Question:
Is gold in another bubble or is the price rise rational considering the devaluation of the dollar and what many see as the only safe haven given the world’s financial woes. Many “experts” see gold rising to $1500 if not $2000 by next year. What do you think?
Tom from Goldville
Answer:
Tom, I think that gold is a bubble, and the rise in price is neither rational nor warranted.
Those who tell us that gold is the future currency, that the dollar will fall to points heretofore unknown, and that our global competitors will soon overtake the U.S. economy, amuse me. Where do these people come from? Where do they get their information? Are they paid to knock the dollar and push gold?
In any case, facts are fact. The dollar has been lower and could go lower still. Our debt has been higher relative to GDP. Corporate socialism is not new. Economic bailouts are not new. Our economy is in recovery mode. Add to this another fact–if you add the GDP of, Japan ($4,909,272), China ($4,326,187), and Germany ($3,652,824) together, that sum does not equal the GDP of the United States ($14,204,322). It would take a long period of decline for the U.S., while these other economies (so dependent on us) gain tremendously, for the U.S. (and the dollar) to lose its power as the global economic leader. Finally, gold has never been higher, dollar for dollar.
Right now both the U.S. dollar and gold are trades, nothing more. Fundamentally, the dollar is weak. The dollar will rise in value when the Federal Reserve raises short-term interest rates, we see two solid quarters or so of GDP growth, and the economy starts putting people back to work again.
On the other hand, the fundamentals of the gold trade don’t explain its rise. Where is the fundamental change in supply and demand driving gold up? I learned something about bubbles some time ago—if the fundamental makeup of any trade does not explain its rise in price, it is a bubble, and bubbles always pop, whether it be at $1500 or $2000 per ounce. The question for you, is “how lucky do you feel?”
Trade in the day; invest in your life …
