Some Comments on the Price of Gold

Gold Hits a New High
As everyone knows, the price of gold bullion has been on a tear lately. It seems each day that passes, the price of bullion hits a new high.

I think it was Greenspan that said that you can never recognize that you are in a bubble, until after bubble has burst. Today there are many pundits who are starting to look at the price of bullion as perhaps being a bubble. We also hear of a greater number of ‘experts’ (if there is such a thing as an expert) as saying we are headed for much higher highs. A lot of chatter from a lot of so-called experts.

How to Determine Whether The Price of Gold is in a Bubble

One of the criteria that is recognized as determining whether we are in a bubble, is whether taxi drivers, barbers, and other service people are talking about the same subject that the financial people are speaking about. It is an old saying that if your taxi driver talks about a certain class of stocks, it is time to sell and get out.

A recent quote from George Soros: “Nothing is very safe, including gold.”
In an exclusive interview on September 15 with Thompson Reuters, Soros says that gold is the ”ultimate bubble,’ and that ”this is a period of great uncertainty so nothing is very safe.”

“[In a deflationary environment], Gold is the only actual bull market currently. It just made a new high yesterday. In the present circumstances that may continue. It will be very interesting to see if there is a decline in the next few weeks because practically everything that makes a new high almost immediately afterwards reverses and disappoints.”

“I called gold the ultimate bubble which means it may go higher but it’s certainly not safe and it’s not going to last forever.”

Will Gold Go Higher or Collapse

Today pundits were speculating that gold could go much higher quickly if the Fed continues its ‘easing’ program and creates more money out of thin air. This is part of the theory that the economic world will collapse from the weight of US dollars being created out of nothing. You might wish to read comments we made in a previous blog on this subject. We pointed out the the current deficits are bad, but have precidents.

The Reality
As the current speculation rages, we refer you to another previous blog on this site discussing the price of gold. I urge you to read it. Without going into the details, suffice to say that the price of gold will fluctuate, as it always has. Just remember that in percentage terms, if the price of gold bullion falls $100, that is a 7% drop. That is not very much at all on a comparative basis. On even a one year chart, in November 2009, gold dropped from over $1,200 to under $1,100. On a percentage basis, that is a greater percentage drop.

From April 2008 to October 2008, gold dropped from $1,000 by almost 25%. Yet here it is, a scant 2 years later and gold is around $1,350. There are numerous similar examples of dramatic changes in the price of gold bullion. One must look at the price of bullion in context. So long as traders exist, the price of bullion will fluctuate and there are more people trading in gold today than ever before. The taxi driver is speculating in gold.

Why Gold Will Increase in Value

Perhaps not tomorrow, perhaps not next month, but gold will increase in value. The basic fundamentals discussed previously make an increase in the price of gold bullion inevitable.

A short list of reasons for this follows, but it is not a comprehensive list. It is only a list of the most obvious.

• The major gold mines are reaching the end of their lifespan.

• The amount of gold being produced worldwide is not increasing. Actually it is falling.

• As more paper currency is being created worldwide, people grow more fearful and want to have a bit of gold as a safety blanket.

• The actual number of people in the world that are able to afford to buy a bit of gold, is increasing dramatically as more of the former second and third world countries improve in prosperity, and the sheer number of more prosperous people is increasing at a phenomenal rate.

• Banks and other institutions are now buying gold, rather than selling gold as they have done for decades.

• There are more funds being created that investors buy shares in, that have as their sole asset gold bullion or precious metals. Every ounce of gold bought by one of these funds is taken off the market and stored away. This reduces the supply while demand is increasing.

• New mines are digging deeper to find the metal. The actual amount of gold in a ton of rock that is profitable to mine continues to drop. In many situations, ½ of 1 gram per ton is now profitable. Yet the overall supply of gold has not increased.

• The inflation adjusted price of gold bullion is now over $2,000 based on its high in the 1980’s. We are nowhere close yet.

• The uses of gold in industrial processes are growing. Gold has properties that are unique.
And most important, there is an ever growing number of people that believe in the security of gold/

It is true that the price of gold may fall, but not for long. Feel safe. There is no bubble just yet for gold.