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Gold: Is It Really In a Pricing Bubble?

October 13, 2012 Leave a comment Go to comments

Guest post by Jacob Harrison | Australian Bullion Company

As the price of gold continues to climb, we are starting to hear some analysts warning of a gold bubble. Others, of course, contend that diversifying your investment portfolio with physical gold is still a wise thing to do. So who do you believe and how can you get an objective analysis?

The first thing to understand is what exactly a bubble is. The term bubble simply means that there is a major disconnect between a thing’s price and its true worth. The price of gold is, of course, easy to determine by looking at the many pricing sources available, but calculating its actual “worth” is a much more complex matter.

It’s Only Money
The primary function of gold is that of money. Unfortunately, there are so many complicated variables involved in valuation that there really is no way for anyone, regardless of their credentials, to clearly identify and measure the future purchasing power of gold with 100% accuracy. Every index being used today to measure gold’s true value is in some way or another a compromise. For example, the U.S. government has changed its methodology repeatedly for how to calculate the devaluation of its own fiat money.

It’s All Relative
Gold value has been charted relative to the value of the S&P 500, the GDP, to other industrial metals and to median family income, to name just a few. Gold prices have been climbing steadily for quite some time now. However, in none of the aforementioned relative indexes has gold eclipsed its relative valuation peak in 1980. However it is getting close, relative to median family income and the prices of other industrial metals.

A Thumb in the Dike
Regardless of what any of these measures show, the fact remains that on a global scale, things are still a mess. The global economy continues to teeter on the brink of disaster, the global banking system is basically insolvent, many of the world’s largest economies are saddled with such enormous debt that they will likely never get paid off and the black hole created by the derivatives debacle is still looming about with uncertainty. Even though this may sound like a doomsday perspective on things, the facts speak for themselves.

Pop Goes the Weasel
So it may be that gold is not in a bubble after all, but the system built on top of it may be what’s in a bubble. The system of never-ending and constantly-expanding paper money and credit. It seems to be getting pushed from every angle and pushed way beyond its capacity. Just how long can major economies keep printing money and increasing debt before something gives? If this enormous house of cards comes tumbling down, what do you think will be most valued then?

So it only seems to make sense to have at least a portion of your assets based in a type of money that is outside the global banking system, is a liability to no one and is completely outside of political control. From this perspective, gold still shines.

Jacob Harrison is a precious metals investment specialist from Australian Bullion Company, Australia’s oldest privately-run precious metals wholesaler and retailer.

Related Resources (Charts)

Finanzbuch Verlag, a technical analyst in Munich and author of the book “Geheime Goldpolitik” (“Secret Gold Policy”) explains why strictly speaking, gold cannot be in a “bubble” in his recent interview with Lars Schall, a renowned financial journalist from Germany.

The interview covers mainly the issue of gold price manipulation by central banks, but the gold bubble issue is addressed 18m30s into the video.


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