Proclaiming
a gold bubble has been the mainstream financial media's Pavlovian response to
every incremental increase made by the yellow metal since it emerged from a
two decade low in 2001. Appreciating an astounding 400%+ in USD's from
its bottom, gold has handily outperformed all major asset classes over the
past 10 years. Importantly, this achievement was attained without the
support of, nay, despite relentless negative coverage by mainstream financial
pundits and highly esteemed economic academics.
Cockeyed
thinking in the conventional camp.
Conventional
thought concludes that gold must be overvalued, since it has appreciated so
forcefully against the professionally managed dollar (and all other central
bank controlled fiat currencies) the past 10 years. The basic premise
supporting this thinking is fundamentally and fatally flawed. The
foundation for this belief lies in a blind devotion to the idea that the US
dollar, cast as ultimate and omnipotent medium of exchange, has achieved a
state of permanence. In reality, such a position could only
be ascribed to a medium of exchange far less vulnerable to the misguided
policies of error prone men. Further, this myopic US dollar centric
mindset demonstrates a dangerous lack of appreciation for history.
Not a
70's gold bull replay.
True,
gold's last bull run gave way to 20 years of price erosion, ratcheting down
to the lowly exchange rate of $255 per ounce. Regardless, the US and
global economic landscape of 2010 is vastly different than that of 1980.
Today's exponential growth of sovereign debt is straining confidence in
faith based currencies, particularly one which holds the mantle of world's
reserve currency. This current debt differentiator, in conjunction with
a myriad of other issues inhibiting US economic growth, is substantial enough
to reasonably assure investors of a strikingly different course and
conclusion to this gold bull.
Observations
from a natural resources expert.
Striving
to keep my ideas in check, I seek to consult with others tasked with
understanding the global financial markets. As such, I posed the basic
question of whether the gold price is in bubble territory to Tom Winmill,
president and portfolio manager of the Midas Fund (www.MidasFunds.com).
Tom's response; "Whether gold is in a bubble depends on your
currency point of view. In Zimbabwe dollars, definitely not. In
Chinese renminbi? Maybe. In U.S. dollars? That's what at Midas we
call the 62 trillion dollar question. Sixty-two trillion dollars is the
approximate amount that some, including David Walker who served as the U.S.
Comptroller General from 1998 to 2008 , estimate is the total debt of the
United States in explicit obligations and unfunded promises. The
question then becomes is "how is the United States ever going to deal
with this unimaginably huge sum?"
Exploding
debt and politically expedient solutions.
Strip
away all the trappings, and the US dollar quandary is easy to
understand. Huge debt, growing debt, and no politically feasible way to
resolve it. With history as a guide, and political attitudes as they
are, the road ahead for the dollar is somewhat predictable. More debt
and more dollars, which should be supportive of gold's ongoing long term
price assent, followed by US debt saturation and dollar repudiation,
potentially sending gold prices parabolic.
The
chart below provides a good illustration of the accelerating national
debt. Similar acts of financial self destruction were simultaneously
performed by a large swath of individual households in tandem with state and
local government. Note the irony in regard to the close time proximity
whereby national debt accumulation began its aggressive ascent and gold
commenced its 20 year odyssey in the financial wilderness. As the debt
seeds were being sown, gold was squelched by investors heeding the siren song
of "this time it's different, debt doesn't matter." Of
course it doesn't matter, until it does. Come 2001, gold ceased to
remain mum on the soon to emerge global financial crisis and resumed its role
as financial early warning system.
Greenspan
comes clean on gold and fiat currency.
Speaking
to the Council on Foreign Relations on September 15, 2010, Alan Greenspan
advised central bankers that they should be paying attention to the price of
gold. "It signals problems with respect to currency markets,
" said Greenspan. "Central banks should pay attention to
it."
Responding
to a query by the Council as to the forces driving the price of gold, the
former Fed Chairman replied, "Fiat money has no place to go but
gold," as reported by economist David Malpass in The New York Sun.
Malpass further noted that Greenspan admitted to thinking a lot about gold
prices over the years and decided the supply and demand explanations treating
gold like other commodities "simply don't pan out."
Greenspan's conclusion, as characterized by Malpass, "gold is simply
different."
Conclusion
Gold
bubble or debt bubble leading to currency crisis?
If
blind allegiance is pledged to a faith based currency, and unswerving trust
is bestowed upon its guardians, than gold must appear to be trading at absurd
levels. Conversely, if the actions of the Fed, Treasury, and Congress
continue as they have, and no credible indication to the contrary has been
remotely telegraphed yet, than history may prove the most astute
forecaster. In such an environment, gold may not only not be in a
bubble, but in the preliminary stages of a monumental bull market leading to
the unthinkable. And the last point may be that when priced in future
dollars, as when measured in Zimbabwe dollars or Weimer Republic Mark notes,
whatever price level gold ascends to could be a point of permanence.
Chris Blasi
Neptune
Global
Chris Blasi is
President of Neptune Global Holdings LLC (www.NeptuneGlobal.com) and a guest
contributor to both www.FinancialArticleSummariesToday.com and www.munKNEE.com
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