There is a widespread fear that gold is in a bubble and that the price could crash at anytime. This could not be more wrong. Gold's rise in value has not been due to "irrational exuberance" but because the US government has chosen (rightly or wrongly) to print money to buy their way out of recession.
The Federal Reserve is printing paper backed by politician's promises. People have recognised this and in order to prepare for 'the great inflation' have bought gold in physical and paper form in order to protect their capital.
Gold is just a yellow metal. It has little industrial use. It's value is based upon it's comparative rarity and investor perception. However, to many, gold is currency. This is made evident by renewed purchasing from the the Chinese and Russian Reserve Banks. In fact more than 20% of the worlds 'above ground' gold is owned by governments.
These governments are worried. The United States is their biggest trading partner and the US government owes them trillions of dollars. Unfortunately, it is also bankrupt.
So whilst the US prints more money and coordinates its stimuli with its global governmental partners, they buy gold, as a hedge against their dollar holdings and a potential debt default.
The relative weakness of the dollar and demand from BRIC nations have kept commodity prices high. This is dangerous. When the recovery comes, there will be a global craving for oil, copper and coal etc.
So now we have a scenario where the US government is flooding the market with money in order to lubricate the cogs and gears of its economy but cheapens its currency internationally, with every note printed pushing up the dollar price of materials. Add to this an eventual commodity bull market which will have been force fed on the steroids of recovery and we have an inflationary nightmare.
This is why people buy gold.
Below is a great chart from Barry Ritholtz of 'The Big Picture' busting the myth that gold is at a high. As he correctly points out, the high is merely nominal and not inflation adjusted.
As the chart shows, the actual gold price high in real terms is over $2,300. However, that high whilst magnificent was brief. This time, I believe that gold is in a long term secular bull market that has only just begun.
Are we irrationally exuberant about the price of gold? I don't think so. A good example are Apple shares. They are up over 120% since the start of the year whereas the ETF GLD has barely made a return of 20% since January 1.
In fact since March 2008, gold can barely scratch a 2% gain!
Exuberant? No.
Confident? Yes.
Inflation will come and we'll be vested in order to benefit and profit from it.
No comments:
Post a Comment