Gold: Is it in a bubble?

[pywong]

Not according to this chart.

Proof That Gold Is Not a Bubble

By Christopher Barker | More Articles
March 22, 2011 | Comments (58.)

http://g.foolcdn.com/img/editorial/032211_sprottgold.jpg

Hedge fund manager Eric Sprott presented this data to the Casey Research Gold & Resource Summit last fall, and it remains the most powerful visual tool I have encountered to help dissuade Fools from rushing to careless presumptions of gold's bubblehood.

As you can see, a very significant portion of the world's wealth was routinely held in gold throughout the twentieth century; that is, until the currency encountered wholesale cultural abandonment in favor of the almighty dollar and its worldwide fiat counterparts, and the global economy embraced obscene degrees of fiat-based leverage that we now know set the stage for our ongoing financial crisis.

Gold ownership through the ages

Although many continue to misperceive gold as a commodity to trade fluidly in response to panic or fear, many fail to recognize just how significantly that notion differs from historical attitudes toward gold. Prior to 1933, gold was effectively indistinguishable from U.S. currency, and the dollar's official peg at $20.67 per ounce of gold meant that gold coins and paper bills that were promises for gold could circulate in tandem.

Then along came a historic bait-and-switch that Bernie Madoff himself would tip a hat to: In 1933, President Roosevelt ordered the confiscation of all gold from the public, outlawed the possession thereof, and then devalued the U.S. dollar by nearly 70% overnight, with a revaluation of gold to $35 per ounce. By the time American citizens would once again be permitted legally to own and trade gold in 1975, the gold price had appreciated a further fivefold to some $175 per ounce. President Nixon, of course, had finally severed all ties between gold and the dollar in 1971, which itself set the stage for that decade's inflationary battle and subsequent spike in gold to $850 per ounce in 1980.

After then-Fed Chairman Paul Volcker courageously hiked the federal funds rate to 20% in 1980 to slay an inflationary beast, the gold market snapped back, fell out of favor with most investors, and quickly became the all-but forgotten currency of the late twentieth century. Asset allocation models, which had typically advocated for 5% to 10% gold exposure after 1975, were gradually adjusted to remove gold from the picture entirely. Unbacked fiat currency, and in particular the U.S. dollar, grasped the financial reigns as though gold were now some wholly irrelevant vestige of a quaintly fiscally constrained past. As private investment demand tanked, and sales from central banks boosted supply, gold struck rock bottom as the century came to a close.

Enter the true asset bubbles

To be clear, the above chart does not speak directly to those trends within gold investment allocations, nor reveal the shifting boundaries between public and private ownership of gold. The preceding discussion, rather, provides context for the historically anomalous abandonment of gold that happened to coincide with an equally anomalous and highly leveraged explosion in the combined notional value of competing asset classes worldwide.

Every last Fool who has ventured to ascertain the root causes of our ongoing financial crisis will no doubt recognize the factors that precipitated the massive decline in gold's value as a proportion of global assets between 1981 and 2009. Following incremental moves to undermine the reach of Glass-Steagall -- as in 1987, when the Fed bowed to pressure from the predecessors of Citigroup (NYSE: C ) and JPMorgan Chase (NYSE: JPM) to permit banks to deal in commercial paper and mortgage-backed securities -- the eventual repeal of Glass-Steagall fomented arguably the largest asset bubble ever formed. I'm talking about the toxic mountain of global financial distress that Warren Buffett labeled "financial weapons of mass destruction": derivatives. And thanks to Helicopter Ben and his seemingly limitless appetite for monetary intervention, this asset bubble has yet to truly unwind!

During 2009, gold reached the $1,000 mark for the second time in as many years. Fortune Magazine boldly proclaimed gold a bubble at the time, drawing a sharp rebuke from this very Fool. The SPDR Gold Trust (NYSE: GLD ) , which I do not recommend as a suitable proxy for gold, has climbed another 34% since that time. A secular bull market, of the strength and longevity we have witnessed from gold thus far, underscores the fundamental return of this globally recognized currency into the fabric of our global financial system, Alan Greenspan himself has marveled: "What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment."

If gold is not fundamentally irrelevant, as the world's financial markets saw fit to pretend for many years, but rather the foremost barometer of distress in unbacked currencies (Greenspan has called gold "the canary in the coal mine"), then a Fool can reasonably expect gold to retake some meaningful portion of its value relative to global assets before any secular bull market reverses course. I have no way to know whether gold will ever make up as big a proportion of global assets as it did historically, but I am extremely confident that its proportion beneath 1% as of 2009 was only the beginning.

Something has to give with respect to the chart above. Wholesale accumulation of gold by central banks and investors the world over will likely continue to support gold's multiyear revaluation event relative to the U.S. dollar. Meanwhile, global asset values, tainted by toxic derivatives and other leveraged assets, remain highly susceptible to a significant downward correction. Along with those derivatives, I consider U.S. Treasuries another potential bubble of fairly epic proportions; bond fund manager PIMCO's remarkable decision to remove all Treasury bond exposure only seems to confirm my suspicions there.

If any of this strikes a chord of truth for you as an investor, consider some form of investment exposure to gold (or silver). Central Fund of Canada (AMEX: CEF ) provides reliably sound exposure to unencumbered gold and silver bullion, while the Market Vectors Junior Gold Mining ETF (NYSE: GDXJ ) offers some very simple one-stop exposure to promising gold and silver miners, including my top gold pick for 2011: Gammon Gold (NYSE: GRS ) . Those seeking larger-cap plays, meanwhile, should remember that Goldcorp (NYSE: GG ) is the hands-down king of the major low-cost producers.

I believe that gold will keep rising well beyond my conservative long-term price target of $2,000. As I stated last year: "Gold's legitimacy was never lost; it was merely forgotten, ignored, and then grossly misunderstood." Restoring what is truly the ultimate currency from the brink of supposed irrelevance to its rightful place within the sum of global asset values requires a monster move, and 0.8% of the total by 2009 does not even begin to convey a bubble.

Give me a shout when gold reaches even 5% of global assets. Perhaps then, it'll be time to evaluate whether gold's really a bubble. For now, however, I view some manner of gold (or silver) exposure as a basic financial imperative. Whatever your view on this inescapably controversial topic, I look forward to reading your thoughts in the comments section below. fool.com. (http://www.fool.com/investing/general/2011/03/22/proof-that-gold-is-not-a-bubble.aspx)

[pywong]

Gold and Silver Break Records on Libya, Japan, Portugal

By James West
MidasLetter.com
March 24, 2011



I don’t know how likely it is, but shouldn’t the gold price naysayers and gold bubble theorists all stand up on their chairs and jump off right about now?

There are so many factors pointing to not just an increasing gold (and silver) price, but an absolute breakout seems all but inevitable at this point. Judging by the solid return to strength in the junior resource sector on the buy side, it appears that not only gold, but silver too, are poised to set new records in the sessions immediately ahead.

The big surprise is that they haven’t already performed ten times more strongly than they have.

The middle east is undergoing a transformation that has got Israel, the United States and Saudi Arabia on tenterhooks. There’s a very real fear that the grass roots protests that started in Tunisia and Egypt and have now spread to Libya, Yemen, and Bahrain could have an inspirational effect on insurgents in other Mid East countries, especially Saudi Arabia.

In a worst case scenario, fundamentalist Islamists could theoretically unite amid the chaos and begin to work in a concerted effort to attack Western and Israeli interests, and complete upset the balance of power in the region that has permitted Israel to exist and allow for the American exploitation of hydrocarbon resources for the last 70 years.

Furthermore, China has seen an escalation in social media-borne agitation for a “Jasmine Revolution”, which is a call to dissidents to join forces in popular protests in major urban centers throughout China. China has had to block access to popular websites where such messaging has surfaced, and the police presence throughout the country has been beefed up and there is a coincident sense of raised tensions, according to some residents.

All of which promotes a sense of global instability, which has always been one of the fundamental reasons to own gold.

Portugal Collapsed

There are other geopolitical risks that are also helping to point to much higher prices in gold and silver.

Portugal’s government is on the brink of collapse. If the country’s parliament votes to reject the government’s IMF-mandated austerity measures, the minority Socialist controlling party could be hoofed out, opening the door for a complete Iceland-style collapse.

And Portugal is not alone. Ireland too, is so close to a complete default that local economic commentators see it as a ‘no brainer’. The new finance minister, Michael Noonan, has stated publicly that the 10 billion Euro bailout package recently proposed was nowhere near enough to cover mounting losses from Irish banks. The figure, according to Daniel McConnell of the Dublin-based Independent is more like 25 billion Euros. This is above and beyond the €46 billion already committed in taxpayer bailout funds, €30 billion in NAMA bonds, and €70 billion from the Irish Central Bank.

Greece is in a similar state despite IMF bailouts. Greece’s largest lender, the National Bank of Greece announced a profit last quarter from a loss for the same quarter last year, but its deposits have shrunk by 4%, and the trend in non-performing loans for Greek banks was expected to remain unchanged for 2011, pegged at 12% by the end of the year. Hardly good news.

USD

And lets not forget about every gold bug’s favorite punching bag, the United States dollar, looking more and more like the beaten up curbside hooker that she is, teetering ever closer to the realm of complete collapse.

Despite its apparent ‘strength’ and ‘resilience’ in the mainstream financial press, there’s simply no glossing over the fact that the global supply of U.S. dollars has increased by a factor of 3 since 2004, and there is little choice for the United States to continue printing more, since nobody is willing to lend them any more money in the form of Treasuries. Never mind ‘Quantitative Easing” 3. The insouciance with which this nation of future beggars flood the global market with their useless paper I making the prices of gold and silver go up simply in nominal terms, thanks to the never ending proliferation policy.

Quantitative Easing is counterfeiting, pure and simple, and future generations will look back and marvel at how the perpetrators of such ill-advised and desperate fiscal policy managed to stay out of prison for so long.

In the meantime, all the rest of us can do is trade in U.S. dollars for gold and silver as quickly as possible. The mantra for the immediate future is ‘gold for wealth preservations, silver for speculation’. This policy, rigorously adhered to, will be the most profitable strategy for household’s seeking to avoid complete financial annihilation.

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[pywong]

Is gold rising because America is broke? (http://www.ibtimes.com/articles/137448/20110424/gold-super-cycle-rally-record-united-states-america-economy-pawn-unemployment-dollar-price.htm)
By Jijo Jacob | April 24, 2011 5:15 AM EDT

Gold prices shot up to a new record of $1,512.50 an ounce in New York late on Friday, posting a record weekly gain and maintaining a six-week winning streak.

While a lot of gold investors are laughing all the way to bank the world over, gold's super cycle rally could have ominous meanings for the Us economy.

Analysts have pointed out that gold's advance into what is termed as a super cycle does not bode well for the US economy.

A sustained gold and oil boom indicates that the dollar is slipping into grave danger and the economy closer to collapse, according to Daily Markets analyst Michael Snyder.

"... when these commodities go up in price it is a sign that the U.S. dollar is dying and that our country is getting closer to economic collapse," Snyder wrote recently.

He explained that when the gold and silver prices soar, it indicates that investors everywhere in the world are losing trust in the dollar and the U.S. government treasuries. And they seek out something they can trust more.

"The U.S. has been running trillion dollar deficits for several years now, and this has created a lot of new money." And he says the rest of the world is now seriously doubting the sustainability of U.S. government debt.

The factors that fuelled this unseemly gold rally are numerous, but the most prominent ones are panic over the state of fiscal stability in the U.S, a weak dollar, spiralling crisis in the Middle Eastern oil hub of and sustained uncertainty over European economic health, coupled with new sources of instability in Japan.

And among these it's dollar that is hurting the most. It’s no coincidence that dollar had fallen back to near-three-year lows against major currencies when precious commodity prices shot through the roof.

And the prospects for the dollar are bleaker in the months to come. Interest rates are at a record low and the Fed has still not looked like they are going to rise any time soon. Besides, the federal budget deficit puts added pressure on dollar, precipitating its possible fall towards the 2008 lows.

This is why analysts think the gold super rally is likely sustain well into the coming years. Analysts quoted by Reuters said they thought gold prices could touch $1,700 an ounce in 2015.

What the gold rally means to the dollar and the American people is obvious from the rush pawn shops see across the United States. "For many Americans struggling to make ends meet, the gold boom has meant a heart-breaking trip to the pawn shop, selling off jewellery to pay the bills," UK's Daily Mail wrote in an article.

"A lot of people don't want to sell their jewellery, but they have to ... It's their monthly mortgage payment or whatever the case is ... We hear a lot of sad stories," says Steven Bumb, part owner of Santa Cruz Pawn, according to the report. People also flock to gold parties where they can discreetly sell gold to meet their cash requirements.

High unemployment levels also drive people to the thriving wee -buy-your-gold markets across the country.

The commodity rally is not just limited to gold. Silver outperformed gold again in the last week, recording an 8.4 percent weekly gain as against gold's 1.5 percent gain. Silver prices hit another all-time peak of $46.69 an ounce.

The Standard Chartered bank report said gold prices could reach $2100 by 2014 per ounce and that as high a price as $5000 per ounce by the end of the decade is possible. The bank said gold prices are yet to hit the super cycle as demand from the emerging economies like China and India will scale to peak levels later in the current decade.

[pywong]

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/4/22_Richard_Russell_-_The_Great_Gold_Tsunami_Lies_Ahead_files/shapeimage_26.png

Richard Russell - The Great Gold Tsunami Lies Ahead (http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/4/22_Richard_Russell_-_The_Great_Gold_Tsunami_Lies_Ahead.html)

With gold and silver continuing on their historic run, the Godfather of newsletter writers Richard Russell had this to say in his latest commentary, “Gold -- The desperate battle to keep gold below 1500 continues. I watched the erratic action of gold near yesterday's close. I'm fascinated to see whether June gold can close above 1500 or whether the anti-gold contingent can manage to knock gold down (again) below 1500.



The action is now so blatant that it literally screams of manipulation. At its high yesterday, June gold sold at 1506.50. At yesterday's close, June gold was trading at 1498.10. It's almost embarrassing to watch the action. What we're seeing is the anti-gold crowd and the manipulators vs. the great primary trend of gold.”


“I've tried to emphasize this, but the key here is PURCHASING POWER. When the dollar price of a loaf of bread rises from $1.90 to $2.10 that means something to the average American. But when the Dollar Index drops from 75 to 73.97 the average American doesn't understand it and isn't the least bit interested.



Why the battle to keep gold below 1500? Markets tend to stop at big even numbers. Many of us old timers remember the battle of "Dow one thousand." We remember how the Dow fought month after month to close decisively above 1,000. Then, once above 1,000 the Dow was on its way to 2,000, 3,000, 4,000 and finally 5,000. From there the Dow battled to move above 5,000 -- on its way to 10,000.



The battle about gold closing above 1500 is that once above 1500, technically gold will be on its way to 2,000. And from there 5,000 will be the target. So 1500 is a psychological barrier that, from the bull's standpoint, must be bettered. But from the anti-gold crowd's standpoint, gold must be held (on a closing basis) below 1500.



The answer: As I see it, the primary trend of gold remains bullish. In due time, gold will gather the strength to close above 1500. The gold-bears will be defeated. It's only a matter of time.



The Coming Gold Tsunami -- We're moving nearer and nearer to the edge of the hurricane. I can feel it in my bones. Every newspaper now carries an ad for gold.



Is there a gold bubble? Are you kidding me? Here's an ad that somebody paid for suggesting that people should turn in their gold (!!) for Federal Reserve Notes. They're not telling you to buy gold during one of the greatest bull markets in history -- hardly, they're asking you to throw parties in which the object is to get ignorant people to SELL their gold.



I can feel them caressing my face -- the early breezes. They are blowing gently and hinting of the forthcoming gold hurricane that will sweep across the US and the planet with all the force and power that was seen when gold was first discovered at Sutter's Creek during the California gold rush of 1849. The gold rush of the 2000s is in the wings. The old phrase is ringing in my ears again (I haven't heard it since the late '70s), "There's no fever like gold fever."



If the temperature of full gold fever is a hot 106, we're only at 99 now, but I can feel it, I can tell you that the temperature is rising.



The panic to buy gold will override everything else. It will be one of the greatest financial phenomena that most of today's investors will ever see. It will blot out everything else like a cloud blotting out the sun.



After the calm, comes the storm. We've been watching ten years of gold climbing amid an atmosphere of calm. The great gold tsunami lies ahead. It will be historic.”



Many years ago when I used to write, Richard Russell would publish my work quite a bit. One time when he published a piece I had written he referred to me as Eric “The King.” That may have been flattering at the time but in reality there is only one “King” of financial writers and it is Richard Russell.



In the twilight of his career this old timer once again pulled a rabbit out of his hat by nailing this secular bull market in gold in the early stages. He’s kept his subscribers long while many others have been bucked off of this golden bull. I guess maybe Russell learned a thing or two over more than half a century of writing about the markets. Russell is correct, when this gold bull finally crescendos it will be one for the history books.



To subscribe to Richard Russell’s Dow Theory Letters CLICK HERE.



Eric King

KingWorldNews.com

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