Is gold in a bubble? Please!

I keep reading articles where financially savvy people allegedly claim that gold is “bubbling” or “bubbly” or whatever term these people didn’t apply to the real estate market in 2006. They profess alarm at the “speed” of the rise the price of gold, or suggest that all the late-night infomercials encouraging people to sell their “junk” gold suggest that the prices are too high. And then they go on to suggest that people buy something else (in the case of the article I read most recently, cigarette and junk food companies).

With all due respect, such advisors are clueless.

I’m not saying that to make your current recommendations disappear. While one might think, or even hope, that companies selling death-dispensing products won’t do well in a general economic downturn, that’s not the basis of my criticism. My review is for people who never noticed that gold was in a bull market for the first ten years, and then their first comment is that the bull market is over. And in such absurd tests.

To take the most absurd claim first, consider the late-night commercials. They shout that gold is at all-time highs and encourage people to sell it as quickly and conveniently as possible. Market analysts apparently think advertisers are either ignorant or just… extremely helpful in offering to take all this high-priced “junk” out of the hands of a group of people notoriously vulnerable to emotional promotions. By contrast, any rational analysis of infomercials would lead to precisely the opposite conclusion: infomercials seek to tap into their audience’s desire for instant gratification (or simple desperation) and buy something that they expect to increase substantially in value. Or to put it more bluntly, infomercials are trying to separate suckers from their money.

So a proper view of things suggests that infomercial makers believe that the price of gold will soon rise. And the most economically ignorant and desperate people in the population are susceptible to the belief that gold is overvalued. To the extent that that suggests anything, it is a clear sign that the price of gold will soon go higher. Something dramatic in the wind will be when infomercials suggest ways for people to buy, rather than sell, more gold. The top comes when the rich sell to the poor, not the other way around.

So how precipitous has the rise in the price of gold been? The bottom occurred in the late 1990s and was around $275 an ounce. The recent high was about four times that price. Quadrupling in twelve years hardly makes us a country bleeding from the nose, considering the rises in technology stock prices before its crash in 2000 or the recent swings in crude oil prices, but perhaps raises the question of whether such growth price is justified. and it is likely to continue given the fundamentals.

Like the infomercialists, I strongly believe that the gold price has a long, long way to go before it reaches the top. One could compare the gold price peak that occurred in 1980 (it took almost twenty years to reach the minimum) of around $850 an ounce. Adjusting that price for inflation would suggest a much higher price for gold, assuming gold reaches those heights again (as I do). Analysis of supply and demand would produce a similar result.

In my opinion, however, the best place to base the analysis of the price of gold is its function as a monetary resource. Some people claim that gold is money, others the contrary, but it is undeniable that it suggests that the biggest holders of gold in the world are the central banks. Relic barbarian or not, gold is treated like money by the people who count. It should be considered as a form of money.

And the supply of gold has remained near constant while the number of government-issued “fiat” currencies has skyrocketed. Governments around the world have vastly expanded the amount of their money in existence, while gold has become relatively much rarer. This suggests that the price of gold would need to rise much higher to return to its relationship with national currencies.

Perhaps most significantly, the supply of gold is almost completely independent of government action and, among other things, the value of gold becomes something of a barometer of global confidence in government integrity. As governments are increasingly unable and unwilling to control their spending, and as they competitively devalue their currencies, people are slowly losing trust in government. The slowness is probably more a function of people’s unwillingness to believe that their lives will actually change than anything else – the facts are absolutely clear. It is this gap between reality and what people accept that convinces me that the price of gold must continue to rise.

And it will increase, at the very least, until public perception matches the scope of the problems facing the financial world. I think this is at least several years away.