Gold Bubbles

UK financial writer Dominic Frisby argues “that both metals [gold and silver] are still in a bull-market phase. Any mania is yet to come.” In support, he notes that in 1980 gold bullion went from $400 to $873 an ounce in only 36 trading days, with silver trading from $16 to $50 in 37 days. The current market is not exhibiting those sort of price moves.

He also proposes looking at the value of the US gold reserves compared to money on issue as an indicator of a bubble – “in 1980 … the market value of the 260 million ounces of gold held by the USA in Fort Knox came in at $221bn, yet only some $160bn of paper money was in issue” so if “the market value of the gold held in Fort Knox once again exceeds the number of US dollars the US authorities have issued, then gold will be in bubble territory once again, in that it will be trading at levels above its intrinsic value”.

Dominic closes his article with his definition of a bubble that I think may explain why a lot of financial commentators are consistently negative on gold: “A bubble is a bull market in which you don’t have a position”. However, I doubt we will see many of them change their view and buy gold, because these days the internet means all their previous statements are recorded and easily searchable and I can’t see them admitting they were wrong.

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