Thoughtful Piece Discussing The Gold-Bubble Question

It's by Robert Blumen, and it's been webbed over at LewRockwell.com. After pointing out that the same people who are saying "gold bubble" missed the ones that popped last year, he says that it's a matter of one's model. Since a bubble means that an asset is way above its fair value, the determination of said value is crucial.

He ends, however, with this call: "If I am correct, then the next phase of monetary history would almost certainly involve an informal or formal recognition of gold as a monetary reserve asset by central banks. Gold would then be revalued at a much higher level of purchasing power relative to recent history."

My own "model" is based upon market psychology, not fundamental value. As Mr. Blumen himself pointed out, it may be impossible to determine a proper fundamental value for gold because it's not used as money anymore. The main driver for its fundamental value is demand, which is unmeasurable except for past buys. There's no income derived from gold that can be used as a gauge.

Market psychology is more pragmatic: an asset or asset class is in a bubble because it acts like it's in a bubble. Central to my own model is a New-Era story making gold look undervalued despite its spectacular rise. In gold's case the hoped-for "New Era" features the U.S. dollar being dethroned as the world's reserve currency and being replaced (at least partially) by gold at the central-bank level. To me, it counts as a New Era story because the greenback is too ensconced as a reserve currency, and the United States itself is too ensconced as the world's only superpower and major market.

I should also make clear that I believe that gold's at the beginning of a bubble, not the end of one. The New-Era story hasn't kicked in, and gold's only beginning to move into the mainstream. (When an normally alternate investment moves into the mainstream, like gold did in the late 1970s, it's a good sign that a bubble's forming. Alternate investments typically stay alternate.) My own reasoning is explained here.