If the price of something has risen by 45.06% in the space of a year, does that mean it is a price bubble?
Not necessarily, but it’s a question worth asking.
Take a look at the chart for gold priced in US dollars below:
Even in the last two months the price has burst through the USD$1,000 level and is now trading comfortably at USD$1,164.
The story of the Australian dollar price of gold is not quite the same, but I’ll address that tomorrow. Today we’ll just look at the US dollar gold price.
We all know that the price of something can’t go up in a straight line forever. It has to ‘correct’ at some point. But is gold different? Is it possible that the price of gold can keep going up?
Well, let’s take a look at gold to see what it is.
Ask any gold bug what gold is and they’ll reply, “Gold is money.”
And of course they’re right. Gold has been used as a medium of exchange since it was first discovered – probably, we weren’t around then so we can’t know for sure.
There’s a few simple set of reasons for that. Some of which include – it’s rare, it’s non-perishable and it’s relatively transportable. There are other reasons as well, such as it’s not easy to produce more of it.
All that exploration and digging and refining takes a lot of time, effort and, yes, money.
That’s compared to paper or electronic money which isn’t rare, it is ‘perishable’ in that it can be erased by the click of a button, but it’s just as easy to produce more of it, also by the click of a button.
The one thing paper money has in common with gold is that it’s relatively easy to move it around. Although at today’s prices an ounce of gold would take up less space in your wallet than twelve $100 notes.
So arguably, gold is easier to move than paper money.
But that doesn’t really help to explain whether gold can keep going up or not.
If we look at a longer term view of the gold price, you can see that gold has had plenty of corrections over the last thirty-odd years:
In fact, following the last peak nearly thirty years ago, gold went into a long term bear market. That was until Alan Greenspan started the disastrous policy of keeping interest rates artificially low at 1% during the early 2000′s.
Since then – just as then UK chancellor of the exchequer Gordon Brown decided to sell half the UKs gold stock – gold has barely looked back.
In US dollar terms it was trading below USD$300 an ounce in 2000 (Gordon Brown’s selling price!), compared to USD$1,164 today.
In percentage terms that’s an increase of 288%.
If we were talking about the housing market or the stock market we’d quite rightly say that following such a gain it was a bubble waiting to be popped.
In that case how is it possible for gold to buck that?
Look, let me state for the record that we don’t consider our self to be a diehard gold bug. But even so, do you know what, you don’t have to be a gold bug to see that the case for gold is as compelling today at USD$1,164 an ounce as it was at USD$300 an ounce.
All you need to do is accept that gold has certain benefits when compared to paper or electronic money. Those are the benefits I highlighted above.
If you accept those benefits are valid then all you need to do is look at the policy actions of certain central banks to see how they are eroding and even destroying any remaining value there is in paper money.
And it is the action of destroying the value of paper money which is increasing the value of gold.
It’s quite simple when you think about it. The more you create of one thing, the less valuable it becomes in terms of another thing.
Providing more paper or electronic money is created than there is gold being recovered from the ground then the price of gold should rise. Of course that doesn’t mean that a bubble can’t be created in gold, it can if the price is pushed up too high too quickly.
The only issue there is at what price is the gold price too high.
Right now, even after a twenty-year 288% increase, it’s still hard to see how that price increase isn’t justifiable when you look at central bank policy actions.
I’ve already mentioned Alan Greenspan and his low interest rate party. Well, that’s continuing under Ben Bernanke. Only Bernanke is doing an even better/worse job of it.
At least Greenspan wasn’t stupid enough to push the interest rate below 1%. Bernanke on the other hand has managed to push interest rates to zero.
Which is quite funny really, because even the mainstream economists you see on CNBC and Bloomberg seem to agree that Greenspan’s low interest rates helped cause the current economic problems. Yet at the same time they laud Bernanke’s courage for taking rates down to zero.
Did I say ‘zero’, I meant to say negative. Take this quote from Bloomberg News:
“Negative Rates… For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate…”
That’s right, in the US investors are prepared to ‘invest’ in government bonds that provide a negative return. Can you believe anyone would want to do that?
In simple terms, investors are paying USD$100 for a bond with a face value of USD$100 with no coupon/interest payment. In other words they’re handing over USD$100 today in order to get USD$100 back in thirty days.
Only, thanks to the transaction costs and inflation, the USD$100 they get back in thirty days will actually be worth less than it is today.
But following on from the quote above, Bloomberg News writes:
“For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate — a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.
That’s when the Standard & Poor’s 500 Index climbed 25 percent even as bill rates tumbled to 0.05 percent from 0.45 percent. In 1939 stocks began a three-year, 34 percent decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized.”
The article goes on to explain that because Bernanke is a ‘student’ of the Great Depression he is determined not to make the same mistakes as policy makers during the Great Depression.
The trouble is, he’s destined to make the New Great Depression even worse than the old one.
Continuing to keep interest rates at zero and creating more and more money is inflation. Inflation is already here. The next phase is the rapid price increases which will only cause an upward spiral as more money is created to combat rising prices.
Arguing that keeping interest rates at zero is the best way to prevent a New Great Depression is completely illogical.
It’s like saying you’re better off hitting a brick wall at 200km per hour than at 100km per hour.
That’s what makes the case for gold even more compelling, despite the 288% price rise.
Sure, gold may have risen too quickly in the short term – or it may not – but with the clear signs from the Federal Reserve that it is in no hurry to increase interest rates, and other clear signs that governments here and overseas are in no hurry to stop spending, buying gold, even at the current price of USD$1,164 could be one of the best investment decisions you ever make.
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
The S&P/ASX200 finished up yesterday, to 4,717, higher by 31 points. After a massive gain in the US the market has opened up.
Not only did the market close up yesterday, but Alex Moffatt an adviser of Joseph Palmer & Sons was quoted saying that he is “…still confident that we might get within a hair’ breath of 4900 by the end of this year”. Learn more here.
The Dow Jones Industrial Average had a rally overnight, closing up by 132 points, ending the day at 10,450.95. This was the highest close since 2 October 2008.
In the UK, the FTSE100 gained just shy of 2% last night, finishing at 5,355.50. The Footsie is up 20.5% overall this year.
The Nikkei closed down 51 points to 9,497.68
Gold has gone to new highs yet again, with the December gold futures reached $1,174.
The price of spot gold in Australian dollars is trading at $1,260.22, while in US Dollars it is trading at $1,164.19.
Currently the price of silver in Aussie dollars is $20.23 and in US Dollars it is $18.59.
Colin Crownover, head of currency management at State Street Global Advisors is convienced that not only will the Australian dollar reach parity with the US, but will push past it to reach $1.02 – 03 within six months. Find out his reasons here.
The Aussie dollar versus the US dollar is trading at USD$0.9239, and against the Japanese Yen JPY82.21
Crude oil remained unchanged overnight closing at USD$77.47
For the biggest movers on the market yesterday click here…
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GB – this is my understanding about what’s up with gold:
1. For a long time, its price was surpressed by collusion between central bankers, lead by the Fed, who surreptitiously “leased” gold to the commercial banks, who played the gold market with it, allowing the price to rise, and then severely shorting it and taking the busloads of money from the speculative longs. Through this game, they achieved two intended things:
a. They made loads of money for themselves.
b. By terrorising the gold market, they kept the price of gold down.
So far, so good, but the sting in the tail is this:
c. Through this game they have slowly sold off roughly 50% of the reported gold reserves of the participating central banks at much lower prices than where we are at the moment. This gold is gone, as it was slowly but surely taken by all those longs who stood for delivery on the COMEX over the years. And even though the central banks are yet to owe up to the fact, they do not have this gold in their vaults, or if they do, the legal ownership has changed to those who stood for said delivery over the years.
2. The scam is that these central banks are still counting the leased gold as if it was theirs, when in reality the so-called leased gold has been sold, and its ownership is now changed, and will have to be bought back from willing sellers at probably much much higher prices than where we are at the moment.
3. The basic facts on the market are that much more gold has been sold on the COMEX than is in fact available in physical form to make good those contracts. If those on the receiving end of the contracts refuse settlement in paper, and insist on physical delivery instead, the shorts are toast, there will be a default, and the price of gold will be driven by the physical maket, not the paper market, and that will mean double or tripple prices from where we are at the moment.
An old saying is: He who holds the gold, makes the rules. Well, guess what. Half the gold of the participating banking cartel is no longer owned by them. None of the leased gold, with which they supressed the gold price, is really theirs anymore, and now that their fiat paper money is being rejected, and the central banks of the BRIC countries are openly saying that they are standing in the market for buying more gold with their USD reserves, the jig is up.
The central banks of Asia are not cooperating against surpressing the gold price, but instead are in open revolt and are publicly announcing that they are not sellers of gold, but buyers of it on the open market. Given the spending power these nations have, and especially given their mountains of USD reserves accummulated over the decades, the USD is toast and the price of gold is headed to the moon. The game is up, and the short squeeze is on. The massive concentrated short positions in gold and silver on the COMEX are trapped, because with central banks standing at the other end of their trades, demanding delivery of the physical metal, instead of settlement in paper, the shorts will not be able to get all the physical gold to deliver to these longs. These idiots did not realise that all the gold they have sold on paper, which they did not possess in physical form, are going to be demanded from them by the longs, who will want the physical, not more payment in rubbish paper. So, in short, because the emphasis has been now shifted to physical gold, it is the availability of physical bullion at current prices that has started to drive the market.
The short and long of it is that the gold price is on what is called a swiss stairway and it could explode to the upside at any time. This is where it gets really interesting, because we are witnessing nothing less than one of the most significant episodes in the the historical process of real wealth being shifted from the West to the East. The transfer of our factories and jobs has been part of this massive transfer of wealth, and the transfer of our knowledge and technological know-how was another part. What we are witnessing now is the transfer of our accummulated savings in the form of physical gold.
It is all part of the same process and it is analogous to a situation where someone first takes you job, then all your accummulated technical knowledge of how to do things and be successful in business, and finally they also take your accummulated savings, your money, or a good part of it, anyhow.
I encourage you to study the research by GATA on gold, and Ted Butler on silver. I will try to get you some links a little later, if you are interested.
“”"”"”"”"The short and long of it is that the gold price is on what is called a swiss stairway and it could explode to the upside at any time. This is where it gets really interesting, because we are witnessing nothing less than one of the most significant episodes in the the historical process of real wealth being shifted from the West to the East.”"”"”"”"”"”"”"”"”"”"”
AND THE GUT FEELIN” i have ……………….
is no matter how logical to run “here or there”
gold ,property,super,shares, jobs,rabbit warrens ,watever
somehow……………….
these “BIG FILTHS” up there are going to find a way to get their fingers in there ,,one way or another
in other words ,i just dont think, almost anything ,monetarily,is or will be safe ,anymore,,,
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