With gold reaching all time [nominal] highs several times in the last few months, ABC news and mainstream media has been asking: Is gold in a bubble and should you invest?
Gold has not yet reached a bubble, but before this crisis is over, it will – without a doubt.
Yes, it has increased some 400% over the last 10 years. It seems that early investors, those who started investing in gold post tech bubble, smelled something. Perhaps it was inflation (the same inflation that led to overvalued real estate and stock market prices), or maybe investors sensed impending doom due to unrealistic government policies.
Whatever the case, we’ve repeatedly argued that in times of economic distress, be it during the fall of Rome, the Great Depression of the 1930’s, or the recession of the 1970’s, those worried about government stability have always sought precious metals as a hedge against collapsing currencies and economies.
This time is no different. While the mainstream analysts and talking heads argue about whether or not gold has reached a bubble, we submit that until these mouthpieces for media conglomerates are all telling us that gold is the investment vehicle of the future (much like they did with real estate and stocks during their respective bubbles), gold is far from being in bubble territory.
One argument currently being made is that if you invest in gold today, you’d be buying it at historic highs. This is true, but only if we look at gold in terms of today’s dollars. In the early 80’s gold reach nearly $900 per ounce, which remained the historical high for nearly 30 years, until just recently. What most analysts fail to mention, whether due to ignorance or by design, is that since 1980 the dollar has inflated considerably and if we were to price gold in “real” terms, in 1980 dollars, the price of gold would have to exceed $2000 to reach its all time highs.
We are of the opinion that our current economic and fiscal crisis is significantly more severe than any that the United States, perhaps the world, has ever experienced. As such, considering that gold hasn’t yet even reached it’s all time high in real terms, calling it a bubble is a bit premature.
The global economy, with the U.S. leading the way, will continue to deteriorate for the next several years. As investors get spooked in real estate, stocks and eventually bonds, there will be one final asset of safety to flock to – gold.
Before the bubble peak which will eventually happen in gold, we warn our readers, especially those with short investment horizons, that gold will be very volatile. We can expect to see downward corrections much like what we saw in the crash of 2008 – which sent precious metals on a near 30% plunge. Do not be surprised to see similar effects going forward. Nothing is certain save that we are in times of uncertainty. This factor alone is enough to cause massive fluctuations in asset prices the world over.
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