CHART OF THE DAY: GOLD PRICES COULD DOUBLE OR TRIPLE BEFORE GETTING TOO BUBBLY
15 December 2009 by Cullen Roche
17 Comments
Nouriel Roubini is among the numerous analysts who have been calling gold a bubble in recent weeks (I too am in this camp though I became cautious on the yellow metal 10% higher). Today’s chart of the day comes to us courtesy of Todd Harrison at Minyanville. According to Todd, gold might be in a bubble, but if that is the case it could have substantial upside from here. A quick comparison of gold with previous bubbles shows that the recent run-up is literally nothing in comparison to some of the great bubbles of the last decade:
Great chart, something that I have been wanting to know. Thanks as always.
Awesome chart. So the million dollar question is – do we buy gold and try to time the bubble or do we hold off?
Although I suspect gold could very well be in the process of putting in an intermediate top, I can’t see where the underlying psychology of the general public is consistent with gold being in a true bubble. The majority of people I know have never even touched a gold coin much less owned one. Contrast that with Tech in the 90′s or real estate a couple years ago. I could count the people one one hand who weren’t involved.
Hopefully I’m not wrong because I hate being a bag-holder.
Nice chart too.
My only problem with the whole bubble debate is this: gold rises when fear levels rise. In other words, it is a hedge against the fall of the fiat currency system. So, the recent rise in gold that coincides with a rise in economic activity can almost be seen as a contrarian indicator. We can’t continue to see strong economic growth (that isn’t inflationary) along with higher gold prices. It simply won’t occur.
So, you have to ask yourself – do you really believe the fiat currency system and the economy will crumble because that is the only scenario in which gold will get truly overvalued and “bubbly”.
If you’re more “pragmatic” and subscribe to the TPC outlook of below trend positive GDP and low inflation then gold makes no sense in this environment.
That is my major reason for not owning gold currently. I don’t see how we can have run away gold prices when we continue to see little to no inflation and the likelihood of economic doom is over with. This does not mean things won’t be bad for the next few years in terms of the economy, but I truly believe the full blown panic phase of this crisis is behind us.
The nanny state will prevent all future crisis from getting too bad so long as it primarily effects Wall Street or another powerful group which has undue influence over our political leaders. The rest of us can go jump in a lake.
Trouble is, the last true gold bubble, one would line up around the corner to buy physical gold or certificates from a bank or trust co. Now you open a brokerage account and buy the ETF. Not as obvious but still a bubble in my book. USD is bottoming, gold co’s are unhedged(!) and inflation is nowhere to be seen. I think a $600 handle on gold is coming within 12 mos.
There’s a huge problem with this chart and its scaling. Gold is up about 4x over this period, but by putting it on the Tech stock scale it gets swamped because of the starting position. If every asset was graphed on its own axis and normalized the view is very different. Pretty lame attempt to show gold isn’t about to crumble.
It clearly shows that gold’s ascent has been much more gradual. Most of those major bubbles saw 80% of the returns occur over the course of a year or so. Gold just hasn’t rallied as much considering the long time horizon….
No, your chart is gradual for gold only because it is the latest to ramp up; you should not start at 1998 for all assets; that would distort the slope for those who ramped up first like Tech, even though Nasdaq also ramped up 4x, according to your chart. You need to compare over the same number of years before the peak, and in percentage terms.
It’s not my chart, but I’ll inquire about it.
While I agree with the author from Minnyvale on a purely technical and chart basis, I believe that if gold makes that kind of move, silver will make a move at least three times as big.
The reason is that both monetary metals, gold and silver are the only two major commodities that have not recently touched their inflation adjusted highs. Even at its current price gold is around half of its inflation adjust high while Silver remains at less than 1/6th of its price.
In my opinion the only rationale reason for this coincides with the findings of GATA’s research into the regular coordinated price manipulation by some of the largest Western Central banks over many years.
It is ironical that so many headlines keep talking about how risk aversion was put to rest in Dubai, causing gold to rally, when in fact, the most logical safe haven for increasingly risky sovereign debt problems isn’t in the most indebted currency in the world but in the only currencies that have absolutely no counter party entropy, gold and silver. To top it off, smart money will, in my opinion, before long, realize that with all the available above ground gold fitting into about two Olympic size swimming pools and the silver being a much much smaller market, it won’t take much in the way of physical off-take from the futures and other market sources to see physical demand have a massive leverage over the paper gold and silver markets which in my opinion are in serious trouble relative to available metals in gold and silver.
The reason I believe this is because of the change and nomenclature in regard to showing all gold settlements in cash as opposed to distinguishing between physical, delivery or cash settlements at COMEX. What is also a clear signal of trouble in physical deliver is the new offer to settle contracts in GLD and the increasing delivery times for those who insist on physical delivery that have been reported.
Duffminster
http://www.duffminster.com/SilverandGold
several driving isues:
1) supply and demand–gold and silver supplies are getting –err, thin while demand is increasing and thats before real deamnd begins.
2) paper shorts on comex fo rboth gold and silver is mindboggling.
3) Have you seen the US balance sheet lately? we are writing checks we cannot cash (without printing paper) at the federal, state and local levels, not to mention the banks are still in doo doo (think trillions of derivatives).
think of our paper currency like going into a bar and getting watered down drinks (which is why I do not want water in my drinks). The drink is worth less like our currency is worth less–and the fear is that it becomes worthless. We have a faith based currency (as do most countries but that does not make it right).
But you all have to make your own decisions. Thats whats beautiful about a free economy.
In the US private credit is contracting rapidly and being replaced by pubic debt. Overall debt more or less flat. Debt is a high % of GDP and ultimately must be reduced. Credit contraction is deflationary so long as the credit is in the home currency (see Japan and now the US, Germany, etc). Most of the developed world is in deflation or disinflation. Debt default is inflationary if the debt is in a foreign currency (see past history of Argentina, Brazil, Mexico, etc). No major creditor to the US (China, Japan, etc) will allow the dollar to crash. They would be hurt much more by the devalution of their dollar reserves than the US. (They are smart enough not to run for the exits.) Increasing public debt (see US, UK, Germany, Japan, etc) will be a major drag on the economy going forward, that is deflationary. There will be inflationary forces coming from the emerging markets until bubbles pop there (see China’s propery bubble) and then there may be more sources of deflationary pressure. Debt and paper asset destruction (see all the paper gold with multiple owners) can reduce the quality of “paper currency” faster than the central banks can print especially if banks are not willing to lend due to default risk.
The short squeeze scenario in gold and silver is very interesting, but might the price of gold crash (instead of skyrocket) if holders of paper gold fiqure out that it is potentially worthless and instead of trying to take physical possession (like a run on the bank) which is a hassle and potentially pointless actually trying to sell their worthless paper gold and silver as fast as they can? What legal recourse does a holder of the GLD, IAU, etc have?
Gold may have room to run higher into mega bubble territory (it is already 2.7 its historical inflation adjusted value; a run up to 6x, say 2,700, would be consistent with other bubbles) but the large increases at central banks may be a sign that it is already late in the game.
http://www.bloomberg.com/apps/news?pid=20601087&sid=arhlK7_y34Mg
Central banks can certainly move the markets, but their timing is not great from a profit standpoint. They were big sellers as gold hit its low at the beginning of the decade and buyers after it quadruples?
Sounds similar to all the companies that announced share buybacks during 2007 using cash to buy their own shares at high prices. Why weren’t companies announcing share buybacks at the March lows? That would have added value for shareholders. Someday in the futre when we hear about share buybacks on a daily basis, we will know two things, the credit markets have fully normalized, main street CEOs have become as greedy as Wall Street again and the stock market is near a peak.
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The scales are highly suspect. Since 99 oil went up X7 while gold went X5 ish yet you’d think gold is flat by looking at the graph.