The Gold Bubble

One major concern throughout the gold bull market has been that gold prices are in a bubble and is set to burst from the outset.

The main component of the article is that people are being suckered into buying gold and risking a loss on their assets. More than likely if you invested in the stock market since yr. 2000, you will have made inflation-adjusted losses which can never be recovered. But the emphasis here is on a gold price correction should it occur.

If the gold price comes to a major correction which will probably happen in coming months, then the gold price will likely have obtained its 40-year inflation-adjusted average. This amount should be in the region of ~$2000/oz. U.S.

However, if your equity asset, denominated in a depreciating currency also manages to lose against inflation, then there is no hope whatsoever of ever obtaining a return, technically speaking. Gold in the meanwhile, will have kept its value over time.

Will it correct to ~$250/oz. finally and then we can write it off as a bag of rocks? This absurd proposition is the basis for the argument that gold is in a bubble, that it will lose all value. Acutally, it has merely been adjusting for inflation, which takes all of the romance out of the bull market.

If it were to appreciate in nominal terms as Oil or Silver have over the years, then it would obtain ~$3500/oz. U.S., simply on the basis that Oil in its bull market multiplied 14X and Silver in its bull market did the same. People see Oil and Silver as going to the moon, but in actual matter of fact, have obtained higher inflation-adjusted averages. After correcting, you will obtain a higher average amount.

The way to obtain a proxy for the average gold price is through gold miners.

Financial Post

-F6