Apr 14, 2010
“The ultimate asset bubble is gold” said George Soros in late January.
This was widely reported as Gold is now the ultimate bubble. A subtle but very significant difference, thereby implying that Soros was stating that gold was in a bubble right now.
Only Mr Soros knows what the true intent of his remarks were. However the fact that he had been purchasing shares in both gold mining companies and the Gold ETF at the end of last year would make you think he was likely doing his best to talk the gold price down so he could buy some more. Most likely these were very carefully chosen words that he knew would be misinterpreted by an uninformed mainstream media and help to prod the masses to sell gold.
History proves that Gold is in fact the ultimate bubble. 5 years after the 1929 stock market crash, gold’s investment purchasing power rose 17 times. From 1970 to 1979 it rose 15 times. But from 2000 to now gold is up 4 times (Source: Bullionvault). So with only a 4 fold rise so far in this bull market, the ultimate bubble seems like it is a few years away yet. Or put another way gold is in fact the anti-bubble, the ultimate extinguisher of debt as per John Exter’s Inverse liquidity pyramid (A whole other topic in and of itself).
But the oft asked question is “When will I know it’s time to sell my gold?” Unfortunately there is not likely to be someone holding up a sign proclaiming “The top is in – Sell Gold Now!” However history shows there may be some not quite so literal signs we can still look out for. Below is a list of them and our verdict on their “bubblishness”.
1. Dow Gold Ratio.
The Dow Gold ratio is simply the Dow Jones Industrial average (a measure of the US stock market) divided by the price of gold. It is useful as a guide as to when stocks are cheap and when they’re overvalued. See the below chart care of sharelynx.com for these extremes.
Towards the end of the 1930’s depression the ratio reached a low of 2 and at the end of the inflationary 1970’s it reached a low of just over 1. It’s currently at just under 10. So history shows the time to sell gold will be when the ratio reaches these levels again. Interestingly the below Log scale graph (hat tip to Sharelynx.com again – a must visit site for great graphs) shows the ratio has made higher highs each time it has peaked over the last century. It also made a lower low in 1980 so could fall below 1 at the end of the current monetary crisis.
So while the ratio has fallen it’s still at 10. Verdict: No Gold Bubble. (For more on the Dow Gold ratio see this earlier article Expert gold miners opinion on the dow gold ratio.)
2. Housing gold ratio.
Much like the Dow Gold ratio the Housing gold ratio also indicates when housing is over and undervalued. In New Zealand the ratio last bottomed out in 1980 at just over 50.
It’s currently at 250 so when it gets close to 100 that might be the time to swap some gold for property. We covered the US, UK and NZ housing gold ratio in great depth previously here: Could NZ House Values drop by 80%. Verdict: No Gold Bubble.
3. Real interest rates rise.
A common misconception is that gold performs poorly when interest rates rise as gold pays no dividend or interest. However the key is what real interest rates are doing. That is the nominal interest rate less the rate of inflation. Currently there is very little reward in the form of interest for keeping your money in the bank, and real interest rates are actually negative as per the graph below from McClellan Financial Publications, www.mcoscillator.com
You’ll notice how gold continued to rise throughout the 1970’s until real interest rates finally turned positive again. However, today central banks find themselves in a worse position than 1980 as it will be very difficult to raise interest rates sufficiently to head off gold without destroying their economies in the process. So interest rates could rise from here but if inflation rose too then real rates would stay below zero, and gold would continue it’s rise as there would still be insufficient reward for dollars in the bank. Verdict: No Gold Bubble.
4. Governments become fiscally responsible.
At the end of the inflationary 1970’s we had the likes of Margaret Thatcher in the UK cutting government spending and Paul Volker for the US Federal Reserve raising interest rates significantly to fight inflation. Here in NZ the 80’s saw “Rogernomics” and some harsh medicine for the country to swallow. Worldwide generally this period saw taxes cut along with government spending. Cast our eyes across the planet at the politics of today and generally we see more government spending and increasing public debt and likely higher taxes – as much as they would have us believe otherwise. Verdict: No Gold Bubble.
5. People discuss how much their gold mining shares have risen at dinner parties and where to buy the cheapest gold coins.
Most likely you currently know very few people in your wider circle of friends and acquaintances that have any gold or gold related investments. When the tables turn and gold is dominating discussions at social gatherings and regularly on the mainstream news we are likely getting near a top. A long way from there yet I’d say. Verdict: No Gold Bubble.
6. There are Gold kiosks selling gold bars and coins popping up in shopping malls everywhere.
As we have mentioned previously here, we are seeing the opposite of this currently with kiosks popping up buying gold from the public. Verdict: No Gold Bubble. (However, the counter to point 5 and point 6 above is that Joe Public may be so tapped out and broke that he won’t be able to afford to buy any gold. In this case it will be institutions that are buying gold bullion and gold mining shares.)
7. Our website visitors rise exponentially!
Highly likely if more and more people start paying an interest in gold. They’re rising steadily currently. Don’t worry we’ll let you know if our visitor numbers start exploding without us doing anything to warrant it. Verdict: No Gold Bubble.
The other possibility to consider is that you may not have to sell your gold at all. “Huh?” You may be thinking, “I’ve read stories of people who didn’t sell gold when it was in the $800’s at the end of the 1970’s and then watched it drop all the way down to $300 or less.” Well, you see, the possibility exists that gold could become widely accepted again as money. This could come about in a couple of ways…
1. The elites may be forced to reintroduce a gold standard and hopefully a true gold standard as existed prior to WW1. Whereby an ounce of gold is worth a specific dollar amount. So gold = money.
2. The above doesn’t happen and so the global financial system totally breaks down, maybe hyperinflation ensues, paper money is worthless and people resort to trading and bartering. Gold will still buy the same amount of goods and services as it always has. Again gold = money.
Another possibility bandied about by the likes of Jim Sinclair of jsmineset.com, is that the elites merely introduce a loose gold link. This would possibly be by way of a new global currency with gold trading in a narrow range but at a much higher price. This would allow the master planners to still control the currency issuance – albeit with a partial handbrake on their money creating powers. Whatever the final outcome, it appears that paper currency is slowly (or maybe not so slowly) dying. Who knows what will deliver the death blow, and it could be a way off yet, but none of the above signs of a “gold bubble” are here yet so don’t sell gold….. Buy gold (and silver). Hold gold (and silver). Learn, observe and wait.
Great report, thank you for all your hard work. Cheers
Soros is an old crook , while he is saying gold is a bubble he and others of his ilk are buying big time, particularly physical and shares ( not the scams of ETF etc)