Proof That Gold Is Not a Bubble

The Motley Fool ^ | March 22, 2011 | Christopher Barker

[Atlas Sneezed]

If a picture says a thousand words, then the image below speaks volumes against accusations of a bloated asset bubble in gold.

I'm sure you've seen the invariably confident claims that gold must represent a bubble, backed by deeply unscientific litmus tests. It must be a bubble, because "my mother recently asked me if she should buy some." (Psst! Hey, Mom ... Yes!) Others may feel compelled to sound the panic alarm because -- gasp! -- commercials have appeared on television to sell the yellow metal.

Of course, those anecdotal arguments against gold exposure have proven incorrect time and time again. With each successive breakout to fresh all-time highs, gold continues to confound perennial bubble callers with the sheer strength and continuity of its secular bull-market run.

Concealed amid the cavernous disconnect between the equally entrenched outlooks of gold bulls and bears, however, lies a basic and crucial consideration that bubble callers have persistently overlooked. It's all too easy to presume that a bubble exists when an asset gains value and attention quite rapidly. But one careful look at the relative historical context offers enormously compelling evidence that gold's historic resurgence retains ample room to run. At the core of gold's momentum is not a fear-driven speculative frenzy, as many have argued, but rather a protracted revaluation event for a global currency that had been all but tossed into the world's collective wastebasket.

I know we are all busy Fools, but I need you to take a moment to fully absorb the implications of the following chart:

[Travis McGee]

This chart is more useful.

[USFRIENDINVICTORIA]

If you added some vertical lines, labeled with the events mentioned in the article, you'd have exactly the type of chart I was trying to describe. Thanks for posting this. (Of course, the article uses the ratio of the value of gold to the value of all assets — but, the DJIA is a reasonable proxy. In fact, I'm not really sure by what the authors meant by “all assets” — but, the DJIA is a well-known metric.)

This chart provides a lot more information, than the one in the article. You can see the trends — before and after the events, represented in the bar graphs. You can also see that gold is not a sure bet (note the precipitous drops).

[Atlas Sneezed]

Thanks. What do you think that one might learn from that? (A gold bug might point to 25 years ahead of the Dow being below 10Au - or a plausible baseline of Dow=2-3Au = Dow 10,000, Gold $5000)

[Travis McGee]

I think we’ll see gold and the dow pass around 5,000.

[Kenny500c]

Hey Trav, you are aware that Meyer’s boat was named the “John Maynard Keynes?”