Monday 18 July 2011

Is There A Gold Bubble?

When things go bad, really really bad, Gold is not going to be of much help. And US $ is not going to be extinct anytime soon.

There are Gold Bugs everywhere, screaming their head off for $ 5000 gold. According to their logic, all currencies of the world will collapse soon and will be replaced by Gold. It’s not going to happen mate.
Let me put down my anti-gold points:

·         People rave about the bull market in gold for the last 10 years but forget that gold was in bear market for 20 years. They talk of limited production, increased consumption by India and China and last but not the least, collapse of fiat currencies like US $ and Euro.  But Indians have been buying gold for centuries, why gold was in a bear market between 1983 to 2003? Look at the long term chart of gold. People who listened to the end of the world story in 1983 and purchased gold at $ 700 then, had to wait 25 years to get their money back. In fact, on an inflation adjusted basis, gold is still far away from its peak price reached in 1980.

·         The current rise in the price of gold is nothing but liquidity fuelled rally and is an unintended consequence of loose money policy of Alan Greenspan and helicopter Ben as you can see from the following chart. But the whole world is going through a balance sheet contraction. The assets values in the books of the banks and Governments are being destroyed ( like the worthless MBS that are in Feds Books or Greek Bonds that in the books of ECB or overinflated land securities that the Chinese banks are holding)  and however hard ECB or FED or China may try, the debt bust is inevitable. With that the western world is actually faced with deflation. When all assets prices are destroyed, how gold and silver prices will go up is anybody’s guess. Please read “The Age of Deleveraging” by Gary Shilling to get a full understanding of the concept of balance sheet contraction.

·         Gold has to reach $50,000/oz to replace the money supply of the world and become the reserve currency by replacing US$. What are the chances of that happening? Zero. Dollar will survive not because it is the best, but because it the least worst of the lot. When all the debts are deflated and gone by 2015, there will be fewer dollars in the world, in-spite of the trillions pumped in by Ben. So the theory that people are buying gold because they want to replace dollar, is not very convincing one. People are buying gold because they are chasing momentum. Momentum chasing is not investment.

·         The reserve currency status is also linked with the military might of USA. When the Mullahs in Iran finally make the A bomb, only USA can be of any use to the world. Without USA, NATO is just a rubber soldier. See what is happening in Libya. After months of bombing, NATO without USA is like a toothless tiger. So long US has its military might, US$ will continue to be the reserve currency. Most likely Euro will be split into two, a Northern Euro and a Southern Euro. That will make US$ stronger. In the face of stronger US $, gold does not have much of a chance. Apart from US $, there are no alternative in the world. Euro is limping, Yen is a dead man walking, Chinese Yuan is not floated and others in Asia will not accept it as reserve currency apart from being highly manipulated and there is not enough of Swiss Frank. So there you are!

·         There are different types of investors for gold. The retail investors who are making much of the noise and institutional investors like Soros  are selling their gold. A parabolic move up always ends with a parabolic move down.  The institutional investors pump the gold market and speculators pile on to chase the momentum. At the end retail investors will be  left holding an overpriced  asset.

·         When the Armageddon comes in the stock markets, which may be as soon as this September, the margin calls will force all over leveraged hedge funds and big investors to liquidate all their assets, gold will also get sold. Gold prices are part of the greater commodity bubble and the commodity bubble is about to burst.

·         By next week, when the debt ceiling dust has settled down, gold prices will start their downward journey. Collective memory of the market is so short that it is un-believable. Only few months back, when silver was going up and up, nearing $48, people were talking of silver reaching $100. And then we came down to $ 33. I do not think that the correction in silver is over yet and we shall see $12 before we see $ 100 for silver.

·         The 1st bubble was the dot com bubble created by Greenspan. The second bubble was the housing bubble created by Greenspan and Ben. The third bubble is the stock market and commodity bubble by Ben alone. That bubble is about to burst as bubbles always do and commodities will be the last one to burst. The 30 year commodity cycle is in its last leg and that’s why we are seeing such crazy moves in prices.

·         I had written in my Blog on 25th June that gold will reach a price level of $ 1650 and will reach the top in the next two or three months. I still stand by that and I think we shall see the top by end of August. Time will tell.

By the way, I went long in the stock market today in the face of fear. I am expecting a rally soon which will take SPX near about 1370/1380 before a pullback.


  1. I am sorry to say that you have no clue what you are talking about. The same arguments are true about all ''great'' paper currencies of the past and where are they now? Gold has preserved its value for 5000 years and the modern central banker that can change this hasn't been born yet and is not likely to be born ever. Gold fell after 1980 because the US dealt with its inflation problem. Still, you should remember that in 1971 gold was £35!
    The issue now is that the amount of debt we have is simply too much and cannot possibly be dealt with in any reasonable way. Only ways left out of this are money printing and/or outright defaults. It is true that gold fell during the 80's and 90's. This is why it is still cheap. Of course, you can choose to keep your money in a ''safe'' bank account but in a few years time, due to negative real yields, you are just going to lose a nice chunk of you purchasing power as paper money loses value. Since 1971 the dollar has lost 98% of its purchasing power (if you look at the price of gold as a reference). I think that this process of currency debasement will accelerate and we can see it lose another 90% of its value in the next 10-15 years, if not faster. Hopefully it will not get that bad but it will get very bad unfortunately.

  2. pre 71 gold prices are a faulty way of judging the performance of gold as pre 74 it was illegal to own in the us in anything other than an "artistic" form. cant eat your money in the end; ground , grub, guns that is what will never be worthless. granted it has to be apocalyptic to get to that point. but just where and when does the nonsense end?