Is Gold In a Bubble ... And If So, How Much Further Can It Rise Before It Pops?

George Washington's picture

Washington’s Blog

When everyone from Jim Cramer to Mr. T is hawking gold - and when the price has risen to all-time highs - it sure feels like a bubble.

On the other hand, the super rich - who presumably know a thing or two about investing - are buying gold by the ton.

Lewis wrote in September:

prices would need to surpass USD 1,455/oz to be considered extreme in
real terms and hit USD 2,000/oz to represent a bubble.

Bloomberg notes:

Zyblock, chief institutional strategist at RBC Capital Markets, said
last month gold may soar to $3,800 within three years as it follows
the pattern of previous “investment manias.”

Barron's points out:

Yamada, the eminent technical analyst who for many years worked at
the various firms that have coalesced into Citigroup and now presides
over LY Advisors, last week remarked in a client note that gold—based
on its current trajectory—most likely wouldn't represent a true
bubble unless and until it gets to $5,200 an ounce (from its
$1,317.80 December-contract close on Friday) within a couple of

University of Michigan economics professor Mark J. Perry noted in July that inflation-adjusted gold prices are lower now than in 1980:

for inflation, the price of gold today is 41.5% below the January 1980
peak of more than $2,000 per ounce (in 2010 dollars).

Frank Holmes, the CEO of US Global Investors said recently:

“If you take a look at previous cycles, super cycles, we're far from it,” he said.

“If gold were to go to 1980 prices like most commodities have gone to, gold would be over $2 300/oz,” Holmes commented.

WJB Capital Group's John Roque pointed out in May that the current gold bubble is still much smaller than the bubble in the 1970s when priced against the S&P.

MSN's Money Central noted last month:

Arends, a columnist for The Wall Street Journal and MarketWatch,
estimated that "individuals bought $5.4 billion worth of gold, and sold
about $2.7 billion, (so) their total net investment comes to $2.7
billion" in 2010, through early summer.


Arends contrasted that with the $155 billion they shoveled into bond funds through July. That may be the real bubble.


also concluded that "if it continues along the same trajectory (of
past bull markets) -- a big if -- gold today is only where the Nasdaq
was in 1998 and housing in 2003."

In May, Arends wrote in the Wall Street Journal:

we assume the gold bubble has hit its peak, let's see how it compares
with the last two bubbles—the tech mania of the 1990s and the housing
bubble that peaked in 2005-06.


The chart is below, and it's both an eye-opener and a spine-tingler.



compares the rise in gold today with the rise of the Nasdaq in the
1990s and the Dow Jones index of home-building stocks in the 10 years
leading up to 2005-06.


They look uncannily similar to me.


far gold has followed the same path as the previous two bubbles. And
if it continues along the same trajectory—a big if—gold today is only
where the Nasdaq was in 1998 and housing in 2003.


In other words, just before those markets went into orbit.

Tyler Durden notes:

Morgan's] Michael Cembalest indicat[es] that ownership of gold in
dilutable terms (aka dollars), as a portion of global financial assets
has declined from 17% in 1982 to just 4% in 2009. And even though the
price of gold has double in the time period, as has the amount of
investible gold, the massive expansion in all other dollar-denominated
assets has drowned out the true worth of gold. Were gold to have kept a
constant proportion-to-financial asset ratio over the years, the price
of gold would have to be well over $5,000/ounce.

(Durden points out that when derivatives are factored in, the percentages are even more dramatic).

Aden Forecast argues in its November 12th forecast:

is in a mega trend. Eventually, the magnitude of the situation and its
repercussions will become more obvious. That’s also why the U.S. dollar
will continue to fall because more spending and money creation makes
the dollar worth less, and gold will keep rising because it is real
money. This is one main reason why they’re in mega trends too.


clearly believe that gold and silver are far from being in a bubble....
The value of the whole monetary system is under question and until this
very issue is resolved, gold and silver will prevail.

Many people think that the Federal Reserve's QE2 will boost gold prices. And since QE2 will continue for many months, that augers well for gold.

With all of the money printing worldwide, it is not surprising that gold has continued to rally against all currencies.

For background on gold, see this.

Note: I am not an investment advisor and this should not be taken as investment advice.

if the gold bull market has further to run, gold prices might correct
sharply downward in the short-run, and you shouldn't buy gold unless
you're willing to lose your investment.

In addition, if the
government decides to confiscate gold like it did in the 1930s - or to
heavily tax gold - this could considerably change the cost-benefit

Remember also that if the Fed raises interest rates, gold could fall rapidly.

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topshelfstuff's picture

BTW, have our "Leaders" figured out how much Cheaper Gold, Silver and every other Commodity would cost China and the Chinese People if they did raise the renmimbi the 40% TPTB has near demanding---have you all considered that? When you think about all those who have been asking for this it should have made you wonder what the "catch" was---after all, just look at their past moves and non-moves

Pampalona's picture

Under what circumstances can we expect the price of gold to drop? I mean is there any scenario where gold could drop that doesnt see the economy in good health? Because if thats the case buying would seem like a good idea - worst case the economy improves and we all get job security in exchange for losing a little on our gold this a reasonable or foolish assumption?

topshelfstuff's picture

just slide the decimal point and that should be where the POG is heading

the secondary choice is the USD Pegging to China's Yuan, about a 15 cent dollar

pragmatic hobo's picture

as long as Obama is in the white house the allure of GOLD will remain.

mogul rider's picture

someone asked at that party what those moguls in my yard were. I said the bodies of the last people who asked.



Wags's picture

Frankly at this stage it might not be how much money you will make on gold, silver, etc. It is how much gold and silver won't lose when the currencies come crashing down with the economy.

It's the existing over-leveraging that still remains that is killing our future. Truthfully what the world needs is slow steady growth for a decade to recover. I don't think it will get it.

Buy gold & silver and hold. For most it is insurance. If you are a trader that's another story.

mogul rider's picture

It's simple really


How many people here own physical gold and silver?

Nevertheless I bet it's 25%. I'm talking physical here not paper etf's or stocks of miners.

I sampled the people in my neighborhood the other night at our neighbor hood party. 10% owned some. Very little acutally = a coupel oz's of gold and zero silver.


My sample is the bubble indicator. When 50% have some i'll bail.

Duffminster's picture

Personally, I think that the opening of the Sprott Physical Silver Trust which enables redemption in Physical silver and for which the silver is not being stored and handled by JP Morgan like SLV, there will be a lot of additional IRA and Fund money moving into PSLV and that will begin to put even more pressure on CRIMEX as the already very tight physical silver situation begins to pressure the massive paper efforts to keep it down.

In the mean time everything is fine because Roubini is saying "inflation is not a problem."

anarkst's picture

How about people get a life and stop worrying about the price of gold!

svendthrift's picture

Because very wealthy people want an otherwise useless asset that they own to become the currency of the largest economy on earth. It's quite simple, really.

philgramm's picture

Because very wealthy people want an otherwise useless asset that they own to becomethe currncy of the largest economy on earth. 

So you would rather these wealthy people be able to print as much "currency" as they see fit so they can devalue our hard earnings.  Get a clue!! 


svendthrift's picture

So you would rather these wealthy people be able to print as much "currency" as they see fit so they can devalue our hard earnings.  Get a clue!!

That's the system we have now. With a gold standard, there would still be fractional reserve banking and paper money. They'd manipulate that too.

The Greenback system was superior. Congress should issue and control the value of money. No inflation from banks. If Congress creates inflation they must be held accountable. Now, nobody is.

Robbob's picture

Maybe you should read up on freegold.

Silversinner's picture

If gold and silver do a historic accounting

against fiat today the prices would be at

least ten fold.You shoud not put gold against

dollar,but against all paper currency.

If you make a prediction for the future,one

has to know how much extra fiat will be printed.

I guess a lot.Like a race,can gold's price rise faster

then printing press can print currency.Gold will

loose in the short run but then takes all when paper

value drop to zero.

GFORCE's picture

We've already seen a few articles comparing gold to the nasdaq etc. Have a look on the daily/weely charts and you'll see a threat of some overdue correction here, probably alongside another deleveraging. Following that then maybe 2,000.

Robbob's picture

This is just psychological warfare mis-info bullshit to scare the general public from buying gold, bitchez.

Watauga's picture

The amazing thing is that there is even talk of a gold or silver bubble.  The United States government is $133T+ in debt (about $13T in current debt and $130T in future obligations) and will run multi-trillion dollar deficits for the foreseeable future.  The only thing that could possibly stop this would be a radical change in government spending habits, which is not likely to happen.  Hell, our government just committed the taxpayer to provide health care for another 40M people (and that's supposed to save money?). 

The only recourse at this point is to devalue (i.e., devastate) the dollar.  There is no way to pay the debt off or meet future obligations honestly, so the only path is to print money as fast as is acceptable to the public and the world (though the public showed dissatisfaction on Election Day and the world is increasingly angered).  Ultimately, this will destroy the dollar--but it won't happen until the monied interests have adequately protected themselves.

Add to all of that the fact that we are a nation fighting two ground wars simultaneously, with the strong probability of engaging in several more at any time, from Pakistan to Iran to Yemen.  The cost of keeping oil flowing may one day exceed its value. 

And add to it a REAL unemployment rate of about 25% (rather than the government's laughable 9.X%).

And add to it a permanent trade deficit, a near total loss of manufacturing in the U.S., a shift to the East in terms of the technology advantage, and a shift to the East in terms of world confidence about what nations will be left standing in 20 years when the 21st C begins to shake out for real, and things look awfully dark for the U.S. in the coming years.

So, what in any of that reality makes anyone think gold, which is barely a consideration of most institutional investors and has barely been touched by the vast majority of mom&pop types, is in a bubble?  Is its price higher than what it has been in the past?  Of course, because some of the money has moved to gold (and silver, platinum, and palladium) for all the right reasons.  There is a Hell of alot more room to expand--a HELL OF A LOT--before the word bubble should even cross anyone's lips.  There will be corrections, yes, but it is difficult to gauge what a bubble in gold would even look like since we have never faced a totally collapsed dollar and U.S. economy, which may well be where it is all headed.  If that happens, what should the price of gold be?  If that price is $5000/ounce, is that a bubble?  I don't think we know.  We have never confronted what we likely will have to confront in the next 10 years.  "This time is different."

ejmoosa's picture

Since it it not a bubble that is can be burst by supply, and only by demand dropping, I'll take my chance on silver.

I know what they doing on the supply side of the greenback.  That's the bubble you better worry about.

Mr Lennon Hendrix's picture

Never in the history of absolute FIAT AMerica has the nation been faced with bankruptcy.  If the nation that holds the reserve currency is faced with bankruptcy, then its medium of exchange as the dollar is subject to the same.  The cycle of history in repeat is that of a burned empire.  Measuring gold in ashes is a non complete.

Joe Grannville's picture

I sure wish that Turd would weigh in.

RichardENixon's picture

He did on another thread. He sees gold at 1,500 by 12/11.

bingaling's picture

Seriously hardly anyone I know is buying or has bought gold . That said this is not a bubble . When my next door neighbor starts asking me where to get gold that is when I would sell. Other examples of when to sell .

When you over hear a waitress in a restaurant that she has just bought a few grams (make sure she isn't talking about Californian gold)

Joe the plumber is now buying .

I would also say these examples apply for silver as well being people like this cant afford gold at these prices . But again the average person is not out there running to shops buying physical when they do I get off the train . (also if you have a shop in your area and you notice there are 10 people browsing when normally there are 1 or 2 -I would sell )

covert's picture

there is not bubble here. the price of gold, silver etc is about where it should be.


El Hosel's picture!


 Silver song, Banksters gone wrong, put them where they belong... Behind silver bars, without their vasoline jars


Ignorance is bliss's picture

I noticed that APMEX purchases are recorded. If there was ever a Gold confiscation like the one in 1933, couldn't they just ask the primary mint distributers for their records? Then the Gov't could just knock on your door and ask for your gold. Heck they might even take your house for possessing an illegal substance.

Vendetta's picture

when they come to the door, you can offer them a 1/10 ounce to go away and tell their bosses they couldn't find any in the house

Vendetta's picture

when they come to the door, you can offer them a 1/10 ounce to go away and tell their bosses they couldn't find any in the house

Thanatos's picture

When they come to the door, don't answer or make any noise/movement.

If they don't have a warrant, they can't come in.

If they come in without a warrant... In my state the law says: that's the last mistake a person makes.

When they leave, wait until it's clear, DO NOT TAKE YOUR MOBILE, go and hide your PM's.

Come home and call the Poilce. Report a robbery of ALL your PM's.


The thought of PM confiscation really rubs me the wrong way.

Thanatos's picture

Basically, substitute guns for PM's and you will have a better understanding of just how fed up people are...

The party might detonate pre-placed devices intended to mitigate the PM Collection Efforts.

The party might give all their PM's to an armed, extremist group to help THEM mitigate the PM Collection Efforts.

The party might have moved and not given their forwarding address to the MVD or anyone else.

The party might NOT have placed utilities in their name to prevent them from being located.

The party might....

If they come to get PM's... There WILL BE a HARD RAIN.

Let it rain!


DosZap's picture

All Dealers report sales to the IRS, and you should get a 1099R from them at the end of the year.(for sales over 10k)

The IRS considers your previously taxed purchased PM's  metals as 100% income.IOW's, you get to prove it's not NEW income.(again if you sell it,any ,all).

It's up to you to keep track of any you sell,and make sure you have recipts for a cost basis.(you are required by law to pay taxes on any gains on anything you sell, period, if you made a profit.)

Otherwise, you will wind up paying taxes 100% of your income bracket rate on the entire amount you sold.

You buy & sell  say, $56,000 worth, guess what, you just made it, and you did not have taxes removed from the income.(IRS assumes this, you prove otherwise.)

So unless you want to be raped, keep invoices.And be damned sure to report it.

Any transaction over $10k gets reported, and the Dealers are required to send out 1099's, or at least report the sales to the IRS.

If your smart, and do not want an audit, you will list sales, and profits, or loss,whichever the case may be.

You purchase , and sell within a 12 mo period, your taxed 10% on capital  gains, after 12 mos, 28%.(from the grapevine, that may be going up a LOT).

Look at Bullion Directs site, you cannot even buy from them without giving your SS up front,and read the disclaimers on Cashiers Checks, and Money Orders.

If anyone here is a dealer, and I am off in any area, please advise.(again, this applies to SALES only).

RichardENixon's picture

You purchase , and sell within a 12 mo period, your taxed 10% on capital  gains, after 12 mos, 28%.(from the grapevine, that may be going up a LOT).-- Actually I believe that the minimum tax you can pay is 28%. Where did you get the 10%?

Sad Sufi's picture

Dealers I speak with say that although by law they keep track of all purchases, that they would need court papers to open their books.  Law apparently says "keep track," but doesn't require disclosure unless there is an investigation of some kind...

Peterpaul's picture

The government could request them, but:

1. The party may not respond or refuse, especially if it is out of the country;

2. The party may delay answering until the issue blows over.

Some folks may have sold a small amount of gold or silver and failed to record it; others may have lost in gambling or have it stolen. And still others may have bought it for cash from a dealer that does not record it.




capitallosses's picture

Comparisons with past bubbles are worthless. The chart to watch is fiat trash.

drchris's picture

A few years back I decided it was finally time to keep ~10% of my portfolio in precious metals.  Over the summer, I was contemplating increasing that number to ~20%.  I asked everyone I knew for advice (specifically about buying gold/silver).  They all said gold was in a bubble.  Many seemed down right angry about gold.  Of course, that convinced me it was time to stock up.  I'm glad I did.  

Although I'm happy that I've done well with PMs, I doubt I would sell them.  If gold/silver dropped 50% I'd probably just buy more.  I feel they are essential to portfolio management and provide a safety net for some of the worst-case scenarios.  


Mr. T.'s picture

T is a buyer.

any fool know fiat is the bubble, and every fool is long fiat.

but T is humble, mama taught him.

Sean7k's picture

The enemy of my enemy is my ally. Bankers hate gold and silver. That is all I have to know. 

The only thing capable of creating a bubble is leverage. Bubble in paper gold? Perhaps. In physical gold- cannot happen. 

At this time, gold and silver are not traceable or taxable. In the future? Only if you are stupid enough to tell the government.

If you have faith in tyranny, then sell your gold and silver. Invest in bonds. If you have faith in liberty, buy gold and silver. Let the bankers hang in the streets.

Blindweb's picture

A long term chart shows that fiat currency is a bubble.  How many times do we have to go over this?

traderjoe's picture

Yup. And yes to Sean7k below. 

BTW, Mr. T wants to BUY your gold - not sell you any. When I was at the local coin shop buying my xmas presents and simultaneously taking down JPM (silver maples, low premium), more people were selling then buying. Mostly, unfortunately, I would guess to make monthly expenses...

Ye Ye's picture

I watch the top results for the search "+gold it's a new paradigm".  Currently it's still mostly of the "it's a bad investment" flavor.  When that turns, watch out.

JW n FL's picture
Bearish trustees dig deep for gold and diamonds

Tara Loader Wilkinson

15 Nov 2010

Renewed inflation concerns, a weakening dollar and allegations of manipulation in the silver market are rendering many wealthy investors ultra-bearish and sending them hunting for physical gold rather than gold derivative investments. Others are seeking to hedge their riskier bets.

Last week the price of gold broke records, passing $1,400 per ounce, up 25% so far this year. But, for some, investing in gold through exchange-traded funds and other products is not safe enough. They crave physical gold.

Iain Tait, partner at UK wealth adviser London & Capital, received requests from separate trustees in Jersey and Guernsey for physical diamonds and gold bars last week. He said: “There is the feeling that ETFs are the home of the speculator while bars and real diamonds are the domain of wealthy families trying to protect themselves.”

A lawsuit filed last week against global banks JP Morgan and HSBC by investors in the US, over an alleged conspiracy to manipulate the market for silver futures, was the latest news to take the shine off the gold derivatives industry, wealth managers said. JP Morgan did not return calls for comment. HSBC declined to comment.

Ned Naylor-Leyland, partner at Cheviot Asset Management, said a lack of trust in banks and the spectre of counterparty risk was a problem. “I hear Swiss banks are turning out their vaults for clients wanting to take home their gold. Trust is wearing thin.”

The suggestion of manipulation followed assertions that paper claims on gold far outweighed the physical asset. This year, Jeffrey Christian, managing director of commodities market researcher CPM Group, said a hundred times more gold and silver changes hands each year than is produced or used.

According to the World Gold Council, global demand for gold bars climbed by a third between the second quarter of 2009 and the same period this year, while demand for gold ETFs and similar products rocketed 414%.

Nicholas Brooks, head of research and strategy at ETF Securities, said concerns that many ETFs are not backed by physical assets are overblown. He said: “Our ETFs are 100% backed by physical gold in vaults in London. There are other gold investment vehicles listed globally that do not provide the same level of detail on their holdings or independent audits and this may be a factor fuelling some of the conspiracy theories.”

Some investors are put off by the idea that gold ETFs can contain other financial products, such as swaps or derivatives, even if just a small percentage of their weighting.

Angus Murray, chief executive of London-based Castlestone Management, said: “Physical gold is simply metal without any other financial product or structure. My clients want to own an unleveraged real asset.”
He added: “If the ETF doesn’t have the ability to list additional shares there can be a pricing issue. Why complicate it?”

Fearing the precious metal is in danger of over-reaching itself after its big gains this year, some warn gold is approaching bubble territory. Andrew Thompson, Kleinwort Benson’s head of advisory portfolio management, said: “In the short term, gold is looking ‘overbought’ and some sort of correction is all but inevitable. If it does form a bubble it will burst, as bubbles do.”


Chartist's picture

I believe silver will continue to rise until it takes out its 1980 high of $50....Not sure where gold will be at that time.

GrouchoNotKarl's picture

Don't you mean inflation-adjusted high in 1980 of ~150?

squidward's picture

Gold comes out of the ground at an average cost of about $600.  Where is all the talk about  the Starbucks coffee, windows 7, viagra bubble?  Margins are similar.

The Rogue Economist's picture

What's the difference? When did you last hear of a Viagra shortage because they couldn't get it out of the mine fast enough? Production of Viagra could climb toward infinity with enough demand. The production of gold can't.

Oh BTW, coffee should be listed with gold, not Viagra. Are gold, silver, soybeans, and cotton all in simultaneous bubbles right now, or is the dollar just trading lower and lower? The evidence points to an issue with the dollar, not with rampant speculation in tofu.

repete's picture

Al-Qaeda is rumored to be purchasing large numbers of box cutters for another go at NORAD.  This may have an influence on gold as a flight to safety trade.

hbjork1's picture


Having worked at NORAD as a weather forcaster before they were in the mountain and having kept somewhat "in touch", I feel qualified to offer an opinion. 

If that story is true, the current Al-Qaeda operatives are deluded in the extreme.  Box cutters would have no value whatsoever in getting into NORAD.  IMO, I don't think Al-Qaeda has shown that they are really that stupid.  The possibility that it is a rumor being circulated as "straw man" to mislead is about the only credible place for that.

repete's picture

My comment was a sarcastic reference to our governments claim/admission that a few guys used box cutters to render Norad defenses useless on 911.  Sorry the comment was not on topic. I'll junk myself!