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Anyone calling gold a bubble is talking through their hat or worse...
Yes,
growth in global gold demand is rapid. No, another decade of quintupling
prices isn't nailed on. But neither of those facts make
gold a "bubble" today.
In
fact, anyone calling gold a bubble right now is talking through their hat -
at best. Take these jokers, for instance, all holding forth in the last
month...
Myth #1. "Gold is a crowded trade"
The
finance pages are packed with gold headlines, but actual investment levels
remain low. In the early 1980s, private-bank clients were expected to hold 3%
of their wealth in gold, many
times the 0.5% allocation seen across the finance
industry today. Even in the bullion market itself, three-quarters of the 500-plus
analysts and traders attending last autumn's LBMA conference
in Berlin said they held as little as nothing ("Between 0% and
10%") of their savings in precious metals. Saturation is a long way off.
Myth #2. "Gold has madly rushed to $1500
without a correction"
Compared
with undeniable bubbles, gold's recent climb
just isn't steep enough. Gold prices rose 70% for Dollar investors in the
last 3 years, but US stocks rose 160% in that length of time in the 1920s,
and Germany's Neuer Markt rose
over 1600% starting in 1997. London's South Sea Bubble of 1720 rose 9-fold in
5 months! What makes gold remarkable today is the longevity, not speed, of
its bull market - now delivering positive, inflation-beating returns to US
and UK savers every year since 2001.
Myth #3. "Gold will fall hard when interest
rates rise"
Only
if interest rates outpace inflation, and what are the chances of that? People
turn to gold when cash - its major (and otherwise better) competitor as a
store of wealth - loses value. Sub-zero real US rates have already cost cash
savers over 3% of their spending power in the last 18 months. Rates currently
lag inflation by the widest margin since the summer of 1980. Back then,
however, the cost of living was rising at double-digits, and could not be
talked away.
Myth #4. "Inflation is set to fall back"
How,
exactly? The cost living is hurting earners, savers and seniors alike, but
mostly because their incomes aren't growing. On the official data, the
Consumer Price Index has risen barely 11% from five years ago, its weakest
long-term rise since 1967. Anything lower, and QE3 looks certain, thanks to
the Fed's anti-deflation fixation. If US inflation is headed anywhere from
here, it's not down.
Myth #5. "Gold's not an investment, because it
doesn't pay interest"
A
desperate claim which is at least true - true a decade ago at $260, and true
evermore unless an investment bank sells you a structured derivative. Gold's lack of income means it has no
promises to break, setting it apart from all other asset classes, most
notably debt. It's hard to accuse gold buyers of "over-optimism " (Charles Kindleberger's definition of bubble), but this market would only move
into "irrational exuberance" (Robert Shiller's phrase) if it kept rising after monetary policy
switched from weak to strong.
Myth #6. "Gold will burst when the world
economy settles down"
You've
got to love that "when". But beyond its impact on policy rates,
however, economic growth has little to do with gold prices. Gold fell vs. the Dollar
during the US recessions of 1980 and 1990, only to triple during the go-go
years of 2003-2007. Across the last four decades, in fact, gold shows a negative but statistically
insignificant correlation with quarterly US GDP of minus 0.11 year-over-year.
Quarterly GDP in China (the world's second-biggest buyers) shows a negligible
0.08 correlation since 2005. Rupee gold prices since 1996 show only a 0.32
correlation with Indian GDP.
People
started saying gold was a bubble in early 2008 at $1000, then at $1200 and
$1300 in 2009 and 2010, and now at $1500 and above in 2011. Yet still nothing
has changed to the core case for gold. If anything, in fact, the fundamental
reasons for private savings going to buy gold have grown stronger.
Ultra-loose money is locked in by record peace-time debts and
deficits. Central-bank and private-Asian gold buying continue to grow as
economic power moves East.
Everything
else is just noise - the one excess to which gold investing is prone right
now.
Adrian
Ash
Head
of Research
Bullionvault.com
You
can also Receive
your first gram of Gold free by opening an account with Bullion Vault : Click here.
City
correspondent for The Daily Reckoning in London, Adrian Ash is head of
research at BullionVault.com
– giving you direct access to investment gold, vaulted in Zurich, on $3
spreads and 0.8% dealing fees.
Please
Note: This article is to inform your
thinking, not lead it. Only you can decide the best place for your money, and
any decision you make will put your money at risk. Information or data
included here may have already been overtaken by events – and must be
verified elsewhere – should you choose to act on it.
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