Wednesday, May 12, 2010

Another Call For A Gold Bubble

Not from a gold skeptic, but from another watcher who thinks that gold's on the verge of going into one. Introducing the subject by discussing the Beanie Babies mania, Joseph Meth argues that world inflation and the intrinsic valuelessness of fiat money [if unprotected by law] has made conditions ripe for gold to become the next bubble asset.
The financial crises in the EU and our own staggering and still escalating national debt underscores that the world’s spending and obligations has outgrown it’s ability to pay. Inflation is coming and there isn’t any way around it. The policies that pulled us out of the recent economic crash put trillions of new dollars into circulation. That makes all of our existing dollars worth less… but it increases the value gold and silver. In other words, currency is being devalued around the world-even in China.

The rise in the price of gold didn’t start last month or last year. It really started to run (see chart above) about the same time as the US deficit started to balloon due to the recession following the DotCom Bubble Crash and 9/11. Rather than slowing down, the worldwide financial crises and recessions could accelerate the rise. Consequently, gold now has characteristics similar to the objects of earlier bubbles with two exceptions: its demand is worldwide and governments could stop it by agreeing to fix currency exchange rates fixed to gold.

Until that happens (it may come at any time), the price of gold will probably act the same as did for beanie babies, tulips, tech stocks or stocks in companies that promise to develop mines on Mars and the moon (ala, South Seas Company stock).

Interestingly, the only people using "gold bubble" now are normally pro-gold commentators and analysts; they expect one to form and turn into an all-out mania at the end. I haven't come across a gold skeptic proclaiming that gold's bubble is about to burst since January of February. I've only read tradition-hewing analysts who see the growth in investment demand as only a temporary and self-reversing phenomenon.

If gold sinks down later this month, and stays in a doldrum phase this summer, those skeptics will probably be out in force again.

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