Gold Price is No Bubble

By James West    Nov 4 2009 10:59AM

The price performance of gold recently has all sorts of armchair economists waxing philosophical on the idea that this is the advent of a price “bubble”. While certainly everyone has and is entitled to their opinion, there are other features of humanity that we all possess, and much like many opinions, are best obscured from view.

Declaring that gold is in a “bubble” demonstrates complete ignorance of or disregard for the fundamental drivers of the almost ten year ascent of gold. And saying that the price is forming a bubble implies that, like the real estate bubble, the tech bubble, and the tulip bubble, the price must necessarily “pop” and return to a sustainable long term average.

During each of the bubbles of recent and distant history, the cause of the meteoric price ascents of these various asset classes were all predicated by the same string of events.

Supply was far outstripped by demand because the public perception emerged that the asset class in question was the ultimate asset class at that point in time. Disproportionately high levels of capital were directed to them, and upon the eventual discovery that supply could easily meet and exceed demand, the bubble pops, the price declines, and the herd mentality resumes its frantic search for the next ‘ultimate’ asset class.

Homes, technology and tulips are all a product of effort. With increased effort, more of each of these can be created. Supply can easily be ramped up to meet demand.

Not so much, in the case of gold. The availability of economic concentrations of gold in deposits near to the surface of terra firma is finite. Increased effort might guarantee the temporary increase in supply from known deposits, but each deposit is eventually exhausted, and no amount of increased effort can bring back the gold.

Gold, for the most part, is not used up. It is fabricated into jewellery or bullion or coins, and hoarded and preserved.

Technology, real estate, and tulips, on the other hand, are consumed and replaced. Technology becomes obsolete, homes wear out, tulips die and are reborn each spring.

Gold? Gold goes nowhere. Gold stays put. Gold is passed from generation to generation in last wills and as heirloom collectors items. Gold is recognized as a store of value that is not temporary.

The only way to diminish that is through government interference, such as the various legislative actions that have historically capped gold’s value at a fixed price, or if, for some reason, humanity decided to abandon its greedy predisposition to hoard value against future financial calamity.

The latter is just as improbable as the former.

The idea of capping the price of gold through international agreements flies in the face of the entire concept of free markets, now the near universally accepted preferred economic style. And the innate fear of not having enough that is a basic element of the human cerebral infrastructure is eternal, or at least, that’s how it seems.

So what could, for arguments sake, cause the price of gold to plummet suddenly, thus obviating the recent spike as a bubble?

Well, the forces of supply and demand are always dominant. If those who want to buy gold and are willing to pay the market price for it exceed the number of those who have gold and are willing to sell it, the price will be forced upward. Just as elementally, if sellers outnumber buyers, the price must needs decline. So simple.

And who’s selling gold?

Well we can point to the International Monetary Funds plan to divest itself of 400 tonnes of gold, ostensibly to finance the stimulus of nations unable to underwrite their own economic stimulus. But just as soon as the proposed sale is announced, India steps up to the plate to take half. In one transaction. The largest single lot of gold made available since the onset of the secular bull market, and a buyer is found easily.

Russia, the economic basket case of the world thanks to its national inability to govern itself with laws and reason as opposed to brute force, recently announced the necessity of a sale. But that is clearly necessitated by the national hands’ inability to refrain from raiding its own pockets. A genetic defect, it would appear.

Who else has sufficient gold to sell, that might drastically influence the supply/demand matrix to cause a popular abandonment of gold? China, the United States, and various G7 nations. But none of them are selling. Indeed, China has revealed that it has been the principle sovereign accumulator of gold for over 5 years.

Even during and post economic crisis, the impetus was to retain and accumulate, not sell gold.

No. The bubble we are immersed in at present is the currency bubble. Led by the disingenuous United States, the world has temporarily forgotten that despite the fact it is possible to print currency easily and with abandon, the laws of supply and demand will definitely re-assert themselves in due course. And that is what we are seeing now with the gold price.

The confidence in a dollar printed on paper being able to obtain a dollar’s worth of merchandise is fading with every treasury auction. The popular perception is growing that gold is indeed a monetary standard, and a store of value that can be trusted in both turbulent and stable economic conditions.

There is nothing on the economic horizon that can change this. We are in the period of descent for the American empire and its feeble dollar. The nation is bankrupt, morally and economically. It can no longer bamboozle the world into accepting its counterfeit currency in exchange for trade. Only nations who are forced by their vast holdings of the monopoly dough to entertain the notion that it has value participate in the illusion, because the alternative would necessitate a drastic re-valuation of their own financial integrity.

So on the supply side, there is no availability. No one is selling. The miners are mining as much as they can as fast as they can and still the buyers are lining up.

On the demand side, nothing but more, more and more demand. No trustworthy currency in sight (except perhaps the renmibi, increasingly a gold-backed currency), no asset class alternative that is comparable, no new bubble to chase.

I suppose its good to have alternative viewpoints in media. Its important to listen to all sides of a story. But if the issuing orifice declaring a bubble inhabits a region below the waist, those who act on such advice will find themselves duly smeared in good time.

Gold price bubble? Give me a break!

James West
MidasLetter.com
Wednesday, November 4, 2009

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James West is the editor of MidasLetter.com, a subscriber-based financial newsletter that alerts readers to opportunities and threats to their financial well-being. A subscription is US$499 for one year. Visit www.MidasLetter.com to learn more.