Has gold reached bubble territory?February 7, 2008
The recent pullback in gold prices has many commodity bears calling for a major correction in gold prices, possibly another $50 or more per ounce. While I certainly can’t rule out the possibility of a minor correction, the upward trend should continue over the next few years for the same reason it has been steadily trending upwards for the past several years — inflation. Gold is not an investment, it’s money. As US dollars continue to depreciate against foreign currencies and all currencies depreciate against many commodities, central banks and wealthy individuals around the world will choose to preserve their capital by building or increasing gold reserves. I can’t help but laugh every time I hear some analyst on TV bragging about how good it feels to be in cash when the market drops, why anybody would choose to maintain dollars as a store of value is beyond me. We’re nowhere near the top of this gold bull market. Inflation adjusted, gold is not even half way to its all time high. Many other commodities have shot way past their all time records and there is every reason to believe gold will follow. You will know gold is approaching bubble territory when individuals start pawning their jewellery to pay for groceries, which is not a far fetched proposition given current economic conditions. Until then, the shiny stuff is where you want to be.
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Nice site. Agree with most all you said, but confused about the last paragraph. You think people pawning their gold for groceries will mark the top. I just recently read an article on msn.com talking about just that… well some didn’t “need” the money, but it said over and over that people were unloading their gold because of “these ridiculously high prices.” The contrarian in me seems to think that the top will be when the ordinary Joe-schmoe wants to BUY gold (because they’re convinced it’s going to keep going up), not sell it. Would appreciate your thoughts (email me if you will, in case I can’t find this exact post again.)
If I could re-write that last paragraph I probably would clarify that when previously well-to-do people start pawning their gold, that will mark the top. When average people sell gold that increases supply (brings prices down). When average people buy gold, that reduces supply (brings prices up). If we get to a point where any time gold hits a certain price everybody dumps their supply on the market, that could create a top, theoretically.
Of course, that’s all conditional on Bernanke’s actions. He could take gold to $5000 if he tries to save the real estate market.
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