Gold Price Bubble

I’ve been reading this article on Asia Times, and it got me thinking, will there be another recession in respects to the huge amount of speculation in relation to commodities trading? I mean Gold, Silver and whole host of other commodity items have seen their value go up to ridiculous levels, now, I know the best place to keep your money is in metals like Gold etc in times of recession, however this piece in the article I read made an interesting point.

The author also indicates apocalyptic style scenario at the end of the article here;


I can’t quite figure out if you feel like the price of gold is about to drop, or not, based on your cites.

I am betting a fair chunk of change the dollar’s value will remain low, inflation in the US will rise, and investing in gold (mining, in my case) is a good bet. So far, so good and I’m up about 25%. YMMV

There is reason to suspect gold prices will remain high. Of particular note is gold production seems to be on a downward slope that will not rise again.

I’ll clarify, I feel like the Gold price has neared it’s height, and is going to fall, but I’m just curious as to what the economic fallout will look like in respect to that, and if it will mirror what the article is saying.

I agree with them there. We have a huge federal deficit, not to mention a huge trade deficit, and neither can keep going forever.

Doubtful. Stock prices are a little bit high now, as measure by price-earnings ratio, but I don’t forsee them heading back to the 6000’s. Most American companies are in fine health, we just need to weed out the few that don’t have a business model which can survive long-term, i.e. GM.

Everyone always says that a falling dollar will be good for exporters, but will it? The dollar has been falling for three years now, down almost to half its former value against the Euro. Yet less stuff is being manufactured in the U.S. now than when the dollar’s plunge began. Perhaps we need to face it. If American workers must be paid $7 per hour while workers in Bangladesh can be paid 10 cents per hour, it will be cheaper to make socks in Bangladesh no matter what the exchange rate is.

The author thinks that we’re going to go from our current state of deflation to “trillion percent inflation” by the end of 2010, with near 100% certainty?

Also, I’m skeptical of any article that predicts major economic change based on the fact that a commodity has gone over a big round number in price (gold over 1,000$, in this case). Back when it was $999.99, we still had a chance, dammit. But now we’re screwed.

Interesting…two views around gold prices today on one of the CNN money shows, and my ears perked up since I have some skin in the game, so to speak.

One analyst remarked that production has been steady year over year past couple of years–something around 83 million ounces a year, I think. Production has been higher in the past.

Of course, the price of gold is not tied to production, but to demand versus production (supply, anyway). According to him, hoarding of bullion has risen, both at the personal investor and country level. Obviously I am betting it will rise further, at least against the dollar. If I were China I would not continue betting on the dollar, that’s for sure.

I think the issue is they are getting less gold per unit of material mined.

Basically it is getting more expensive to mine to have the same amount of gold at the other end. You need to dig more rock, process more rock and so on. That makes it more and more expensive.

Perhaps till now they could keep up output but there are limits and the price needs to rise to match all that extra effort.

ETA: Yep, from my earlier link: “Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa’s output has halved since peaking in 1970.”

The author is confusing cause and effect. The gold market is a minor part of the world economy–there’s no reason to suppose that a collapse in it would have major repercussions. Instead, the price of gold is an effect–that means it’s an (one of many) indicator of what the economy is doing.

No one thinks that the price of gold created the economic turbulence of the 1980s. Likewise, the price isn’t causing any problems now. It does indicate that many investors think inflation is a risk, but the Fed tries to keep the broad-market inflation in control. And current data shows that inflation is not currently a problem and is unlikely to be in the short-term. While there is disagreement about whether the Fed should try to influence some asset classes (real estate or stocks, for example), this is the first I’ve heard anyone advocate using an extremely specific asset as an inflation proxy.

I suppose one could say material commodities should be an asset class that the Fed tries to keep within inflation targets, but I think most economists would say they’re factored into the core inflation rate via the cost of finished goods. Since core inflation is very low right now, the high prices of materials is not significant. (There is debate about whether or not core inflation is capturing the right thing, but this article does not address that problem at all.)

I think that gold is headed for a fall. And what this will do to the economy is anyone’s guess. However, the reason I think that is because the advertisements to invest in gold have seemingly quadrupled on radio and TV. Which reminds me of the oil run up, where people were predicting $7.00 by last christmas. The speculators were creating an artifical demand for oil, they got out, and made a fortune. I see the same thing eventually happening to gold.

Time will tell. But if you got in early, you have done well. Getting in now seems to be investing near the peak of the bubble. MHO.

IMV, this month’s news that the Reserve Bank of India bought 200 tons of gold from the International Monetary Fund was very bullish. A central bank presumably wouldn’t be buying in now if it viewed the market as toppish, so to me this is a strong positive signal about the outlook for the price of gold coming as it does from a member of the official community. It’s also an effective thumbs-down to the dollar, and again, all the more powerful for coming from a central bank, particularly if it triggers more diversification of reserves in other countries.

Since the Indian sale, the IMF has sold a couple more tons of bullion to Mauritius. It would be a further strong bullish sign if another central bank were to buy all of the remaining gold in one lot. (Particularly if that central bank were based in Beijing.)

Ehh. I’m with you, assuming the central bank is a smart one. IME they aren’t, always. I think Gordon Brown sold off a few tonnes of England’s gold reserves some years ago as Chancellor when it was around or below $300.

Isn’t there an inverse relationship between gold prices and the value of the dollar? If the Fed raises interest rates shouldn’t gold and stock prices plummet? I started a thread in General Questions and it was clear from the economists posting there that the Fed is doing a “good thing” by keeping the interest rate and dollar value low.

I’m happy to be with the Indians on this one. Also, Russia’s central bank said this week it bought more gold.

You are correct about Brown. The disposal plan was announced at a very bad time - May 1999, at which point gold had dropped in eight of the 10 prior years. Also, the timing and amount of the individual bullion sales were released ahead of time, which was inane. The IMF handled it much better, saying in September it planned to dispose of 403.3 tons of gold without giving further details and then keeping shtum until after India had completed its purchase.

Not just gold, but all dollar-priced commodities. Indeed, it would be a bloodbath in commodity markets if the Fed were to raise rates unexpectedly and/or aggressively, but I think the risk of that happening is quite low and any increases will be clearly telegraphed ahead of time.

But, ultimately, it will happen. It’s just when.

Gold is certainly in a bubble. However, who knows when and how hard that bubble will burst?

In other words, I would not rush to sell off Gold, but OTOH, I would not be buying it at this time, either.

Sri Lanka has purchased 10 tons of gold from the IMF.