It’s pretty interesting to see Wall Street’s biggest firms now coming out to protect the thesis of what was once believed to be a fringe bull market – gold. In a recent note to clients, Wells Fargo describes the three reasons why they believe gold is not in a bubble:
“Real Gold Price Still Below Record, but Just Barely
The real gold price has not yet reached the high of about $1,952/ounce at today’s prices seen in January 1980, but it is very close. In addition, prices have gone “parabolic,” meaning they have risen by an extraordinary amount in a very short period of time. When asset prices go parabolic, they usually do not stay at those levels very long and often see a quick reversal. Thus, it is possible we could see a near-term pullback in gold based on this technical pattern. However, based on the aforementioned factors driving gold’s meteoric rise, the pullback may not be very large and will probably not last very long before gold prices start to rise again.Gold Still Hasn’t Risen as Much or as Fast as NASDAQ or Oil
In the five years prior to their respective peaks, the NASDAQ rose 500 percent and oil rose 340 percent. Over the last five years, gold has not seen nearly the trajectory of increase, rising only about 200 percent. Thus, based on this metric, gold does not yet appear to be in a bubble à la the NASDAQ in 2000 or oil in 2008. However, the 200 percent five-year increase has risen from 150 percent in our April report.Gold-Oil Price Ratio Above Average, but Not Unprecedented
While gold has soared, oil has dropped to around $84/barrel amid growing concerns about slowing global growth. As such, the gold-oil ratio has jumped to 22.4, well above the historical average of 15.5 but certainly not unprecedented. Furthermore, just because the ratio is above-average does not necessarily mean gold is overvalued or oil is undervalued. At this time, both the jump in gold prices and the plunge in oil prices appear to be justified by fundamentals. This ratio may decline a bit in the coming weeks, but we do not foresee an outright crash in gold prices.”
I agree with their conclusion that gold is not yet in a bubble (though I think it’s going there), but I am not so sure that these are the three best reasons to conclude as much. There are far more powerful drivers of the gold rally currently that I believe are dominating the market action – primarily China and general fears over fiat currencies. Reviewing technical indicators such as the three above can be helpful in analyzing a market, but the true fundamental and psychological drivers are key to understanding the current environment. Until it becomes evident that these catalysts are causing an extreme disequilibrium in the market I am not likely to concede that the gold bull is over.
Source: Wells Fargo
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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