No Bubble Here

Casey's Daily Dispatch (11/05/2009)
"With the recent run-up in gold, I've come across more and more stories claiming that, like housing and tech before it, the gold market has reached bubble status. In my view, nothing could be further from the truth.

Apparently James West agrees. To quote his recent article Gold Price is No Bubble:Declaring that gold is in a “bubble demonstrates complete ignorance of or disregard for the fundamental drivers of the almost ten year ascent of gold. And saying that the price is forming a bubble implies that, like the real estate bubble, the tech bubble, and the tulip bubble, the price must necessarily 'pop' and return to a sustainable long term average.

During each of the bubbles of recent and distant history, the cause of the meteoric price ascents of these various asset classes were all predicated by the same string of events.

Supply was far outstripped by demand because the public perception emerged that the asset class in question was the ultimate asset class at that point in time. Disproportionately high levels of capital were directed to them, and upon the eventual discovery that supply could easily meet and exceed demand, the bubble pops, the price declines, and the herd mentality resumes its frantic search for the next ‘ultimate' asset class.

Homes, technology and tulips are all a product of effort. With increased effort, more of each of these can be created. Supply can easily be ramped up to meet demand.

Not so much, in the case of gold. The availability of economic concentrations of gold in deposits near to the surface of terra firma is finite. Increased effort might guarantee the temporary increase in supply from known deposits, but each deposit is eventually exhausted, and no amount of increased effort can bring back the gold.

Gold, for the most part, is not used up. It is fabricated into jewelry or bullion or coins, and hoarded and preserved.

Technology, real estate, and tulips, on the other hand, are consumed and replaced. Technology becomes obsolete, homes wear out, tulips die and are reborn each spring.

Gold? Gold goes nowhere. Gold stays put. Gold is passed from generation to generation in last wills and as heirloom collector's items. Gold is recognized as a store of value that is not temporary."

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