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

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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:

Gold
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:

Myles
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:

Louise
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
years.

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

Adjusted
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:

Brett
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.

Arends
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:

Before
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.

It
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.

So
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:

[JP
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:

Debt
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.

***

We
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.

Even
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
analysis.

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

Comments

[CIABS]

repete, et al:  question the official story here and you get junked immediately by at least one person, namely the guy whose day-job it is to do so.  to me those junks say "correct."

[repete]

Let's see if the 28 story building that is burning in Shanghai collapses at free fall speed into it's own footprint.  It would be the fourth high rise to ever do that.

[dot_bust]

That was always the biggest hole in the official government explanation for the 9/11 attacks. There's no way on God's green Earth that men armed only with box cutters could ever hijack a plane. The idiot who came up with that cover story should be raped in prison.

[hbjork1]

repeat,

Hadn't heard that one.  That one sounds strange also. 

[snowball777]

Ever count the number of non-Islamic countries on a gold standard?

Illuminating.

[snowball777]

So amusing that people look at the historical gold price and see volatility, not in the pricing currency, but in the asset's value.

There's a reason for the inflection point in 1971.

[Azannoth]

"you shouldn't buy gold unless you're willing to lose your investment." An ounce of gold may loose purchasing power but it never loose all value

[williambanzai7]

Gold is a barometer of confidence or lack thereof. How much confidence do you have GW?

[Teaser]

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

If the government raises interest rates the nation will fall faster than gold could.

[XitSam]

The question is not how much can gold rise, it is how much can the dollar fall before it vanishes.  Gold will still be here.

[Teaser]

exactly.  We should be thinking it terms of what you can buy with gold, rather than what you can buy with FRNs.  We should also be aware of how much gold we earn each week.

[whatsinaname]

Does the price of gold impact CPI or PPI and core CPI/PPI in anyway ? Not that there is any inflation in the economy anyways..

[unwashedmass]

don't bother with gold....buy silver...crush JPM.

[midtowng]

The easy money for gold has already been made. Silver, OTOH, is the place to be.

[snowball777]

+ 100 toz