John wrote:As you know, I've been saying that gold has been in a bubble for several years. At today's prices, even mainstream pundits are talking about gold being in a bubble. What's your opinion?
You have to look at gold and the dollar as two currencies. The world gets about 1% more gold each year and maybe 6 to 10% more dollars on a typical year. They print a trillion new dollars per year now and 70 or 80 years ago it was around a billion new dollars each year. So dollars are being produced about 1,000 times faster now, but gold is produced only a little faster. So gold is never going back to $20/oz, right?
The real danger now is that people might stop buying US treasuries and then as the huge number of existing bonds come due, the US will print huge numbers of new dollars to cover them (yes, sell bonds to the Fed who prints). Treasuries are paying less than the real inflation rate and probably will keep doing so as inflation goes up. Also, when all of the deficit has to be covered by printing, as they are not able to sell new bonds, that will cause more printing too. But the real shocker is when several trillion short term bonds come due the first year and nobody wants to roll them over. They just want their cash. Printing of dollars will be far faster than it has ever been before. And gold will just get another 1% each year. So the exchange rate between gold and dollars will shift.
In the same way nobody now thinks gold will ever go back down to $20/oz, I think within a few years nobody will expect it to ever go back down below $5,000.
Regression toward the mean does not work when one side is cheating and the other side is honest. Since 1914 the dollar is a dishonest measuring stick. You need to be very careful when using it.
Another way to look at this is that either bonds or gold is a bubble. For a bubble to pop the production of that asset has to increase until the supply exceeds demand and the price goes down. What is easier to ramp up production for, bonds or gold? Companies are turning on their bond printers already and ramping up fast. The treasury is already printing bonds at record speed. Gold is at 1% per year and steady or decreasing. So which will pop first?
When the bond bubble pops people will get cash for their bonds as they come due. So there will be far more dollars created. So the exchange rate between dollars and gold will change such that gold becomes priced even higher.
In a bubble the common man is buying the asset. Today the common man is selling gold jewelry and has never even seen a gold coin, let alone invested in one. So many people are in bonds (including of course the biggest buyer, the Fed) that interest rates are near zero percent. That means bonds are very highly valued. So which looks like a bubble?
While I am ranting, one more thing. When I buy gold jewelry from people almost everyone is happy with the price I offer. When I try to buy silver jewelry almost everyone thinks the price is too cheap and does not sell. My percentage off the spot price is the same for gold and silver. I also think silver is too cheap. Silver is only like 22 times what it was 200 years ago, but there is more than 1,000 times more dollars being printed each year.
One more edit. John, to me you are like brainy superman in how you can understand and explain so many things about the world. But you have this one kryptonite type problem in not really groking how continued printing of paper money makes it worth less all the time. I think shows up in your views of gold, and even a bit on your stock market comments.