One of the definitions of an economic bubble is "a temporary market condition created through excessive buying, and an unfounded run-up in prices occurs".
The run up in the value of gold is not an unsustainable exercise in exuberance, if that was so, then the bubble would have popped last year when $1000 per troy ounce was breached. The drop in the value of gold was gradual and it is still yet to breach last years highs. In fact, as of today, the GLD ETF is -2.40% on a yoy basis. Yet buying has been "excessive". GLD is holding approximately 60% (400 tonnes) more gold than last March. Therefore this cannot be a bubble.
"So why hasn't GLD increased by 60% accordingly, particularly if gold turnover worldwide also increased 58%? (Bullion Markets 2009 Report) ", ask some of my clients? My opinion is that the buyers of gold have been accumulating during a period of record US dollar strength (ex-JPY) and low inflation (The December 2008 inflation rate in the US was 0.09%).
These are extremely adverse conditions for gold, which needs high inflation and a weakening dollar to achieve growth.
So will it happen? Will gold hit sustainable record highs? Firstly, I believe that gold is fundamentally overbought given the aforementioned economic conditions and that the price could drop further. It is entirely possible that the gold price will revisit $860 or even lower.
Long term, the gold price will be sensitive to the policies of the Democratic Presidency and Congress. So far, what we are seeing from the Obama administration is political theatre. At this stage of the crisis, it cannot be anything else. Obama has no choice but to spend money like a drunken sailor. To do nothing as the libertarians would like, would appear to be negligent. Therefore he has to act with the conventional wisdom and spend. However, the effect of what could ultimately be, in excess of $3,000,000,000,000 injected into the financial system will be catastrophic.
Below is a video from Glen Beck of Fox News. I'm not a great fan of this guy (to say the least) but on this subject he is absolutely right.
The devaluation of the US dollar will force up the price of gold as "the great inflation" kicks in.
To conclude: Gold is not in a bubble. In fact gold is yet to encounter the conditions that will drive its price into what will be, triple figures. But they are coming. The foundations are being laid with TARP, the Obama stimulus and the various bailouts.
In a time of collapsing equity and property markets and bond yields of below zero, gold offers a fantastic opportunity. It is up to you to take advantage of it.
1 comment:
"GLD is holding approximately 60% (400 tonnes) more gold than last March. So why hasn't GLD increased by 60% accordingly?"
Outstanding shares increased by 60% too.
When physical Gold is added/removed to/from the Trust, the no. of outstanding shares increases/decreases.
The 60% increase in GLD physical gold holdings shows the increased interest in having Gold exposure in portfolios. It has no bearing on the price of Gold.
SPDRGoldTrustProspectus.pdf
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