10 October 2010

Gold Bubbles

UK financial writer Dominic Frisby argues “that both metals [gold and silver] are still in a bull-market phase. Any mania is yet to come.” In support, he notes that in 1980 gold bullion went from $400 to $873 an ounce in only 36 trading days, with silver trading from $16 to $50 in 37 days. The current market is not exhibiting those sort of price moves.

He also proposes looking at the value of the US gold reserves compared to money on issue as an indicator of a bubble - “in 1980 … the market value of the 260 million ounces of gold held by the USA in Fort Knox came in at $221bn, yet only some $160bn of paper money was in issue” so if “the market value of the gold held in Fort Knox once again exceeds the number of US dollars the US authorities have issued, then gold will be in bubble territory once again, in that it will be trading at levels above its intrinsic value”.

Dominic closes his article with his definition of a bubble that I think may explain why a lot of financial commentators are consistently negative on gold: “A bubble is a bull market in which you don't have a position”. However, I doubt we will see many of them change their view and buy gold, because these days the internet means all their previous statements are recorded and easily searchable and I can’t see them admitting they were wrong.

10 comments:

Adrian said...

Hi Bron, nice article. One other issue they rarely mention is the size of the gold market compared to the whole economy, and as we know it's tiny. Additionally, if gold were a bubble why are central banks by 2011 going to be net buyers. Also, if gold is overvalued how could a central bank board approve purchases? The emerging economies value gold more then the west, but as you've said certain institutions are not going to admit they are wrong publically. If we had full disclosure we might see things differently. Some people say if you read Soros's Dec 09 statement between the lines he meant that gold will be the ultimate bubble as the masses rush in, and we are far from that point. Look at what he does, and "not" what he says is my view.

BTW I think it's excellent that the Perth Mint now have the blog as it gets away from much of the dis-information, lack of knowledge, and hysteria that many sites display.

Troy Ounce said...

Mr Frisbee conveniently forgot to mention also that gold, as part of global financial assets in 1980 was 2,77%. In 2009 it was a whopping 0.57%, so gold has a long way to go to equal 1980: 385% to be correct.
http://is.gd/fViJZ

Justin said...

Was gold a bubble in Zimbabwe dollars as most of the population spent every waking hour digging for the stuff?

The whole idea that gold can be in a 'bubble' is bull.

Troy Ounce said...

Now you trust the politicians or you trust gold. Have a look at this Zim video: http://www.youtube.com/watch?v=7ubJp6rmUYM

CarDogg said...

When they print the dollar like it's toilet paper - you can be sure gold and silver are goin' up!

http://joshuagamen.wordpress.com/2010/10/05/blowing-bubbles/

http://www.youtube.com/watch?v=Ru7vy8xKSVE

Anonymous said...

When the uncertainty index goes up so does the 'price' of gold.

AND looking at the various economies today uncertainty is going to be around for some time. It will spike, abate and spike as various black swans come in to land. In the modern world with China and emerging economies increasing their wealth and the competition for resources you can be sure the opportunity for trouble grows. Gold and Silver have become a permanent part of everybody's portfolio or will do, as a means of insurance. This puts a floor under them both.

And with the growth of the emerging economies demand for gold from them will increase, and you can imagine now central banks being aware of how much gold the likes of China, Russia, India an so forth are accumulating and may feel the pressure to increase their holdings.

Gold is money - this is the full realisation now.

The price my dip, suffer corrections and the manipulation of the corrupting cartel, but it will endure and serve its purpose.

Every correction, blow-off is simply an opportunity to buy more.

Vinay said...

Dear Bron,

Has the Perth Mint ever commented on ths series of articles published on the net by Jason Hommel?

Bron said...

No they haven't, a case of trying not to dignify what he says.

But I have, if you look at http://goldchat.blogspot.com/search/label/Ultracrepidarianism there will be posts about Hommel.

Mark said...

Bron,

You might wish to comment on this blog post.

http://agaupm.com/will-perth-mint-also-restrike-lunar-silver-series-i-and-ii-coins/

Bron said...

I've passed it on to our coin guys and they will respond with a post on the corporate blog http://www.perthmintbullion.com/Blog/Blog.aspx