempt to reduce real interest rates.

    http://www.crossingwallstreet.com/archives/2010/10/a-model-t...

    http://www.crossingwallstreet.com/archives/2011/08/updating-...

    http://peterlbrandt.com/the-dominant-fundamental-theory-expl...

    I am not a big fan of Mr. Barker's overall thesis, and I think his thematic, qualitative, hybrid analysis is the wrong way to look at gold. But I think he is correct about the point that gold is a hybrid between a commodity and a "currency alternative." I would not go so far as to call it a currency, obviously. I currently believe that the real interest rate model may be the marker that determines whether gold asserts itself as a currency alternative, or whether it exhibits a commodity status, in which case it becomes much less valuable.

    I am not saying this is the "key" to gold, and I have no position either way in gold, or in silver, but I think anyone considering shorting gold should take a long, hard look at real interest rates, particularly in the U.S., and to a lesser extent Europe, and then Japan. I did a lot of work on looking for sources like this on the interwebbles because I was considering shorting gold. But no longer. The U.S. real interest rate is the most important. Bridgewater Associates analysis, as described in Brandt's piece above, is similar to the Van Eeeden analysis, and depends upon a similar dynamic.

    (I know Matt is not suggesting shorting gold, BTW.)

    Anyway, I do not see real interest rates in the U.S. going back up to 2% anytime soon, do any of you? I think gold could easily breach $2000/oz and go well beyond it in the next year or two before this cycle completes itself. Where I diverge from someone like Mr. Barker of this website, is that I do not believe the 1970's switch to a pure fiat currency was a mistake at all, and I firmly believe there is going to come a time when deleveraging ends, the economy improves, real interest rates rise significantly, and gold plummets like a non-corrosive rock. I just don't currently think that time is going to come anytime in the next year or two.

    Keep an eye on the TIPS yield curve though.

  • Report this Comment On September 14, 2011, at 11:20 AM, SN3165 wrote:

    Inflation? US dollar losing value? US National Debt 14.7 trillion? Europe Debt Crisis?

    "They rose sharply over a prolonged period of time, ran up to lofty prices that made little logical sense, and then crashed."

    Golds been in a secular bull market for 11 or so years (the Nasdaq bubble lasted what, 2 years?)...gold rising makes perfect logical sense...

    Articles like this aren't worth the time.

  • Report this Comment On September 14, 2011, at 11:39 AM, The1MAGE wrote:

    @kariku, median is an average, as is mean, and mode. When people often speak of average they are referring to the mean.

    Sometimes the median is a more informative source of information, and the mean can distort the facts.

  • Report this Comment On September 14, 2011, at 11:59 AM, PaleHorseGroup wrote:

    @SN3: Where is the actual value behind gold that causes panicky investors to use it as a hedge? Gold, in the modern financial system, has almost no practical use. Its value is based entirely on the perception of its stability, and when that perception is shaken gold will tank.

  • Report this Comment On September 14, 2011, at 12:00 PM, TMFBreakerRob wrote:

    Nice article, Matt. You appear to be taking the approach that there will be no discontinuities (major disruptions) in the future. Today, there is an expectation of just such a disruption...in fact, there is a noisy group that expects the US and most of the rest of the world to follow the Weimar Republic and Zimbabwe into fiat currency oblivion. If those expectations prove correct in the next few years, there is no bubble and gold is too cheap on a dollar basis. If not, then many folks can pat themselves on the back for not being drawn into folly. ;) I hope you're correct, but I keep in mind that no government (and no currency) has stood the test of time...all have failed eventually...and our global proclivities for adding debt at a rate much faster than the ability to pay it off do little to provide comfort. :P My "hope" (a slim reed to lean on) is that companies that generate wealth can survive and perhaps prosper in a collapse.

  • Report this Comment On September 14, 2011, at 12:02 PM, DukeTG wrote:

    If you have five people in a room and one of them is warren buffet, the average (mean) income is going to be meaningless. The median income will tell you something useful.

  • Report this Comment On September 14, 2011, at 12:19 PM, FleaBagger wrote:

    Matt and Rob: even though moderate to high inflation might not do much to harm companies like WM and JNJ, a currency collapse would be devastating. Gold would still retain its value, however, better than almost anything else that is easily stored.

  • Report this Comment On September 14, 2011, at 12:20 PM, MrFearful wrote:

    I think gold is definitely on its way to becoming a bubble, but due to the European debt crisis (and don´t forget U.S. debt), I don´t think it is going to burst very soon...

  • Report this Comment On September 14, 2011, at 12:22 PM, whereaminow wrote:

    ------>The fuel of a bubble is irrational optimism and speculation, and those are ingredients that can burn hotter than thermite and melt even the savviest bears in its path.<-------

    Oh really? The feul of a bubble is an increase in the money supply. The irrational optimism, then, would be caused by that increase. Every bubble in history, even the tulip bubble can be traced an increase in the supply of money.

    So herein lies the catch. if gold is entering bubble territory because of the Fed's low rate policies, then it would be agreed by all parties that higher Fed rates will signal an end to the gold run.

    But what is the Fed's current plan? At least two more years of low rates. Hmmm...... I think you are smart to not jump in front of this train.....

    David in Qatar

  • Report this Comment On September 14, 2011, at 12:24 PM, dag154 wrote:

    The graphs are irrelevant. What is the value in comparing gold to oil prices or stocks? Why not compare it to the average price of luxury shoes, or to the price of diamonds, or even toilet paper for that matter?

    Gold will remain expensive.

    Originally the price of gold rose because of increased demand world-wide. People like the shiny stuff: it represents a high social status, makes you look more attractive and, as an added bonus retains its value (unlike super-expensive shoes for example).

    Today, it is a safe haven in unpredictable times.

    US and European governments are merrily printing money and giving it away so as to keep banks afloat and their economies going. To make matters worse, yields are incredible low, thereby ensuring that your cash holding is worth less every year.

    How do you ensure that your savings will no be wiped out by government flooy or crashing markets: buy something which has been valued for thousands of years and is of limited supply: GOLD.

    Diamonds will also do.

  • Report this Comment On September 14, 2011, at 12:36 PM, Stocklovr wrote:

    From a couple of previous comments:

    "Inflation? US dollar losing value? US National Debt 14.7 trillion? Europe Debt Crisis?" -- translated = FEAR, FEAR, FEAR, FEAR.

    Add to that "in fact, there is a noisy group that expects the US and most of the rest of the world to follow the Weimar Republic and Zimbabwe into fiat currency oblivion." translated = FEAR.

    Another component of fear is greed. When the masses worry or are greedy, they bulk up on whatevr they think will alleviate the fear / enhance their greed. 2000 resulted in the internet bubble, 2008 was the housing bubble and in 2010- it is gold.

    Good luck to all who prefer gold but I prefer solid businesses that actually make a tangible product or provide a service and give their investors an ever increasing dividend while also continuing to grow their earnings. I sleep a whole lot better knowing my investments are not based on the sentiment of the masses - which as we all know, can change in a heartbeat!

  • Report this Comment On September 14, 2011, at 12:45 PM, yragca wrote:

    Gold is trading as a currency. Yes it could be somewhat overvalued today, and may fall back, but in 12 months it will be up against all fiat currencies that are clearly being devalued--even the Swiss Frank, for pete's sake. From David Rosenberg: " So what this all means is that gold is no longer being considered as part of a resource complex that is outperforming the segment but is increasingly being viewed as a currency of its own."

    http://georgewashington2.blogspot.com/2010/05/david-rosenber...

    This article is from 5/14/2010, so it's dated, but that is still Mr. Rosenberg's view, except he has recommended diversifying your gold investment with gold miners, since he agrees gold is ahead of itself, and he believe the gold miners are priced for $1200 gold.

    I diversify my cash position with gold. Central banks around the world do that, why not me? I too am long JNJ and solid dividend stocks. But you don't have to choose between gold and dividends, obviously. ( Actually some of the gold miners are paying a dividend.)

  • Report this Comment On September 14, 2011, at 12:50 PM, TMFHousel wrote:

    <<You are quick to call a bubble but where were you on NFLX, PCLN, GMCR, etc.>>

    I like this perspective. Gold can't possibly be a bubble because Matt didn't say Priceline was as well.

  • Report this Comment On September 14, 2011, at 12:54 PM, reflector wrote:

    the price of gold in dollars is not the central issue.

    the fact that gold price is continuing to rise is only a symptom of the sickness of our fiat-currency based financial system which is failing, despite the fed's best efforts to print money and prop up a failing system which inevitably will fail, just as greece's is about to do.

    the us dollar has been in a bubble for some time now, and the dollar bubble is popping.

    the price of gold is not coming down until the structural problems and deficits of our financial system are addressed, i don't see that happening, do you?

  • Report this Comment On September 14, 2011, at 1:00 PM, TMFBreakerRob wrote:

    <I like this perspective. Gold can't possibly be a bubble because Matt didn't say Priceline was as well.> -- Morgan

    LOL....that's right! I'm thinking Priceline can double in a few more years based on their performance and market opportunity. It can't be a bubble until after I pocket my profits! ;)

  • Report this Comment On September 14, 2011, at 1:03 PM, whereaminow wrote:

    The value of all paper currencies is inherently dependent on the viability of the issuing sovereign in the eyes of the market actors. Gold, while in demand in every country and century, on the other hand, serves as a pesky reminder to the state that people are losing faith in their abilty to govern.

    Does this situation sound at all familiar =D?

    David in Qatar

  • Report this Comment On September 14, 2011, at 1:05 PM, TMFKopp wrote:

    "The value of all paper currencies is inherently dependent on the viability of the issuing sovereign in the eyes of the market actors."

    Yes, but how about milk?

    Matt

  • Report this Comment On September 14, 2011, at 1:10 PM, TMFKopp wrote:

    @yragca

    "Gold is trading as a currency."

    Whew! Thank our lucky stars this isn't really true! Were it truly the case, we'd have been facing massive, soul-crushing deflation over the past decade.

    Matt

  • Report this Comment On September 14, 2011, at 1:14 PM, somethingnew wrote:

    @SN3165 housing boom lasted 8 years

  • Report this Comment On September 14, 2011, at 1:17 PM, TMFHousel wrote:

    <<Golds been in a secular bull market for 11 or so years (the Nasdaq bubble lasted what, 2 years?)...gold rising makes perfect logical sense...>>

    This is impressive logical gymnastics.

  • Report this Comment On September 14, 2011, at 1:24 PM, TMFHousel wrote:

    Housing increased every year for 14 years, which was much longer than the dot-com boom. Does that mean it wasn't a bubble?

  • Report this Comment On September 14, 2011, at 1:25 PM, AvianFlu wrote:

    I fully intend to get out of gold...just as soon as we stop debasing the currency. So it's going to be awhile.

  • Report this Comment On September 14, 2011, at 1:28 PM, Turfscape wrote:

    TMFHousel wrote:

    "I like this perspective. Gold can't possibly be a bubble because Matt didn't say Priceline was as well."

    Best comment to date!

  • Report this Comment On September 14, 2011, at 1:35 PM, reflector wrote:

    the chart near the top of this seeking alpha article will give you an idea as to when gold will be a bubble, it should be around the time that 1 ounce of gold in dollars matches the DJIA:

    http://seekingalpha.com/article/265447-stock-ideas-for-5000-...

    once gold meets the DJIA, probably around $7000 or so, then gold will be in a bubble and it will be time to sell.

  • Report this Comment On September 14, 2011, at 1:37 PM, whereaminow wrote:

    TMFKopp,

    ------->

    "The value of all paper currencies is inherently dependent on the viability of the issuing sovereign in the eyes of the market actors."

    Yes, but how about milk?

    Matt<-----------

    How about milk? Milk is a real resource that is valued based on the law of diminishing marginal utility. Paper money is a not real resource. Its value is derived from the sovereign.

    Do you really not understand the concept of monopoly paper currency and its difference from real things that get produced by real market actors in the private, voluntary market?

    David in Qatar

  • Report this Comment On September 14, 2011, at 1:38 PM, TMFHousel wrote:

    I've always been curious about the gold/Dow ratio. Why should a company whose earnings compound at a real rate over time have any correlation to an asset whose purpose is to to maintain value over time?

  • Report this Comment On September 14, 2011, at 1:46 PM, imnotsleeping2 wrote:

    I appreciate the work everyone at TMF does, but saying "gold has gone up more than other assets and is therefore a bubble" is not exactly great analysis. I do realize that you were addressing a specific claim made by a guy in the gold industry.I don't think anyone can tell if gold is in a bubble or not right now. All asset classes go up and down, gold is popular right now due to global uncertainty (read: flight to safety). People want gold and t bills because things are complicated globally right now and they are paying right now's price for safety.

    I think what you are getting at is that Gold is that it is difficult to value. I can't pull up a 10-K and read and analyze it. There are things that influence the price like interest trades, deficit spending, money supply etc, but even that can be cloudy analysis because the relationships between data and gold price can be funky.

    I have gold related CAPS picks because until the global financial problems are closer to resolution or there is more clarity, I think flight to safety gold will get me some points in the CAPS game.

    Anyways, concluding on gold’s bubbliness not notness is not really possible IMHO.

    All the best,

    Mugmugmug

  • Report this Comment On September 14, 2011, at 2:00 PM, TMFKopp wrote:

    @David

    "Do you really not understand the concept of monopoly paper currency and its difference from real things that get produced by real market actors in the private, voluntary market?"

    The blinding light of your absolutely brilliant comments must have made me lose my mind for a moment!

    You completely missed my point (or chose not to address it?). Why would gold have increased so much in relation to milk?

    Matt

  • Report this Comment On September 14, 2011, at 2:10 PM, reflector wrote:

    "I've always been curious about the gold/Dow ratio. Why should a company whose earnings compound at a real rate over time have any correlation to an asset whose purpose is to to maintain value over time?"

    i don't know why it "should", but it's clear from history that it does.

    if you're asking me to speculate as to why it happens, the dow goes in cycles, and gold is the real baseline by which it is measured.

  • Report this Comment On September 14, 2011, at 2:16 PM, reflector wrote:

    oh, one other thing, the gold/cpi chart, it's widely understood that CPI is a government-fudged number, the government manupulates such figures as CPI and unemployment to paint a rosier picture and continue the ponzi scheme.

    for accurate inflation info, please see shadowstats.com

    using the real inflation numbers will show a very different inflation adjusted gold price chart.

  • Report this Comment On September 14, 2011, at 2:18 PM, hot1053 wrote:

    Gold will not be a bubble until a new currency is developed that has everyone rushing to it. Didn't Bernake say gold isn't money? Gold has been the longest running currency. Dollars, Yen, Yaun, Francs, Euros have a short history and not one fiat currency has survived nor is it looking like any of these paper/monopoly money looking currency is going to be worth much of anything in the furture.

    No bubble here until the next big thing happens.

    Btw, wouldn't this make AAPL a bubble? MSFT? ORCL?

    Of course not!

    Gold is being bought by China, India and central banks in droves.

    Remember that when Gold crosses $2000.

  • Report this Comment On September 14, 2011, at 2:23 PM, whereaminow wrote:

    ----->Why would gold have increased so much in relation to milk?

    Matt<--------

    Is this a serious question?

    David in Qatar

  • Report this Comment On September 14, 2011, at 2:33 PM, TMFHousel wrote:

    <<for accurate inflation info, please see shadowstats.com>>

    I'm curious, why is someone with a predisposition for skepticism so confident that shadowstats is 100% accurate?

    Is it possible that shadowstats fudges the numbers too? http://www.econbrowser.com/archives/2008/09/shadowstats_deb....

  • Report this Comment On September 14, 2011, at 2:33 PM, TheDumbMoney wrote:

    Matt,

    "You only think I guessed wrong! That's what's so funny! I switched glasses when your back was turned! Ha ha! You fool! You fell victim to one of the classic blunders - The most famous of which is "never get involved in a land war in Asia" - but only slightly less well-known is this: "Never go against a Sicilian when death is on the line"! and also, "don't get into a blog post argument with David in Qatar, because it will go on, and on, and on, until you finally decide you don't need to get the last word." He must park cars for a living or something.

    Sincerely,

    DTAF

    PS. With much love, David.

  • Report this Comment On September 14, 2011, at 2:40 PM, TMFKopp wrote:

    @DTAF

    Indeed....

    @David

    Please treat it as rhetorical.

    Matt

  • Report this Comment On September 14, 2011, at 2:50 PM, whereaminow wrote:

    Dumber,

    ------>"He must park cars for a living or something.<-------

    LOL, if only you knew. It's sad you have to stoop to a personal attack, especially when you weren't even involved in the coversation.

    Matt,

    Where does the value of paper money come from?

    I made the simple, but irrefutable point that

    1. Value is subjective and is governed by the Law of Diminishing Marginal Utility

    2. Paper money, being a purely political convention with no connection to real resources, derives its value from the viability of the issuing state.

    Rather than address these points, you want to talk about the price of milk? And I'm the crazy one?

    Ok, pal. I'd have a glass for you, but since I'm past the weaning stage, I don't drink milk.

    Now if you actually have a problem with points 1 and 2 above, then say so. Otherwise, drop the I'm-smarter-than-all-you-goldbugs routine. This is basic stuff. You should be able to pick it apart if you're the smart one.

    David in Qatar

  • Report this Comment On September 14, 2011, at 2:55 PM, TMFKopp wrote:

    @David

    Yes, but how bout that price of milk?

    :)

    Matt

  • Report this Comment On September 14, 2011, at 3:00 PM, whereaminow wrote:

    I accept your concession that my points are valid.

    To any readers who don't want to end up a mainstream macro fool, I recommend you learn about the Austrian School of Economics at www.mises.org

    There you will find plenty of resources to learn economic theory, as opposed to the garbled faux mathematical nonsense that predominates the mainstream.

    Get a few books from Rothbard or Mises under your belt, and the mainstream econ journalist has no chance. As evidenced in this post.

    David in Qatar

  • Report this Comment On September 14, 2011, at 3:06 PM, TMFKopp wrote:

    @David

    But seriously, how bout that price of milk?

    Matt

  • Report this Comment On September 14, 2011, at 3:11 PM, whereaminow wrote:

    Matt,

    How about those interest rates?

    David in Qatar

  • Report this Comment On September 14, 2011, at 3:14 PM, TMFFlushDraw wrote:

    I constantly hear about the increasing money supply, but gold bugs fail to mention the increasing gold supply. Miners are constantly pulling more gold out of the ground, shouldn't that decrease the value over time?

    Travis

    PS. I like milk.

  • Report this Comment On September 14, 2011, at 3:19 PM, whereaminow wrote:

    ---->I constantly hear about the increasing money supply, but gold bugs fail to mention the increasing gold supply. Miners are constantly pulling more gold out of the ground, shouldn't that decrease the value over time?<-----

    ROFL. This is mainstream econ, folks!

    The above ground supply of gold dwarfs the yearly mining production.

    How can you even comment on gold without knowing that?

    But how bout that price of milk!

    David in Qatar

  • Report this Comment On September 14, 2011, at 3:33 PM, kirkydu wrote:

    I recently wrote a post on Caps titled "Creating Illiquidity in Gold" which got a few views. The author here points out that we are in a bubble correctly in my view. The problem, as the author identifies, with bubbles is that we do not always know when they will burst, that is they have "no appointment book."

    Right now, near $2000/oz is not an easy short. Gold could very easily go to $4000/oz on a dose of fear from some known issue, i.e. European debt, more money printing, or war, or a black swan.

    George Soros, a big gold bug for almost a decade, has repeated his history of getting in and out of a trade early. He bought gold years ago and sold recently. If Soros has thought he had a British Pound moment coming, you can bet he would have held on. That should tell the retail investor to beware.

    Pessimism is extremely high right now and that bodes well for gold short term. Long run however, gold will revert to its inflation adjusted mean.

    And there's the rub, the most ardent gold bugs claim we are in store for big inflation, largely due to money creation at central banks. I disagree.

    I believe that the money creation at central banks the past three years has roughly filled the hole left when the shadow banking industry was destroyed a few years ago. We do not have more money sloshing around on mouse pads globally than we did a few years ago, it is about the same.

    If velocity picks up, interest rates will have to be raised to offset inflationary pressures. We have plenty of room to maneuver in this regard.

    In addition, I don't see a rapid pick up in velocity due to the extreme current pessimism. The likelihood that a spending pick-up is gradual as developed market consumers pay down debt and developing markets consumers accumulate enough to feel confident spending. It is also very important to remember that there is significant deflationary pressure due to aging populations in the U.S., Europe and Japan, as a natural drag on the global economy.

    If you truly want a hedge versus inflation driven by scarcity or monetary malfeasance, the safer approach is to buy a basket of commodities, i.e. Jim Rogers labeled ETNs offered through Elements, buy a mini-farm and work it on the weekends (that's good for the soul too) or if you have the loot and stamina get into futures directly.

    Kirkydu

    aka www.KirkSpano.com

  • Report this Comment On September 14, 2011, at 3:42 PM, AlphaVolume wrote:

    everyone and their mother is calling the gold bubble, including this guy. Which makes me even more long. was everyone predicting the dot.com bubble? nope. was everyone predicitng the real estate bubble? nope. a bubble is something that rises in price without the fundamentals. Gold certainly has the fundamentals. Gold as an asset class still doesnt even reach the market value of AAPl. There will be an "ah hah" moment for gold as an assett class, in where fund, and managers get into gol. @writer let me know when you're long gold then maybe it will be a bubble.

  • Report this Comment On September 14, 2011, at 3:45 PM, kirkydu wrote:

    @Matt (aka TMFKopp)

    "You completely missed my point (or chose not to address it?). Why would gold have increased so much in relation to milk?"

    I'm from Wisconsin and can unequivocally tell you it is due to happy cows.

    kirkydu

  • Report this Comment On September 14, 2011, at 3:52 PM, kirkydu wrote:

    @DinQ

    "...I made the simple, but irrefutable point that

    1. Value is subjective and is governed by the Law of Diminishing Marginal Utility

    2. Paper money, being a purely political convention with no connection to real resources, derives its value from the viability of the issuing state."

    There you go with "irrefutable" again. You are quite the confident chap.

    1. Your subjective is my analysis, and vice versa.

    2. So very wrong. The viability of a nation's paper money IS absolutely based upon its real resources. Nations might indeed "overspend" their resources, causing inflation due to monetary debasement, however, the United States is nowhere near that point. Not even close.

  • Report this Comment On September 14, 2011, at 3:55 PM, kirkydu wrote:

    Regarding Shadowstats.com

    I have looked in on them for years, even subscribed a few times. While the government puts out pro-government numbers, Shadowstats puts out anti-government stats. The truth appears to be somewhere in between. Think of it as a range.

  • Report this Comment On September 14, 2011, at 5:10 PM, TheDumbMoney wrote:

    To All:

    I would just like to point out the following: Just as the conclusion the U.S. cannot (except by choice) default is equally as consistent with mainstream monetary theory as it is with so-called "modern monetary theory," so too is the conclusion that gold will keep rising for the next year or so equally as consistent with mainstrean monetary and economic theory, as it is with the Austrian School.

    To David:

    You need to understand that I don't have to stoop, I choose to stoop. I think you're smart, and you know I think that, so I can only assume you are unable to rebut my devastating argument that you are like an asian land war. Also, I have long ago decided that you very likely work in national security for some country, perhaps even the U.S., but if it's for the U.S. you work for a private contractor. Or perhaps you used to work for the U.S. and/or be in the army, but now you are a "consultant." So, thank you for your service, anarchist. I hope you use a non-government computer on the Fool, especially when arguing that the official explanation of 9/11 is a lie.

    Best wishes, all.

  • Report this Comment On September 14, 2011, at 5:26 PM, PostScience wrote:

    This time it's different!

  • Report this Comment On September 14, 2011, at 5:52 PM, caltex1nomad wrote:

    I like Milk but, I won't pay $ 2000 a gallon !

  • Report this Comment On September 14, 2011, at 6:03 PM, TMFDitty wrote:

    I'm in awe. Nice work, Matt.

    TMFDitty

  • Report this Comment On September 14, 2011, at 8:53 PM, whereaminow wrote:

    Dumberthanafool,

    -----> "so I can only assume you are unable to rebut my devastating argument that you are like an asian land war."<------

    FWIW, we have the same taste in movies.

    Kirk,

    ----->The viability of a nation's paper money IS absolutely based upon its real resources. Nations might indeed "overspend" their resources, causing inflation due to monetary debasement, however, the United States is nowhere near that point. Not even close. <-----

    We've argued inflation enough, but I would certainly like to know what "that point" is, exactly. If that's something I am supposed to be looking out for, you would think that you could tell me exactly where it is.

    But you're saying the exact same thing as I did, only you are qualifying the terms. That's fine but it doesn't refute my point or show that it's wrong. A government that squanders the resources it confiscates from the private sector will see the value of its paper currency drop. Many people feel that our government has done just that. Who they blame depends on which political card they carry, but they all generally agree that the government has squandered much of America's wealth. It's no coincedence that the value of the dollar has fallen mightily over the last ten years. Most people can see the wealth being squandered (ya know, on wars on stuff) without having to read a book on econ. We're merely phrasing it differently.

    David in Qatar

  • Report this Comment On September 14, 2011, at 10:09 PM, ScottmFool wrote:

    I think buying milk with krugerrands would be cool.

    Getting the change in buffalo gold coins would be a hassle, though.

  • Report this Comment On September 15, 2011, at 1:41 AM, TMFKopp wrote:

    Thanks Rich!

    @caltex1nomad

    "I like Milk but, I won't pay $ 2000 a gallon !"

    That'd be murder for chocolate chip cookie manufacturers.

    Matt

  • Report this Comment On September 15, 2011, at 4:20 AM, reflector wrote:

    $2000 per gallon of milk in a few years may well be a very cheap price, but it depends where the dollar's at (assuming it's still around).

  • Report this Comment On September 15, 2011, at 4:23 AM, reflector wrote:

    fair price for gold is currently at $10,000/oz.

    i read it on bloomberg, so it must be true (only half kidding).

    http://www.bloomberg.com/news/2011-09-15/gold-backed-dollar-...

  • Report this Comment On September 15, 2011, at 6:27 AM, jfh55 wrote:

    And compare the Dow against say MCD and the Dow against other individual Dow component stocks and in some cases it will look like there's no correlation.

    Equal weight a bunch of commodities to form a virtual index of commodities and compare that to gold and you'll see high levels of correlation.

    A wide range of currencies have each seen gold rising at around a 18% annualised rate for the last decade. Gold isn't high, its cash has trashed.

    Some funds in gold as a form of low cost diverse commodity index tracker, some in a low cost index tracker, some in cash/bonds and you're more widely diversified. But that does mean you'll average the middle road such that when stocks are doing well such a blend will lag, but equally when stocks are down it will lead - just part of the parcel for wider dviersfication/smoother ride.

    Useful gold and commodity historic data sources :

    http://www.usagold.com/reference/prices/history.html

    http://www.imf.org/external/np/res/commod/index.aspx

  • Report this Comment On September 15, 2011, at 7:09 AM, decbutt wrote:

    That's some nice work Matt. Both in the article and the discussion. If you don't mind me saying so, you handled DiQ like a pro.

    Humanity has been here before. So much so that there is even a morality tale about "the miser and his gold" - the value that gold has, and the profit that you get from hoarding it is nil. Gold only produces profit, capital, or income, as the medieval saying I just invented goes: when the geld is seld, not held.

    Those in gold's thrall will reinforce their religion by constantly staring at the paper-profits. Everyone agrees the price is going up, so the price goes up.

    The "true value" of gold gets anchored ever higher.

    At some point, a lot of people that hold gold will disagree. Big institutions will lock in their profits, say thank you, and leave the market.

    Many individual investors will think that it is just another dip in which to buy.

    Some people marry their stocks, but gold has been and will ever be a feme fatal.

    In the divorce, those in-love the most stand to lose everything.

  • Report this Comment On September 15, 2011, at 7:24 AM, dbtheonly wrote:

    decbutt,

    I suspect you're missing the rather strong political aspect to the gold discussion.

    I suggest there is a strong political need to advance the gold/hyper-inflation/Austrian Economics/fiat currency/ libertarian position. It is beyond simple economics.

    Politics & religion; a dangerous mix.

    DATF,

    I'd suggest a line from another movie, "We're in the the money. Let's lend it, spend it, sent it rolling along." And it's even better in Pig Latin.

  • Report this Comment On September 15, 2011, at 10:29 AM, CCharing wrote:

    "If you have five people in a room and one of them is warren buffet, the average (mean) income is going to be meaningless. The median income will tell you something useful."

    I probably wouldn't - warren buffett only makes 100k annually.

    Maybe if you were talking net worth heh

  • Report this Comment On September 15, 2011, at 11:58 AM, XMFSinchiruna wrote:

    Matt,

    Peter Munk also presided over the accumulation of Barrick's devastating hedge book, a massive bet against higher gold prices that resulted in a $5.6 billion loss. He may not be the ideal source for reliable perspective on the current gold bull market.

    http://www.fool.com/investing/general/2009/09/10/the-last-go...

    But Munk is entirely correct in highlighting oil and copper as the most salient pair. Because oil is among the key cost-inputs for gold production, its price ratio to gold is by far the most salient of the group. [Both commenters discusssing mine supply above missed the mark, global gold production has not increased dramatically, and mine production is indeed a significant piece of the supply/demand picture despite the persistent above-ground "supply".] Copper, routinely found in geological association with gold, is also right up there as well. Those two commodities were not selected at random. Unless Caterpillar comes out with haulers that run on milk, it appears to me that you have honed in on the commodity that best matches your longstanding bearish outlook on gold.

    Also, while I see you don't consider it a matter of debate whether gold is in a bubble, I would just point out that even Deutsche Bank disagrees with you. Marc Faber just called gold "dirt cheap", adding: "I could make an analysis to show that the price of gold today is probably cheaper than when it was $300 per ounce based on the increase in government debt, based on the increase in monetary base in the United States and based on the expansion of wealth in Asia."

    Your hypothesis regarding gold runs into trouble when you reference "lofty prices that made little logical sense" without explaining why you believe they don't make sense. They make perfect sense to me and plenty of seasoned gold investors.

    ---------------------------------------------------

    But I care about investment results for my readers far more than I care to engage in semantic battles like the gold bubble game. My problem with the bubble-calling continuum is that it has provided no helpful guidance for investors over the past several years, and yet over time that never appears to diminish the authoritative tone with which they are succcessively issued. The same folks continually take turns warning investors to stay away from gold, without ever seeming to acknowledge that similar prior calls all the way up the ladder have served to dissuade many investors from gaining highly profitable exposure to one of the top performing assets of the last several years.

    I refer back to my own comments on the gold bubble question from June 2010, which I believe remain timely today:

    http://www.fool.com/investing/general/2010/06/14/ask-the-foo...

    "Any serious discussion of a gold bubble must first concede that a vast graveyard of similar failed calls has characterized this entire bull market. When gold began a grueling 18-month correction in March of 2008, I encouraged bubble-declaring Fools to keep their gaze on the underlying fundamental drivers supporting sustained strength in gold prices."

    "Now that we stand at another key crossroads beneath $1,250 an ounce, I remind Fools that the very same fundamental drivers remain firmly in place. The only difference today is that the U.S. dollar is experiencing a near-term rally because of a more acute crisis in the euro. However, the scale of deficit spending, and the duration of this zero-bound interest rate environment, do not bode well for sustained strength in the greenback."

    And these comments from 2009, when gold was at $1,060.

    "In my opinion, any notion of a gold bubble flies in the face of overwhelming fundamental indicators that continue to mount, as the world perceives greater inevitability in the dollar's downward trajectory. Former Fed chairman Alan Greenspan himself recently characterized gold's ascent as "an indication of a very early stage of an endeavor to move away from paper currencies.""

    "With increasingly vocal calls from the world's central banks to replace the dollar as leading reserve currency in favor of a basket of currencies, I submit that the latest bubble declarations will join their predecessors in a junkyard of failed calls issued throughout this nine-year bull market for precious metals."

    ----------------------------

    I wish good luck to each and every investor.

  • Report this Comment On September 15, 2011, at 1:23 PM, TMFKopp wrote:

    @TMFSinch

    The history of any bubble is littered with the pom-poms of cheerleaders saying that those doubting the legitimacy of the asset class' run-up were nuts. It's also filled with those that present their case as if they're some ridiculed minority that everyone is against, when in reality they've got a huge army of followers. Of course some of those cheerleaders come late, when the price is already far too lofty, while some wisely come early, do well, let the success feed the idea that the move can go on forever, and simply stay too long.

    I commend you -- to some extent -- for being part of the latter group. As far as I can tell, you started pounding the table on gold at a time when there was good reason to be a buyer (and I'm not talking about 2009). That's awesome. It's not like I see gold as completely worthless. If you are a buyer when the reverse of those charts up there is true -- that is, when investors couldn't care less about the metal and its price is low in relation to other real goods -- it's likely a great time to buy.

    To say that the jig's up now may prove correct or not -- like I said, bubbles are unpredictable. However, you're still cheerleading at a time when the thumbs up on gold has become less of a savvy play and more of a gamble on whether an irrational price run will get more irrational.

    "I would just point out that even Deutsche Bank disagrees with you."

    Even Deutsche Bank? I assume this is the same Deutsche Bank that faced billions in losses thanks to its wrong-way subprime bets? The same Deutsche Bank that rushed to cut thousands of jobs and reported losses from bad telecom loans in the wake of the dotcom bubble?

    Not that I'm surprised that there would be plenty of folks disagreeing with me -- that's the nature of a bubble. If you look back to both the housing and dotcom bubbles, you'll find plenty of high-seated people waving off bubble-callers.

    "Because oil is among the key cost-inputs for gold production, its price ratio to gold is by far the most salient of the group."

    Yeah, not sure I'm totally following the logic here, but actually if you look at the chart above, the gold/oil relationship appears to be one of the most useless for actually determining a good time to buy gold. Focus on that chart and you probably would have been a buyer in the early 80s, a seller in the late 90s, and one poor hombre. All of the charts earlier in the article would have had you buying and selling at very opportune times.

    "it appears to me that you have honed in on the commodity that best matches your longstanding bearish outlook on gold."

    I think the article made it pretty obvious that the story is about a lot more than milk. The five charts that I updated from my previous article all tell a very similar tale. And as I noted in the text, wheat, aluminum, nickel, and cattle are all along the same lines. Given time constraints, I haven't compared gold to every single real good existing in the economy, but I think it's a safe bet that most will be along those lines.

    I focused on milk in the comments because milk/pork/coffee/cotton/wheat/cattle/aluminum/nickel is unwieldy and I think milk is delicious.

    "They make perfect sense to me and plenty of seasoned gold investors."

    Of course it makes sense to seasoned gold investors. They invest in gold, this is what they do. It's like citing circa 1999 Henry Blodget to support bullishness on Pets.com.

    "But I care about investment results for my readers far more than I care to engage in semantic battles like the gold bubble game."

    Your track record (of engaging in semantic battles that is) suggests otherwise. But nonetheless, if you want to refute the data that I've presented, that's one thing. But if you want to try and say "I'm right today because the price went up since yesterday" ... in my mind that's a pretty dangerous stance and exactly the kind of attitude that gets you sucked into a bubble maelstrom.

    Seriously Chris, kudos to you on being early on gold. I mean that and I'd love to go back to 2000 to be a buyer. But the data is no longer on your side and you're now gambling on a bubble.

    Matt

  • Report this Comment On September 15, 2011, at 1:50 PM, XMFSinchiruna wrote:

    Matt,

    Thanks for the discussion. I wish I could convince you to make even just a sliver of room in your portfolio for gold or gold-related stocks. I think you may find yourself surprised by just how much longer and how much higher this secular bull market can go. I do not agree that the current goold price is "irrational". The metal certainly attracts more attention than it used to, but it remains drastically under-owned:

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/...

    "In this environment, gold is far from being over-owned. Rachel Benepe, who runs our gold fund here at First Eagle, she was telling me the other day that if you take global pension funds, not just in the US but in the rest of the world as well, they only have .4% of their assets that are invested in gold. So gold is far from being over-owned...."

    “Gold today should be seen as a currency, none of the major currencies being appealing. The are an enormous amount of debt claims throughout the world, which by comparison with gold at $1,800, the entire amount of gold above ground equals ten trillion dollars, including incidentally half of that being in the form of jewelry."

    I have major respect for you as an analyst, and in fact I just bought one of the two non-pm stocks you recommended above. It has never been about gold vs. stocks; but rather about making some room (even if it's just a little bit of room) for gold within a well balanced portfolio.

    And as a parting thought, here's Bloomberg's chart of the day. :)

    http://www.bloomberg.com/news/2011-09-15/gold-backed-dollar-...

    Fool on!

  • Report this Comment On September 15, 2011, at 3:34 PM, XMFSinchiruna wrote:

    P.S. I too think milk is delicious. :)

  • Report this Comment On September 15, 2011, at 3:46 PM, TMFHousel wrote:

    What percentage of global assets did Pets.com take up in 1999?

    I don't mean that to be snarky. I just don't understand how the % of global assets argument proves anything in reference to gold being overvalued.

    To add context, the market cap of the Nasdaq in 1999 was $5.2 trillion. The value of all mined gold at current prices is over $9 trillion, based on this figure

    http://www.onlygold.com/tutorialpages/All_The_Gold_In_The_Wo...

  • Report this Comment On September 15, 2011, at 4:17 PM, TMFKopp wrote:

    @Chris

    "I wish I could convince you to make even just a sliver of room in your portfolio for gold or gold-related stocks."

    Admittedly, the more I research gold, the more I realize that it really could be a great thing to own. But not now. Now is when everyone is already scared. Now is when nobody wants to own blue-chip stocks at really reasonable prices. Now is when more than a third of American's think that gold is the *best* investment.

    What I want to do is burn this all into my brain so that when gold has crashed and everyone is back on the "stocks can do no wrong" bandwagon and nobody can see any problems at all in the world economy, I will hedge against the widespread optimism with some PMs. It would be a proud moment for me if I could do that, because that kind of emotional control is really, really tough. We'll see.

    So I appreciate the gold debate from the perspective that I've learned a lot and feel like I have a much different appreciation for gold as an asset, but the time to buy has to be right.

    "I think you may find yourself surprised by just how much longer and how much higher this secular bull market can go."

    It's very possible you'll be right. Bubbles are unpredictable and can go on and on and on making naysayers like me look just plain stupid. But my approach to investing is much more focused on minding my downside than chasing upside. With gold I appreciate that there could still be upside, but there's an unpredictable timing to an inevitable downside that I just don't want to expose myself to.

    "In this environment, gold is far from being over-owned."

    I don't understand this line of reasoning and I think Morgan hit the nail on the head above. As an asset there should be some sense of its valuation in relation to *something*. That's why I've stacked it up against a variety of real goods above.

    The idea that the value can continue to go up significantly because it's "under-owned" and that many more people will want it in their portfolios is the kind of thing I could hear people saying about tulips. How do you value a tulip bulb? I don't know, but everyone is going to want to have them, so the price will continue to go up.

    "I have major respect for you as an analyst"

    I certainly appreciate that! But be careful, you risk giving me a big head and encouraging me to continue :)

    "And as a parting thought, here's Bloomberg's chart of the day. :)"

    Nice, but I think Morgan argued nicely as to why using the monetary base can be misleading:

    http://www.fool.com/investing/general/2011/09/15/gold-unhing...

    In my own parting thought, like I said above, I commend you for being early and right on gold. I just think we're now at a point where jumping off -- early or not -- is the right move for a conservative-minded investor.

    Matt

  • Report this Comment On September 15, 2011, at 5:21 PM, blob100000000 wrote:

    Consumer Inflation at Three-Year High

    - August’s Annual Inflation: 3.8% (CPI-U), 4.3% (CPI-W), 11.4% (SGS)

    - “Core” Inflation Jumped Again with Some Acceleration

    - Real Retail Sales Fell 0.3% in August

    - August’s 0.2% Production Gain Was a 0.1% Loss Against Initial September Reporting

  • Report this Comment On September 15, 2011, at 5:25 PM, XMFSinchiruna wrote:

    TMFHousel,

    I believe the attempt was to compare gold to the housing, dot.com, and oil bubbles (I don't consider the oil price decline a very proper example; since we remain at strongly elevated oil prices) rather than to Pets.com.

    But there is a very relevant difference here between gold and those historical examples. Home ownership during the housing bubble was opened up to every breathing being that could make their marks on a mortgage application, and the industry reached an astounding degree of (let's call it:) "market penetration" that set a key precondition for its dramatic collapse.

    Likewise, dot-com (and even oil) stocks were respectively ubiquitous within all manner of typical index and mutual funds held by pension funds during the terminal stages of their respective run-ups. The fact that gold and gold stocks remain conspicuously absent and/or woefully under-owned by pension funds today indicates an extremely salient difference in the degree of market penetration vis-a-vis each of the historical comparisons referenced above.

    I continue to hear plenty of anecdotal claims about how widespread gold exposure is, but 0.4% allocation among the world's pension funds suggests an entirely disparate degree of market penetration than that which we witnessed in any of the floated historical comparisons. I remain convinced that the vast majority of Americans still have zero exposure to gold; and even more telling is that many are still lining up at mall kiosks to unload their golden trinkets for pennies on the dollar.

    Of course, the more relevant comparison would be gold's market penetration today versus the 1971 - 1980 bull market. Typical asset allocation models of the day, it is worth noting, advocated for 5% to 10% exposure to gold.

    CPM Group's Gold Yearbook 2010 notes that in 1968 gold held by individuals for investment purposes represented about 5% of global financial assets. In 1980, it was 3%. In 2000, it was only 0.2% of global assets. The 2010 figure has been estimated at 0.7%. Those data refer solely to physical gold.

    On that basis, I submit that gold does not share a key characteristic of those historical bubbles that provided a key precondition for their respective collapses. When every S&P growth fund you reach for has some gold stocks in it; and after the Cash4Gold folks have closed-up shop because no one is willing to part with their gold; and when multiple Motley Fool newsletters are featuring gold or gold mining stocks as top buy recommendations; ... perhaps then I will begin to take notions of gold being in a bubble more seriously. Until then, I find these periodic bubble proclamations of little actionable ultility to investors.

    ----------------------------------------------------------

    It is important to mention, finally, that one of the potential complicating factors for this debate is the hopelessly diverse set of definitions that individuals apply to the term bubble. Some consider a bubble anything that goes up a lot, others reserve the term for increases that appear to run well beyond underlying fundamental drivers, while still others use the term to describe the heavily over-extended conditions that occur immediately prior to a disastrous collapse.

    From another "gold bubble" discussion last year:

    http://www.fool.com/investing/general/2010/09/22/popping-the...

    The ultimate conceptual bubble

    If there's one notion relating to gold that I observe most unnecessarily confounding the prospective precious metal investor, it's this useless application of the word bubble in reference to gold. By my reckoning, the only time that word becomes helpful is when an asset class soars over time in the absence of a discernable fundamental basis for the move.

    For example, the primary basis for soaring U.S. home prices before 2007 was a derivative-based scheme for unchecked leverage and fictional risk assessment that effectively removed that market from its underlying fundamental drivers. Housing, then, provides a textbook example of an asset bubble that that represented true peril ... and one that I have argued will continue popping for some time yet.

    There may come a time when I will become comfortable applying the term to gold, but not before the identifiable fundamental drivers for higher gold prices fail to continue accumulating. Somewhere north of my $2,000 price target for gold -- which incidentally is shared by Soros' former business partner Jim Rogers -- we may eventually witness a dramatic spike that could render new investment in gold an exercise in dangerous and untimely speculation. But until those cows come home, I will reassure gold investors that we are a very long way removed from the inception of a final blow-off phase for gold's multi-year bull market run.

    Fool on!

    P.S. Matt, you're right, clearly I can't resist the semantic battles. :)

  • Report this Comment On September 15, 2011, at 5:44 PM, XMFSinchiruna wrote:

    Matt,

    Thank you for the above reply. I understand and respect your position, and I appreciate the sincerity behind it.

  • Report this Comment On September 15, 2011, at 5:53 PM, TMFHousel wrote:

    <<Home ownership during the housing bubble was opened up to every breathing being that could make their marks on a mortgage application, and the industry reached an astounding degree of (let's call it:) "market penetration" that set a key precondition for its dramatic collapse.>>

    Not sure I agree there. The home ownership rate was 67.4% in 2000 and peaked at 68.9% in 2004. Indeed, many housing bulls used to point at that "tiny" increase as proof that housing wasn't a bubble (David Lareah, for example). There was an increase, no doubt about it, but it was much smaller than i think most assume.

    When prices are set at the margin, you don't need masses of new participants to send valuations out of whack.

  • Report this Comment On September 15, 2011, at 5:55 PM, TheDumbMoney wrote:

    Christopher,

    Alternatively, if one views real interest rates as existing currently at a generational low, which is unsustainable, and if one thinks that when interest rates rise, gold must drop, gold can still be viewed as a bubble.

    (Wait one more paragraph before penning the angry reply; I"m going somewhere here.)

    Home prices is the wrong analogy. Let me suggest bank earnings. Shortly before it dumped from $50/share, BofA traded at something like a 12 P/E, with a fat divvie. It looked cheap. But the denominator was faulty, which was what was so insidious, and it was faulty not even wholly because of that bank's problems (indeed, BofA was fairly stong and had decent lending standards, which was why it was in a position to buy ML and Countrywide, although now it is tagged with all that horror as if it actually originated those loans, but I digress).

    Anyway, the earnings at BofA were the result of unsustainable deeper market trends. I submit to you that something similar is true today of gold's price. You are absolutely correct that there are deep market trends supporting the price of gold. I simply don't think they are sustainable. I think things like the amount held by pension funds are second-derivative analyses of limited importance compared to the fundamental supply/demand relationship between gold and fiat money, and that is driven largely by real interest rates and general "faith" in fiat currency. I know you want it to, but it is simply not going to happen that faith in fiat currency degenerates to zero. It's not going to happen. This time is not different. Deleveraging and sovereign debt issues have generated enormous strains and fears, and the fed has had to cut real interest rates to prevent deflation, but this -- the fundamental driver of gold price increases, is eventually going to be worked through, and it is going to end. And when that happens, it is going to be like what happened to BofA earnings and stock. The denominator is faulty. The fundamental trend is not as sustainable and inevitable as I believe you the think it is, and gold is going to continue looking great until approximately one fed session, maybe two, after the huge mass of foreclosures gets worked through. That could take two years, and it we get another major leg down in home prices it could take ten years. But I do believe it will happen. In the meantime we will likely see gold hit $2,000, and maybe $3,000, but it will eventually drop. The underlying dynamism of the American economy, and the Fed, will end it, because the Ron Paul revolution in favor of a new gold standard is simply not going to happen in this country. Even if Rick Perry or Mitt Romney get elected it will change nothing, because senior Republicans know the importance of Bernanke, and his term in any event does not end until 2014, by which time Warren Buffett will likely have exercised his options on BofA common stock..

    All best,

    DTAF

  • Report this Comment On September 15, 2011, at 6:02 PM, djemonk wrote:

    TMFSinchi, you make a really good point, and one that I hadn't really factored into my thinking ... and that's that there aren't a whole lot of things that stock investors can actually do if we're right and gold is in bubble territory (which I concede I've been saying since about 2009 when gold was $850 an ounce, so clearly my "bubble" call falls somewhere between "premature" and "catastrophically incorrect."). There probably aren't that many ways to play the downside of this that would be considered anything other that highly speculative.

  • Report this Comment On September 15, 2011, at 6:14 PM, TheDumbMoney wrote:

    Also, just to be clear, forget $3,000, gold could easily get to $5,000 or more before this thing is over. So in that context, whether it is a "bubble" now may be questionable. It certainly doesn't look like it's anywhere near the blow-off stage yet, that's for sure. But I'm not a gold investor, just some random dude, so who knows.

    DTAF

  • Report this Comment On September 15, 2011, at 6:36 PM, XMFSinchiruna wrote:

    "The home ownership rate was 67.4% in 2000 and peaked at 68.9% in 2004."

    Count me among those surprised by those data, but the housing bubble was arguably decades in the making. I would love to see data going back 30 years or more.

  • Report this Comment On September 15, 2011, at 6:46 PM, TMFHousel wrote:

    ^ Here it is:

    http://research.stlouisfed.org/fred2/data/USHOWN.txt

    1984: 64.5%

    2004: 68.9%

    Again, it was a jump, but not nearly what people imagine. David Lareah sold books by the thousands built on the idea that this small jump proved that housing couldn't be a bubble.

  • Report this Comment On September 15, 2011, at 6:49 PM, TMFKopp wrote:

    A lot of good points made above. Trying to finish up an article so I can't write everything I want to, but Chris hit an interesting point. On the definition of a bubble:

    "If there's one notion relating to gold that I observe most unnecessarily confounding the prospective precious metal investor, it's this useless application of the word bubble in reference to gold. By my reckoning, the only time that word becomes helpful is when an asset class soars over time in the absence of a discernable fundamental basis for the move."

    This is absolutely why I *do* refer to gold as a bubble -- it has become unhinged from the fundamentals.

    From a 5,000ft level, all bubbles are the same in this regard. Participants in a bubble look past reasonable ways to value the asset and either come up with new ways to value it or use factors that are vague and fuzzy and therefore can just as easily support a valuation 10% higher as they could support a valuation 10,000% higher.

    In the case of housing the reasonable ways of valuing a roof on four walls -- price / rent, average price / income, etc -- were thrown out as useless. Instead valuations rested solely on comps (which is a circular way of allowing any valuation) or vague concepts like "this is a place you call home."

    In the dotcom bubble all "traditional' valuation metrics -- P/E, EV / revs, price / book -- were thrown out in favor of factors like price / "before expense, adjusted, vapor-added profit", price / eyeballs, or some such rubbish. Or people simply said "this Internet thing is going to be huge, just get on board."

    Not to belabor the point, but in the oil run-up we'd hit peak oil, China was going to slurp every last barrel with a giant red straw, etc etc.

    Perhaps gold is tougher to value. But perhaps not. The primary value in gold seems to be a store of value. Inflation protection. As such you should be able to gauge a reasonable value for gold today based on its relationship to real goods in the economy. That's exactly what I did what I did above.

    But the preferred way to value gold today seems to be based on factors other than this such as how much gold ran up last time it bubbled up, or the percentage of gold in global assets, or the as-yet-happening view that the dollar will be worthless and inflation in the U.S. will put Zimbabwe to shame.

    These are very favorable valuation measures for someone that wants to believe in the indefinite run in the price of gold. How much should gold be as a % of total assets? How much of this wait-wait-it'll-come inflation will we actually see? You can choose any numbers you want to put to these and therefore justify any price for gold from $2,000 to $200,000. Or you can use no numbers at all and just talk about the concerns, ignore the value factor of gold, and just say you need to own it.

    That's very troublesome to me.

    [sigh] Of course, the crash may come 200% from here after 65% of Americans (instead of 34%) think gold is the best investment and people are melting down bullion to make baby cribs b/c they can't figure out what else to do with their gold. The crash will be horrific, but they'll look back at this and say "He was wrong because he was early." Oh well, it's a risk I'm willing to take.

    Matt

  • Report this Comment On September 15, 2011, at 6:53 PM, TMFKopp wrote:

    @DTAF

    I'm not ignoring your continued references to the interest rate / gold model that Elfenbein has shown (pretty sure that's what you're referencing, right?). It's an interesting way to think about the gold value/price issue, but I find myself scratching my head over the idea that if rates stay below a certain point, gold just keeps going up. That's the gist right?

    Matt

  • Report this Comment On September 15, 2011, at 7:10 PM, TheDumbMoney wrote:

    Matt,

    Well, those last comments were for Mr. Barker, but if by 'continued' you mean my incessant, repetitive, shrill, nagging, and mildly annoying continued posting of it on multiple threads by multiple authors, then YES, I plead guilty! :-)

    As to your question: no clue. I haven't worked it out. Other questions: why would the inverse relationship be non-linear at all? Why would it be stable at around 2%? Why would it be so closely tied to U.S. real rates in particular, given the size of other currency players?

    Also note I don't think Eddy is the first guy to derive such a chart. I have found one on the interwebbles from as early as 2003.

    Finally, I have not re-run their (Eddy, and EconomPIC's) numbers, nor do I have the time and capacity to do so (or ultimately the interest, since I'm never going to buy or short gold). That's why I'm trying to get someone at the Fool to take an interest in it. If it gets debunked, fine, I have looked like an idiot before (ALIF, bought at 0.86, sold at 0.53 and 0.60) and will again, and again, and again, and again. But I am truly fascinated by the chart match. And much as I truly admire Morgan, I think the M2 theory is on its face absurd when one compares M2 to gold price for the 1980-1998 period (at which point they were inversely related, with M2 growing and gold declining) to the 2010-present period (during which time they are directly related, with both M2 growing and gold price increasing). (Unless I'm missing something on that, which is very possible since I often look at things very quickly and skim and post something without truly thinking about it.)

    Best,

    DTAF

  • Report this Comment On September 15, 2011, at 7:15 PM, TheDumbMoney wrote:

    "...2010-present..." should be "...2000-present..."

  • Report this Comment On September 15, 2011, at 7:20 PM, TMFKopp wrote:

    @DTAF

    "Well, those last comments were for Mr. Barker, but if by 'continued' you mean my incessant, repetitive, shrill, nagging, and mildly annoying continued posting of it on multiple threads by multiple authors, then YES, I plead guilty! :-)"

    Ha. No, I just saw you mentioned it on a few threads and don't think anyone had addressed it. I don't want to completely overwhelm the site with gold articles (I have another forthcoming already), but I think that's an interesting model to take a closer look at. I saw Eddy's handling and it definitely got my attention.

    And:

    "Other questions: why would the inverse relationship be non-linear at all?"

    Yes, exactly.

    As to Morgan's M2 thing, was monetary base more consistent with gold price in 1980-1998? Because I don't think Morgan meant for the M2 chart to be predictive of the price of gold, but he was simply arguing that M2 is a more reasonable way to look at money supply than monetary base (at least in the gold debate) since much of the addition to monetary base is just sitting around in excess reserves.

    Matt

  • Report this Comment On September 15, 2011, at 7:21 PM, TMFKopp wrote:

    @DTAF

    "Unless I'm missing something on that, which is very possible since I often look at things very quickly and skim and post something without truly thinking about it."

    Hmmm... this seems like a bad habit. Just saying.

    Matt

  • Report this Comment On September 15, 2011, at 7:22 PM, TMFKopp wrote:

    And finally... @Chris

    "P.S. Matt, you're right, clearly I can't resist the semantic battles. :)"

    Gotcha!

    Matt

  • Report this Comment On September 15, 2011, at 7:26 PM, TMFHousel wrote:

    <<And much as I truly admire Morgan, I think the M2 theory is on its face absurd when one compares M2 to gold price for the 1980-1998 period (at which point they were inversely related, with M2 growing and gold declining) to the 2010-present period (during which time they are directly related, with both M2 growing and gold price increasing). (Unless I'm missing something on that, which is very possible since I often look at things very quickly and skim and post something without truly thinking about it.)>>

    The fact that gold/m2 once had a negative correlation isn't relevant to the argument made in my article. Mine is a response to those saying gold is being driven entirely by new money sloshing throughout the economy. Looking at gold vs. M2, you can easily refute that idea.

    As for the relationship since 2010, M2 has increased 12% since Jan. 2010; gold increased more than 70% during that time.

    I think it goes back to an idea Matt talks about: People take a rational argument (money is being printed) and assume that means gold can be any price and still be rationalized. That's the basis of all bubbles.

    And while we're on accolades, I admire you more than nearly any other TMF commenter. Keep up the great work, my friend.

  • Report this Comment On September 15, 2011, at 7:34 PM, XMFSinchiruna wrote:

    DTAF,

    "I know you want it to, but it is simply not going to happen that faith in fiat currency degenerates to zero."

    To the contrary, I have beeen careful to state repeatedly that gold's rise is for me a somber affair, and that I will/would/have never wished for the factors to come together in the way that I believe they have to support expectations for continued gains in gold.

    -----------

    "Also, just to be clear, forget $3,000, gold could easily get to $5,000 or more before this thing is over."

    It's clear there is plenty of common ground between us on the topic of gold. We seem to have arrived at similar conclusions by disparate means; only officially I have only targeted $2,000 gold.

    -------------------

    Furthermore, I must say that I believe your preferred quantitative method relying upon real interest rates has more merit that many other quantitative approaches I've seen floated. Because real interest rates are impacted by so many of the same factors that impact gold, the elevated degree of correlation is not very surprising. I am interested in exploring the model in greater detail.

    -----------------------------------------

    "Shortly before it dumped from $50/share, BofA traded at something like a 12 P/E, with a fat divvie. It looked cheap. But the denominator was faulty, which was what was so insidious..."

    Agreed. I may not have been there at $50, but at $40 I was personally sounding the alarm bells as loudly as I could:

    http://www.fool.com/investing/dividends-income/2008/02/26/ho...

    "For me, the light at the end of the tunnel was extinguished this weekend. For anyone who owns a major mortgage lender, this is your last call to run, not walk, to the nearest exit."

    And I hope this reiteration from early last year may have spared some would-be bargain seekers from additional pain:

    http://www.fool.com/investing/general/2010/01/21/the-worst-s...

    "Unprecedented fiscal interventions and stimulative injections have helped to spur shares along during 2009, but I see indications that 2010 will see a return to valuations that finally take risk and structural impairment into proper account."

    --------------------------------------

    "The fundamental trend is not as sustainable and inevitable as I believe you the think it is, and gold is going to continue looking great until approximately one fed session, maybe two, after the huge mass of foreclosures gets worked through."

    I certainly have my eye on these factors, and indeed I make a concerted attempt to track all salient macroeconomic factors informing / influencing the gold price and the sustainability of gold's price trend. I would counter, simply, that you may not fully appreciate the extent to which my own expectations for this bull market are firmly grounded in a clear-minded, (dare I say) time-tested, and multi-facteted assessment of the relevant fundamental landscape. Those are not just random words; there is a ton of constant research that goes into my hybrid analytical approach, and though it may not suit your preference for more quantitative-oriented approaches, it has nonetheless served me well and continues to do so.

  • Report this Comment On September 15, 2011, at 8:09 PM, TheDumbMoney wrote:

    Chris and Morgan, I appreciate your words. Morgan, I see your point.

    Chris, I'm not trying to attack you here, and I more specifically I certainly did not mean to imply you are a cheerleader for perceived or coming harms.

    I think you're a decent, humane guy. But I note that your response does not exactly contravert my very inexpertly written conclusion that at the bottom of it all, and perhaps even at the bottom of your fundamental original interest in gold/silver (in addition to industry experience that I believe you have, unless you've just learned THAT much), you 1) loath the very concept of a fiat currency, and 2) you think it is wrong and we would be economically better off on some form of a gold standard; and 3) you don't typically say it, but you think a return to some sort of gold standard or, at the very least, the creation of a reserve currency-basket involving gold, is somewhat inevitable. That's not meant to be an attack, that is just how I perceive you from things you have said, particularly in less formal blog posts and replies to the blog posts of others. Is that wrong?

    All best, that's it for me today.

    DTAF

  • Report this Comment On September 15, 2011, at 8:20 PM, TheDumbMoney wrote:

    Chris, also my conclusions about where gold may go are just based on doing the math based on that Eddy model as compared to when I think we may see 2% or thereabout on real interest rates. But there are so many things that could be wrong with that analysis that I don't touch gold either way. Much as I respect your expertise in this area, I just cannot bring myself to put money into anything based on the expertise of another if I cannot comprehend it myself. It's like the Harry Potter quote where Mrs. Weasely tells Ginny not to trust anything that doesn't show you where it keeps its brain. Whether viewed as a commodity or as a currency-alternative, I don't know enough about either commodities or currencies that I feel I have any business speculating on gold. Stocks are hard enough, and I seem to get those wrong all the time, at least so far. But at least they have cash flows and revenues and earnings. Okay now I'm really done.

  • Report this Comment On September 15, 2011, at 8:23 PM, ETFsRule wrote:

    DTAF:

    I believe the correlation between real interest rates and the inverse log of the gold price were first studied in this paper, way back in 1988:

    http://www.gata.org/files/gibson.pdf

    (if you don't feel like reading it all, skip ahead to Fig. 4)

    The interest rate model is an interesting concept, but in my opinion the money supply is still the best indicator to use. You cite the period from 1980-1998 as a counterexample. Well, if you look at van Eeden's chart, his model shows that gold was clearly overvalued in 1980 - so the drop could have been easily predicted:

    http://www.paulvaneeden.com/Gold

    Like most assets, gold exhibits reversion beyond the mean. It oscillates between being overvalued and undervalued.

    I came across an interesting quote from your first link:

    "In effect, gold acts like a highly-leveraged short position in U.S. Treasury bills and the breakeven point is 2% (or more precisely, a short on short-term TIPs)."

    I believe he jumbled his ideas a little bit here. What he means is that gold moves inversely to the yields on T-Bills... meaning it moves in direct correlation with the prices of T-Bills. This makes it a directly leveraged position in T-Bills (not a short position at all).

    This makes me want to graph his model for gold against the price appreciation of 30-year, zero-coupon treasuries... I'm sure I'll get around to it someday.

    Anyway, I'm skeptical of his model because it seems to fit the data a little too well. This would imply that gold is never underpriced or overpriced. Do investors in the real world really know that they should buy gold when real interest rates are 1.9%, and sell it when real rates hit 2.1%? I don't think that's how it works. The 8x leverage also seems very un-natural to me.

    Lastly, he doesn't go back far enough. I'll dig a little deeper to see if his model holds up before 1989.

  • Report this Comment On September 15, 2011, at 8:28 PM, ETFsRule wrote:

    Oh yeah, and Krugman has been posting on this very topic recently:

    http://krugman.blogs.nytimes.com/2011/09/06/treasuries-tips-...

    http://krugman.blogs.nytimes.com/2011/09/10/golden-spikes/

    He leans more towards the real interest rate model than the money supply model... but I won't hold that against him :-)

  • Report this Comment On September 15, 2011, at 11:57 PM, TheDumbMoney wrote:

    ETFs

    Well, Krugman must have read my August blog on TMF, or my late July/early August interchange with BullnBear and David "Asian Land War" in Qatar, when I asked David to get his source to create a real interest rate model for gold. :-) Sigh, if only. "Dear Krugman, you're left of me, but your non-political economics is spot-on -- speaking as just one nobody speaking to a Nobel prize-winner."

    BTW, Bridgewater Associates uses something very much like the Van Eeden model, ETFs.

    I would agree the real interest rate model fits the data better, but it too shows under and over-priced times, too. And, as I tried to say (but maybe I didn't explain it right) to Chris with the BofA example, I think the "over" and "under" analysis at any given time is a short-term analysis, like looking at a P/E snapshot. It is perfectly possible that gold is "accurately priced" on the Eddy model right now, or that the Eddy model accurately tracks it, and yet it is still WAY over-priced, on a long-term-holder basis, because the underlying trend cannot continue forever. These quantitative models, to the extent they do anything, are trader's tools, short-term predictors.

  • Report this Comment On September 16, 2011, at 11:03 AM, XMFSinchiruna wrote:

    DTAF,

    I wouldn't say I loathe the concept of fiat currency. I would say I mistrust it. It's been a fascinating 40-year experiment, but recent developments suggest it may be time to rehitch an anchor to the system. My foray into gold and silver as the core of my investment strategy was never predicated upon an expectation of a return to a gold standard. I think there are certainly some scenarios under which we could see gold brought back into the global currency regime in some form or other, but I would not go as far as to say I view it as inevitable.

  • Report this Comment On September 16, 2011, at 11:06 AM, XMFSinchiruna wrote:

    Alright ... ETFsRule visited the GATA website. :) That's a start, my friend.

  • Report this Comment On September 16, 2011, at 12:21 PM, ETFsRule wrote:

    I had to hold my nose.

    Actually, I got the GATA link from Krugman's blog. Weird, huh?

  • Report this Comment On September 16, 2011, at 12:48 PM, XMFSinchiruna wrote:

    I think Krugman got the link from Larry Summers... even weirder. ;)

  • Report this Comment On September 16, 2011, at 5:04 PM, russvernon wrote:

    Until this country gets its act together gold will contine to rise. Right now we are at the same altitude as we were in 1980. Until we get a President that confronts reality (e.g., Reagan) or a Republican congress that drives down the debt (e.g., 1990's) gold is a safe bet. If either of those things happen, though not likely, get out of gold quickly.

  • Report this Comment On September 16, 2011, at 5:23 PM, xetn wrote:

    Maybe I missed something in all of these discussions, but just in case I didn't:

    The law of supply and demand:

    the price of anything (in a free market) is based on the supply and demand. If people value gold more than fiat money they will bid the price up (and as they say; all other things being equal).

    Since fiat money is not based (entirely on free markets; it is after all a monopoly money by the fact it is "legal tender". But its price is still somewhat based on the same criteria.

    Ergo, the price of milk.

    As someone previously stated, subjective value plays a significant role. Everyone's subjective value is individualized. However, after several billion/trillion independent transactions occur an average price will emerge, but will never be exactly static over time unless the price is managed (monopoly, government).

    Here is an example of gold to house prices:

    http://www.caseyresearch.com/sites/default/files/US%20Home%2...

    Here is a chart of various currencies to the "price" of gold (notice that gold is increasing in relation to all of them):

    http://www.the-privateer.com/chart/g-multi.html

    And to illustrate the long-term reduction in purchasing power of the USD here is the BLS' cpi inflation calculator (from 1913 to 2011; plug any amount in what ever year you wish then compute):

    http://data.bls.gov/cgi-bin/cpicalc.pl

    Finally, a chart of historical bubbles to gold/silver:

    http://www.caseyresearch.com/sites/default/files/Historical%...

    You all can draw your own conclusions as to whether or not gold is in a bubble. But ask yourselves how many people do you know that actually own gold.

  • Report this Comment On September 16, 2011, at 7:19 PM, TMFKopp wrote:

    @xetn

    "Finally, a chart of historical bubbles to gold/silver:"

    Wow! I am absolutely in awe at the utter uselessness of that chart!

    Leaving aside the fact that pertinent information like time frames is completely left off, most of these "bubbles" are individual stocks. If we're going to bring that into the mix, then when it comes to comments like:

    "But ask yourselves how many people do you know that actually own gold."

    My response would be: How many people do you know that owned Novastar? eDigital? Nortel Networks? KB Home? Or, as Morgan said above: "What percentage of global assets did Pets.com take up in 1999?"

    Further confirmation that an asset doesn't need to be a high percentage of every investor's portfolio in order for it to be wildly inflated.

    And wait, wait... hang on.... To get to the % gain for MBIA listed you need to take the stock's low price in 1987 -- right after the Black Monday crash! -- versus the high price in 2006. I'm sorry, but that's laughable. Are we to assume that any time a stock increases in value drastically over a long period of time that it's a bubble?

    This chart is a very bad attempt at trying to support a further gold-price increase.

    Matt

  • Report this Comment On September 16, 2011, at 7:23 PM, TMFKopp wrote:

    @russvernon

    "Until this country gets its act together gold will contine to rise."

    I hate to be a broken record, but this is exactly the kind of sentiment that encourages people to buy an asset without any view of its value. It was *exactly* the same in 2000 when people "needed" to buy internet stocks regardless of the actual profit outlook simply because the internet was going to be the future.

    Plus, the more of that kind of sentiment that's driving gold buyers, the more gold owners will be of the mind "as soon as things start to look different I'm dumping it." Playing with that kind of crowd is exactly how you end up on the wrong end of a stampede.

    Matt

  • Report this Comment On September 16, 2011, at 7:27 PM, TMFKopp wrote:

    @xetn

    Also:

    "Here is an example of gold to house prices:"

    If you flip that chart on its head (gold/house) and throw in a median, it would fit nicely in my display above. Basically it looks to me like there's a cyclical nature to that ratio and (as displayed in the chart you provided) it's currently at or near the bottom of its range.

    Matt

  • Report this Comment On September 17, 2011, at 12:42 AM, skypilot2005 wrote:

    Excerpt from a recent interview of Eric Sprott of Sprott Asset Management

    Interviewer: “At some future date, will gold become overvalued in your view?”

    Eric Sprott:

    “People just ask me the question in a different way. They say, "What are the things that would make you sell it?" (Gold)

    “I say, There are three possibilities. One is if I see a mania in the market. Just somehow I see crazy, crazy things happening. OK, fine. This reminds me of NASDAQ 2000. And maybe I'll get off the train."

    “The other one would be if governments became responsible. Governments and central banks became responsible would be the second reason. Luckily, we don't see that reason at all."

    "The third reason that you might think it's time to get out is where they would make it the reserve currency. Then you don't need to own gold and silver because you can trade for it at any time you want. Maybe you could then consider investing in other things knowing that it was backed by gold and silver.”

    I feel these three possibilities also apply to knowing if gold is in a “bubble”.

    I don’t think it is.

    Sky Pilot

  • Report this Comment On September 17, 2011, at 1:22 AM, TMFDiogenes wrote:

    FYI, Krugman's model was not an argument that gold could be valued inversely to interest rates, but that it could be valued inversely to *expectations* for *real* interest rates. It has to do with that model that I don't really fully understand. But one nice feature is that it's consistent with how gold was so high during the 70s (high inflation) and today (low inflation).

  • Report this Comment On September 17, 2011, at 10:53 PM, TMFKopp wrote:

    @Sky Pilot

    That's an interesting perspective, but asking Eric Sprott about the price of gold is like asking John Chambers about Cisco's valuation circa 1999. I don't think we should ignore the perspective, but I think we definitely need to recognize the bias that it comes with.

    Matt

  • Report this Comment On September 18, 2011, at 3:00 AM, kirkydu wrote:

    @DinQ

    Have you been to Texas, Wyoming, Montana, North Dakota? I just was. We have so much untapped energy resources it is overwhelming. That does not even count Alaska. Now that we export about as much energy as we import (net exports as of about nine months ago actually), what do you think the next "big thing" is? I think it is that we become a net exporter of energy. In addition, we are the biggest farm in the world.

    The United States is so fabulously wealthy, if we'd just stop the thieves from stripping the assets of the nation and hoarding the profits, we would be fine. All we would need to do then is commit to a very basic flattening of the spending curve and a cleaning up of tax code and regulatory flaws which have accumulated over a few decades.

    BTW, how can you tell when somebody is a book nerd? When they are replying to David in Qatar at 2am on Saturday night with a buzz.

  • Report this Comment On September 18, 2011, at 7:23 AM, skypilot2005 wrote:

    September 17, 2011, at 10:53 PM, TMFKopp wrote:

    @Sky Pilot

    "That's an interesting perspective, but asking Eric Sprott about the price of gold is like asking John Chambers about Cisco's valuation circa 1999. I don't think we should ignore the perspective, but I think we definitely need to recognize the bias that it comes with.

    Matt"

    Matt,

    I used a quote from Mr. Sprott because he explains my viewpoint succinctly.

    There isn’t a known “Formula” to consistently and accurately value Gold. Ie.: predict it’s exact value. So, I feel it is best to read the opinions of experts with excellent track records predicting the price of precious metals. Mr. Sprott is one of those.

    Because he is a successful expert, doesn’t diminish the credibility of his opinion. That’s what you seem to be contending. Calling him biased, without refuting his opinion point by point, doesn’t add any value to the discussion.

    He is petty clear. Do you feel governments are acting responsibly when they consistently run massive deficits? What about reserve currency issues? They all affect the price of gold.

    It seems to me to say that Gold is not priced correctly; you need to make the argument that these current events are going to change.

    You have not.

    Fool On

    Sky Pilot

  • Report this Comment On September 19, 2011, at 12:05 AM, TMFKopp wrote:

    @Sky Pilot

    "It seems to me to say that Gold is not priced correctly; you need to make the argument that these current events are going to change."

    Well... this is a statement that I disagree with. I've made my case above. Profligate spending and deficits by the government are part of the picture, but you can't just say that that's a problem and use it to justify gold at any price.

    Matt

  • Report this Comment On September 19, 2011, at 6:27 AM, Pr0metheus wrote:

    Bubbles generally have two characteristics:

    1) The asset is widely/aggressively owned.

    2) The asset's price is widely believed to be incapable of significantly contracting.

    As other Fool authors have pointed out, recent studies show that gold remains under owned. As for #2, there are plenty of gold bears and doubts about gold.

    During the housing bubble it was considered common sense that home prices will always rise (and all of my relatives cited this "fact" when I was debating renting vs buying). During the dot com bubble, any company with ".com" on the end of its name went unquestioned and got near-instant IPOs from investment bankers.

    Gold has not yet achieved such a grip on the mass consciousness. So I think calling it a bubble is a little premature right now.

    However, it is quite capable of going down in price. If Mr. Koppenheffer or anyone else is looking for a signal to short gold (or get out of it), then they would do well to watch the US dollar. Gold has had a strong inverse relationship with the dollar over the past 10 years (the 12-month coefficient has hovered between -0.6 and -0.9, with -1 being a perfect inverse relationship). If and when significant strength emerges in the US Dollar, it would be wise to have little or no exposure to gold.

    -Bob

  • Report this Comment On September 19, 2011, at 12:42 PM, JBHAV wrote:

    Who knows what future holds, in any portfolio a little gold must fall and in time bubbles will burst, reform and burst again. As long as your portfolio is growing ignore all comments as future is not forecasted by anyone accurately. Jim

  • Report this Comment On September 19, 2011, at 8:51 PM, skypilot2005 wrote:

    On September 19, 2011, at 12:05 AM, TMFKopp wrote:

    "Profligate spending and deficits by the government are part of the picture, but you can't just say that that's a problem and use it to justify gold at any price."

    Matt,

    Please show me where Mr. Sprott or I have said this; "justify gold at any price."

    I feel it was a lazy response at best, especially given the title of your article.

    How about, "Because I say it's so, It's so." Now that would save us all a lot of time.

    Fool On

    Sky Pilot

  • Report this Comment On September 20, 2011, at 12:26 AM, steltek wrote:

    <<Golds been in a secular bull market for 11 or so years (the Nasdaq bubble lasted what, 2 years?)...gold rising makes perfect logical sense...>>

    This is impressive logical gymnastics.

    ---------------

    This is impressively unprofessional. Until lately, I was used to a certain level of professionalism here, which didn't include getting snarky with subscribers.

    These snarky comments occur more frequently, lately. This has me wondering: is TMF feeling defensive? If so, why?

  • Report this Comment On September 20, 2011, at 4:54 AM, hartep wrote:

    Can somebody please explain to me how the rise of cold can be predicted based on the inflation adjusted price (I take it we're talking about the 80ies here) ? Except the psychology that comes in to it, I don't see the correlation.

  • Report this Comment On September 20, 2011, at 9:46 PM, skypilot2005 wrote:

    @ Pr0metheus:

    You wrote:

    "Gold has had a strong inverse relationship with the dollar over the past 10 years (the 12-month coefficient has hovered between -0.6 and -0.9, with -1 being a perfect inverse relationship). If and when significant strength emerges in the US Dollar, it would be wise to have little or no exposure to gold."

    I thought you may find this interesting:

    Gold tops $100 to set record high

    Chicago Tribune

    May 15, 1973

    “Gold leaped to the highest prices in history on European free markets today, surpassing the $100-an-ounce mark for the first time while the dollar dropped under heavy selling pressure.”

    Sky Pilot

  • Report this Comment On September 21, 2011, at 3:47 AM, GINIAB wrote:

    Gold is not in a bubble. Some day it will be, but, that day is far in the future. I can understand how an unsophisticated person might make such an error. The price has recently been reaching what appears to some to be unreasonable levels.

    You will know when Gold is really in a bubble by several things. Two of the clues will be: (1) Much greater participation by the masses of investors. Right now very few people are invested in gold and silver. In time this will change drastically. (2) When interest Rates exceed the true rate of inflation. We are nowhere close to this point in time. In fact, it will be years before we are.

    Inflation right now is double or triple what the government numbers for the CPI say it is. Of course, when you don't count food and energy and you play all sorts of games with the methodology you employ, a false number is easy to produce. The amazing thing is that so many appear to believe the false data coming out of the government.

  • Report this Comment On September 21, 2011, at 8:36 AM, JEx9 wrote:

    Gold .. Gold.. Doesn't this come down to Chjnese consumer demand ? Or did I miss something new ?

    Wish everyone wasn't talking about 'bubble' but talk has gone on for weeks I think

    anyway I adjusted mental 'review' point to 2100

    cheers JE

  • Report this Comment On September 22, 2011, at 1:02 AM, AlphaVolume wrote:

    this is just a cheap attempt to get clicks. youre comparing gold with copper and cotton? what is the relevancy. All the gold companies put together are still smaller than AAPL's mkt cap. how is that a bubble?

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