The Gold Bubble Myth

The page explores the gold bubble myth.

The argument for gold being is an economic bubble is that the price of gold has been rising for 11 years. Consequently, it is in a bubble.

This is flawed logic.

Before saying something is in a bubble (just because it has been rising for several years) we must first understand the characteristics of an economic bubble.

Next, we need to know what are the driving forces behind that rise of an economic sector, and if these forces still exist. If they do, then that sector (gold in this case) is not in a economic bubble.

What is a economic bubble?
The Gold Bubble Myth
An economic bubble (also known as a financial bubble) is when products in a market have increased in price greater than their intrinsic worth.

Two recent economic bubbles were:

The dotcom boom from 1995-2000. - During the dot-com bubble, internet stocks were drastically over valued and in 2000 came crashing down.

The housing bubble During the housing bubble, prices of houses increased dramatically over many years, were pumped up further by subprime mortgages and eventually crashed in 2008 and beyond.

Dangers and Characteristics of Economic Bubbles
The Gold Bubble Myth
The primary concern with a financial bubble is that it will burst. In the examples provided, both the dotcom and the housing bubble burst caused great financial losses to many people. The characteristics of an economic bubble are:

A loose money supply – On a national level this is caused by a Federal Reserves loose money policy. This drives speculative behavior. The more money people have (or perceive to have) the more they spend freely. In other words loose money enables speculative and risky behavior.

Speculative behavior - Speculation is primarily driven by greed to get more “stuff” coupled with a lack of fear of a loss, because more easy money can always be obtained.

Driving forces- There are many different types of forces that can drive bubbles. Most bubbles are (at least partially) fueled by media hype (ex. the dot-com bubble) and loose money.

Other factors include things like government policy and dangerous products. For example, the housing bubble was driven by:

Loose money from the FED - Low interest rates and lax qualifying requirements.
Media hype.
Government policies encouraging subprime mortgages - This put more people in the housing market—who could not afford to be there.
Dangerous products - Such as derivatives.

Strong interest in an economic sector- Media hype drives many people behavior. One of the bad behaviors of human beings is the herd mentality. Many people exhibit this behavior and the media is frequently an enabler.

Prices inflated past what they are worth - When an economic sector has products that are overpriced, that sector is said to be in a economic bubble. Conversely, if products in an economic sector do not cost greater than their intrinsic value, then they are not in a bubble

This is the lynchpin to the whole economic bubble theory. If something isn’t worth more that it’s inherent value, then it isn’t in a bubble, no matter how long it has gone up.

Is gold in a bubble?
The Gold Bubble Myth
The short answer is “No.”
Although gold has been rising since late 2000 and silver has been rising since 2003 ( gold and silver have been tied together throughout history) they do not exhibit bubble behavior. Here is why:

The United States is currently on a fiat currency system that does not have commodity backing. We have been off a commodity backed system since 1971 when Richard Nixon took us off of the gold standard.

If we had a commodity backed system today (using gold as that commodity) then each dollar would be backed by a certain amount of gold. To determine that amount of gold we would need to back the US Currency do the following:

Divide the amount of all of the gold held in the US into the M1 money supply. As on December of 2011:

M1 was 2173.9 Trillion Dollars. The M1 money supply is circulating money in the United States. The M1 includes: currency, travelers checks, demand deposits and other checkable deposits. See: M1 and M2 Money Supply.

The gold held in the US is currently 287 million ounces.
See the US Debt Clock

Dividing the amount of gold into the M1 money supply gives us:
2,173,900,000,000/287,000,000 = $7,571/oz of Gold.

Thus, gold is not in a bubble, it is actually quite undervalued!
And, it gets better for precious metal investors.

The M2 money supply may actually be a more accurate reading for what gold should sell for (if we were on a commodity based system).

The M2 money supply is M1 plus retail money market mutual funds (MMMF), saving and small time deposits. In December 2011 the M2 money supply was $9,640 Trillion dollars.

If we divide the M2 money supply by the ounces of gold held by the US the price of gold would be:
9,640,000,000,000/287,000,000 = $33,588/oz of Gold.

Gold Eagle

This seemingly ridiculous number shows how much the US has printed excessive money in our current fiat based monetary system.

It even gets more amazing for Silver. As of early 2012 silver is trading to gold at over 50/1. There is approximately ten times more silver known on the planet as there is gold.

Throughout history gold and silver are frequently at about a 10/1 or 15/1 ratio. Thus, silver may even have more of an appreciation potential than gold, by a factor of about 3/1 from its current prices (which as of the end of January 2012 was around $33/oz).

In other words, if gold were to increase by 300%, silver could conceivably increase by 900% comparably.

Let’s be clear, if gold or silver prices increase to the astronomical values discussed, then we are all in a world of hurt. Our money system is probably crumbling at this point.

However, fiat currencies have failed throughout history on many occasions. Consequently, a currency failure is not unprecedented. Since all of the major countries in the world are on Fiat Currency Systems, things could get really troublesome—to say the least.

Even if we evade a meltdown, there are still major systemic problems within our monetary system. This creates huge upward price pressures on gold and silver . These upward price pressures are increasing as the government prints more and more fiat money.

How Much Could Gold Appreciate to?
The Gold Bubble Myth
Not only do the numbers drive a compelling argument that gold is not in a bubble, it is significantly undervalued.

Numbers, if used correctly do not lie. People who say gold is in a bubble are wrong.

Critical thinking and problem solving skills have been used to review the gold bubble myth and come up with a rational view of what gold prices would be if we were on a gold based monetary system.

Also, calculations validate what I have learned from other reliable sources who are predicting the same monetary systemic issues. In other words, don’t let the gold bubble myth fool you. Gold can increase in value by a great deal.

A 100-300% appreciation of Gold in the next 1-5 years is possible—if not probable. Silver, may increase by even a higher percentage.

And, if the government continues to increase the M1 and M2 money supplies without an increase in productivity in the US (as they probably will for various reasons), the percentage increases in gold and silver prices could even go higher. This is another blow to the Gold Bubble Myth.

If you see any issues with my calculations or assumptions please contact me and use facts and data to show where this information is flawed.

Final Thoughts on the Gold Bubble Myth
According to Mike Maloney from : Throughout history gold has eventually normalized itself against fiat currencies.

This is compelling data that should encourage anyone to think about owning gold and/or silver as a hedge against the monetary policy of the US and all major countries who are printing excessive fiat monies.

The excessive money printing of fiat currencies will increase the monetary problems until the piper is paid—and this won’t be pretty. Using gold and silver to help protect your hard earned net worth makes a great deal of sense.

I hope this web page has shed some light on the fallacy of the Gold Bubble Myth.

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