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Gold has been climbing all decade long, but
throughout its ascent, it wasn't until earlier this year that I first heard gold's
remarkable performance described as a "bubble". Financier George
Soros used that term in a seemingly disparaging way, but interestingly, we
subsequently found out that he actually owned gold and expected it to climb
higher.
Then last week in The Wall Street Journal,
Brent Arends asked whether gold is "the next
bubble?" I have now seen the "bubble" term used a third time.
In an article in this week's Barron's, the author states: "The
gold bubble could continue to inflate."
Anyone can read about bubbles in financial history,
but there is no need to go to the library to learn about them. We have all
witnessed firsthand the Internet bubble and more recently, the real estate
bubble. From these events we know that bubbles are characterized by the
persistent and often rapid rise in the price of an asset, which is generally
fueled by speculation springing from the widespread and growing belief that
the asset's price will continue to rise. But there is also another important
but less well recognized feature that identifies a bubble. Namely, the
asset's price eventually must rise to a point generally far above the asset's
value. When that peak of overvaluation is reached, the price then falls
rapidly - and typically violently like a bursting bubble.
Is that outcome about to happen with gold? No,
for the simple reason that one of the principal ingredients of a bubble is
missing today. Though the gold price has risen four-fold this decade,
importantly, the gold price is not above gold's value, let alone far above
it, which is one of the necessary ingredients of a bubble.
The articles referred to above are looking only at
gold's price. What they are missing is gold's value.
Though price and value are often used
interchangeably when conveying one's view on the economic merit of an asset,
they mean different things. Price is the label that we give an asset when we
interact in the marketplace. Value arises from each person's own subjective
view of the asset's usefulness, and it is here where most people fail to
understand gold. They fail to understand the source of gold's value. Gold's
usefulness arises principally from two key attributes.
First, it is useful in economic calculation. In
other words, gold provides an effective means to calculate the price of goods
and services over time, and economic calculation is the principal function of
any money. To provide but one example, the price of a barrel of crude oil
today is about 2.0 goldgrams, which allowing for
some relatively minor and not long-lasting fluctuations is the same price
crude oil has been at anytime over the last fifty years.
Second, because it is a tangible asset, gold does
not have counterparty risk. When you own gold, you own money that is not dependent
upon the promise of central bankers or politicians. Gold and silver are the
only monies that are tangible assets. In today's uncertain world where
sovereign debts and other financial promises are becoming increasingly
doubted, the avoidance of counterparty risk is an important wealth
preservation objective that is likely to become even more appreciated in the
months and years ahead. The precarious state of government finances generally
throughout the world as well as their unending, irresponsible reliance on
debt means that the value of government paper and in turn the solvency of
banks that own this paper will be increasingly questioned.
Having a sound understanding of the difference
between an asset's price and its value is critically important. Here's a good
example where price and value were confused.
In 1983 the Dow Jones Industrial Average rose above
1000 to make a new all-time high. The DJIA kept rising into 1984, and I
remember the time very well. People everywhere were stating that the market
could not sustain its pace, advising instead that the DJIA was due for a
correction that would put it back below 1000, the price that had capped this
venerable average for nearly two decades.
We all of course know what happened. The stock
market continued to soar, with the DJIA trebling over the next three years.
The DJIA bears back then missed the boat because they focused on the DJIA's
price. They ignored to their peril that over time the DJIA had become
significantly undervalued. So the message here for gold is
clear.
If you want to keep your liquidity in a tangible
asset that preserves purchasing power over long periods of time and do so
without counterparty risk, then continue to hold gold until it becomes
overvalued. That moment is still a long way off. But how will we know when
that moment of overvaluation has arrived?
The answer is simple - by looking at gold's relative
value. I'll be writing more about gold's relative value in the future, but in
the meantime, here is a simple catchphrase to keep in mind.
People often ask me when they should sell their
gold. Clearly, they are looking back to the January 1980 peak with the
benefit of hindsight. I tell them that this time around, you won't sell
your gold - you will spend it. When gold is once again widely accepted
as currency, which is the long-term objective GoldMoney
aims to achieve, you will spend gold to purchase consumer goods to fulfil your needs and wants as well as spend your gold to
purchase investments.
In other words, when gold returns to its rightful
role at the centre of global commerce - which is the role it held for
thousands of years up until the last several decades - then gold's purchasing
power will be at its maximum.
James Turk
GoldMoney.com
Free signup a Goldmoney.com
James Turk is the
founder of the Free Gold Money Report and of GoldMoney.com. He is also the
co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).. Copyright
© by James Turk. All rights
reserved.
Copyright © 2008. All rights reserved.
Edited by James Turk
This material is prepared for general circulation and may not have
regard to the particular circumstances or needs of any specific person who
reads it. The information contained in this report has been compiled from
sources believed to be reliable, but no representations or warranty, express
or implied, is made as to its accuracy, completeness or correctness. All
opinions and estimates contained in this report reflect the writer's
judgement as of the date of this report, are subject to change without notice
and are provided in good faith but without legal responsibility.
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