| Log in

Gold Is Not Yet In A Bubble

24 August, 2011

Students of financial bubbles have plenty to occupy them in the frothy world of bullion. Cash machines dispensing gold are springing up around the world. Canada’s Klondike has an incipient gold rush. The main gold investment vehicle has become the biggest exchange traded fund, holding more of the precious metal than most central banks.

The strongest evidence for a bubble comes from the price. Gold passed $1,900 an ounce this week for the first time, before falling back, in spite of slow demand for jewellery, its main use. The search for safe investments has seen the price rise a third this year, and double since the start of 2009.

How far can it rise? Hard money advocates hope for a return to the gold standard, which would require a fivefold increase but probably prompt a global depression.

More prosaically, goldbugs point out that the shiny metal is still below its 1980 peak, if adjusted for inflation ($2,400 an ounce in today’s money). There is no particular reason gold should return to that bubble-induced level. Then again, there’s no reason gold should be at any particular price.

The possible exception is the real interest rate. Gold has been a pretty good hedge against inflation historically, giving it a zero real yield. The opportunity cost of holding a useless lump of metal is the yield that could be earned elsewhere, on US Treasuries, say. Real yields on 10-year Treasury inflation-protected securities are just 0.04 per cent, and were negative last week.

That makes gold’s zero real yield look reasonable, inasmuch as anything about gold is reasonable. The close link between gold and Tips yields suggests that gold is not, yet, in a bubble; it is merely reacting to falling real yields. For gold to triple from here without a bubble, real yields would have to become deeply negative, needing central bankers to ignore runaway inflation. Even with the doves in the ascendant at the Federal Reserve, that seems unlikely.

More News From Financial Times

Rebels overrun Gaddafi compound

Moody’s downgrades Japan’s debt rating

Charges dropped against Strauss-Kahn

Cosco faces threat of worldwide ship seizures

Stocks mixed as traders await Jackson Hole

 

 

 


Leave Your Comment
Gold heads for biggest annual loss in 32 years

Gold heads for biggest annual loss in 32 years

Reuters 4 years ago
Gold hit a six-month low on Friday, on course for its largest annual loss in 32...
The Golden rule? Thoughts on gold as an investment

The Golden rule? Thoughts on gold as an investment

Aswath Damodaran 5 years ago
Paraphrasing Winston Churchill, gold is a “riddle, wrapped up in a mystery...
Gold at near 1-week high; investors still cautious

Gold at near 1-week high; investors still cautious

Reuters 5 years ago
Bullion edged higher due to physical buying on Tuesday, holding near a 1-week...
No Comments

Gold Is Not Yet In A Bubble

Powered by WordPress.com VIP