Is the gold price a bubble?

Some of you might be worried about the gold price being a bubble, so I would like to place your minds at easy. There are a number of reasons why the gold price is not a bubble:

1. Gold is appealing when there is no returns on other asset classes. In fact gold is appealing if only bonds are low-yielding because only a little bit of that money need to 'slosh around' into gold equities and derivatives.

2. Derivatives are less alluring when financial markets are panicky, so fund managers prefer ETFs, physical gold, mining stocks with long life production capacity, to avoid financial risk exposure.

3. Risk of further currency debasement - the equity markets are going to fall at some point because of low returns will eventually see stocks sold off...US unemployment is around 10%.

4. Risk of slower global growth

5. Gold has very small industrial demand, and very large investment holdings. During times like these 'speculative demand' can greatly add to the price

6. Gold after adjusting for inflation since 1980 ($760/oz) is not very high. Thirty years of inflation means gold is cheap. We looked some time ago at the historic dow jones/gold ratio and concluded that gold can go to $2400/oz without much trouble. The more debasement of the USA, the higher the Dow will go, so rest assured $2400/oz is based on a 10,000 pt Dow. It might be 20,000 in 5 years time. Anyway, you don't need to speculate about that. This ratio has worked well for 113 years.

I personally like emerging gold producers. Africa has particular appeal because of the cheap cost of developing resources and the excellent exposure provided in Australia, Canada and the United States, as well as the London-based AIM (Alternative Investment Market). These markets also provide exposure to gold in Mongolia/China, Russia, Latin America and Indonesia/PNG.

I tend to forget the appeal of silver because there are few stocks in Australia chasing silver. The reason is that they mostly focus on Africa, Asia, whereas most silver mines are in Latin America and the USA.

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Andrew Sheldon www.sheldonthinks.com