April 20, 2024

The Gold Bubble Myth – Investors Remain Underinvested In Gold

The chronic myth that gold is in a bubble continues to persist, perhaps driven by the fact that gold has risen for the past 11 years.

The mainstream press has float stories year after year that gold was dangerously overpriced and unsuitable for most investors.  This gold bubble mindset, promulgated by “analysts” who have never owned gold has succeeded in keeping the vast majority of investors out of the best performing asset class of the past decade.

Despite every effort by the Federal Reserve to debase the value of the U.S. dollar, an uninformed and gullible public seems content to hold paper dollars which continue to decline in purchasing power.   Worse yet, in an effort to forestall insolvency and reduce the value of debt obligations that are mathematically impossible to repay, the Fed has explicitly adopted a dollar debasement policy.

While the smart money has been moving into gold, the vast majority of investors are under invested in precious metals.  The relatively low demand for gold can be seen from the third quarter gold demand and supply statistics from the World Gold Council.

Total gold demand has remained relatively stable for the past four years at approximately 4,000 tonnes.  Various categories of gold demand such as bar and coin and ETF rose while jewellery demand actually dropped and technology demand remained relatively unchanged.  Total global gold demand of 4,000 tonnes is valued at only about $230 billion.  By comparison the market value of Apple is $415 billion, the market value of IBM is $222 billion and the market value of Microsoft is $248 billion.

Meanwhile, monetary authorities world wide are printing money to prop up governments that have reached the limits of taxation and borrowing abilities.  This, along with the low level of demand for gold tells us that we are not even close to the ultimate highs that will be seen in the gold market.

More on this topic:

Gold Bull Market Could Last Another 20 Year With $12,000 Price Target

Why There Is No Upside Limit For Gold and Silver Prices

Sources and Demand For Gold

A nifty graphic detailing the sources and demand for gold can be seen below from Trustable Gold, which provides investors with information on gold investment opportunities.


Courtesy - trustablegold.com

Gold Bull Market Could Last Another 20 Years With $12,000 Price Target

Bull markets are born from underlying macro economic trends that take decades to fully play out.  The bull market in gold has lasted barely ten years, yet analyst after analyst from the conventional press argue vehemently that gold is in bubble territory and dangerously overpriced.

The voices proclaiming a “gold bubble” do not understand why gold has appreciated for ten years, have never owned gold and have kept their clients out of the best performing asset class of the past decade.

The goldandsilverblog.com has previously argued that given the current fiscal, political and monetary circumstances, there is currently no upside limit for the price of gold.  Those exiting the gold market now will be missing the most explosive and profitable part of the gold bull market.

If the gold bull market duplicates other major bull markets, investors in gold can look forward to decades of continued price appreciation.  Consider the duration and price appreciation of the following asset classes.

United States Housing Bubble

The bull market in housing prices began in the early 1970’s.  The nominal price of a house rose from $25,000 in 1972 to $250,000 in 2006 for a 1,000% gain over 34 years.


Courtesy jparsons.net

NASDAQ Stock Bubble

The NASDAQ rose virtually uninterrupted for 26 years from 55 in 1974 to 4,570 in 2000 for a gain of 8,300%.

Courtesy yahoo.com


30 Year U.S. Treasury Bubble

The price of the U.S. 30 year treasury bond has risen continuously since the mid 1980’s and yields have reached 60 year lows.


Courtesy yahoo.com

U.S. Debt Bubble

We consider last, the greatest bubble in all of recorded financial history which is the bubble in U.S. debt.  U.S. debt has increased by almost 3,000% since the early 1970’s.  The increase in borrowings by the United States has gone absolutely parabolic and is unsustainable.  The duration of the U.S. debt bubble cannot be predicted, but when this bubble bursts, the repercussions will be devastating to the global economy.  Astute readers will notice that the genesis of the housing, NASDAQ and U.S. debt bubbles coincide perfectly with the end of the gold standard.

The bubbles cited above lasted an average of 31 years.  The average percentage gain for housing, the NASDAQ and U.S. debt bubbles is 4,100%.   Extrapolating from past historical bubbles, the gold bull market should last another 20 plus years with a price target of over $12,000.

Americans Remain Tragically Underinvested In Gold And Silver

As predicted many times in this blog, the over indebted and over leveraged world financial system is starting to unravel at warp speed.   Massive amounts of  borrowing by governments during the financial meltdown of 2008 has effectively put many sovereign states at the limits of their borrowing ability.

A rapidly contracting economy and job losses will result in a flood of defaults in the private sector by both businesses and individuals.  A vicious self reinforcing cycle of defaults will cause major banking failures that a bankrupt FDIC will be unable to contain.  Banking holidays will become routine, the jobless rate will triple, the middle class will face financial destruction and social unrest will explode across the country.

Crushing levels of debt will be the trigger that causes an economic depression that will make the 1930’s look like a minor recession.  Eventually, the creative destruction of capitalism (as described by economist Joseph Schumpeter) will extinguish debt burdens through defaults, allow for economic recovery and the creation of new wealth.  The downside to recovery through creative destruction, however, is that existing wealth is mercilessly devalued as paper based asset wealth is destroyed.  At this point, which would you prefer to own – a pile of paper dollars or a stack of American Gold Eagles?

The ultimate restructuring of a fiat based monetary system to one backed by more than promises is inevitable.  The timing of the event is the only open question since governments will use every power, legal or otherwise, to prevent the scenario described above.  Unfortunately, for holders of paper financial assets, the only viable option available for governments at this point are the printing presses.  The ocean of paper currencies that will be printed to “save the system” will debase paper financial assets, reducing their purchasing power to virtually nothing.

Gold, the only enduring currency, has been forecasting a financial crisis for the past decade and especially since 2008.  As economic Armageddon looms, however, most Americans remain tragically under invested in gold and silver.  Conventional financial planners and investment advisers recommend a zero or minor position in precious metals even as gold steadily outperforms stocks, bank savings and other financial assets.


S&P vs Gold - courtesy yahoo finance

Making matters worse, many Americans are selling the little amount of gold and silver that they do own as the conventional press publishes “gold bubble” articles every time gold hits a new high.  As reported in coinupdate.com, one major dealer reports that:

As for the general public, they have been selling jewelry by the droves this past week.  On Tuesday, my companies set a record going back more than 30 years for the most number of purchases from the public in a single day.  We broke that record Wednesday and weren’t that far from another all-time record on Thursday.  The main pieces that customers have brought to us have been gold jewelry.  The amount of silver and platinum jewelry has remained steady.

We talk with dozens of coin dealers around Michigan and the country every day.  They are reporting the exact same pattern of activity as we are experiencing.

Perhaps many of these sellers are dumping their gold jewelry due to economic duress, but if they were expecting gold to continue to soar higher, they would not be selling.  The bull market in gold and silver is just beginning and those who hold significant positions will preserve and expand their wealth.