Gold Never Has Been (and Never Will Be) in a Bubble
October 31, 2010
(This item originally appeared in the Daily Reckoning on October 30, 2010.)
Most serious gold investors follow a basic principle: that gold is stable in value. Changes in the “gold price” represent changes in the currency being compared to gold, while gold itself is essentially inert.
This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that “gold is money.”
From this we can see immediately, that if gold doesn’t change in value – at least not very much – then it can never be in a “bubble.” There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.
Let’s take a look at some of the great gold bull markets of the last hundred years:
From 1920 to 1923, the price of gold in German marks rose from 160/oz. to 48 trillion/oz.
From 1945 to 1950, the price of gold in Japanese yen rose from 140/oz. to 12,600/oz.
From 1948 to 1967, the price of gold in Brazilian cruzeiros went from 648/oz. to 94,500/oz.
From 1970 to 1980, the price of gold in US dollars went from 35/oz. to 850/oz.
From 1982 to 1990, the price of gold in Mexican pesos went from 8,000/oz. to 1,025,000/oz.
From 1989 to 2000, the price of gold in Russian rubles went from 1,600/oz. to 8,120,000/oz.
Each of these situations was an episode of paper currency depreciation. Today is no different. The rising dollar/euro/yen gold price is simply a reflection of the Keynesian “easy money” policies popular around the world today.
We can also see that, if gold remains stable in value, then the supply/demand considerations that affect industrial commodities do not affect gold, which is a monetary commodity. This is why gold is used as money. If its value was affected by industrial supply/demand factors, we would not be able to use it as money.
Thus, “jewelry demand” or “peak gold,” or any other such factor, has little meaningful effect on gold’s value. Day-to-day money flows will affect the price at which currencies trade vs. gold, but this ultimately affects the currency in question, not gold.
None of these historical “gold bull markets” resulted from jewelry demand or mining supply.
Any attempt to attach a valuation to gold is mostly a waste of time. Concepts like the “inflation-adjusted gold price” or the “gold/oil ratio,” or a ratio of outstanding debt or currency to a quantity of gold bullion, are a distraction. An item that doesn’t change value is never cheap or dear. That’s what “gold is money” means.
The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money.
Gold is money. Always has been. Probably always will be. This time it’s different? I don’t think so.