Close X Cookies are necessary for the proper functioning of 24hGold.com. By continuing your navigation on our website, you are accepting the use of cookies.
To learn more about cookies ...
EnglishFrench
Gold & Silver Prices in

Is gold in a bubble?

IMG Auteur
Published : February 06th, 2012
760 words - Reading time : 1 - 3 minutes
( 4 votes, 5/5 ) , 3 commentaries
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
3
comment
Our Newsletter...

 

 

 

 

Every once in a while a bubble forms in a market. Bubbles can occur in any market, whether stocks, commodities, real estate or as we know from history, even tulip bulbs.


Market bubbles are, as the name implies, unsustainable. They are manifest by inflated prices that go up and up to achieve unthinkable levels for a while, and in some cases, for a very long while. But like their soap-bubble counterparts, market bubbles clearly lack durability. They can pop at any time. So inevitably, the bubble pops, with the unfailing result that prices thereafter quickly drop back to earth.


In essence, bubbles are nothing more than an emotional frenzy in which prices climb to unheard of levels, until the market attains a shocking level of overvaluation. To achieve this outrageous situation in which price far exceeds an asset’s value, a bubble involves the near-universal acceptance of some delusive idea.


One notorious example is John Law’s scheme in 1716 promoting the virgin lands surrounding the Mississippi River, which was a ruse that swindled the entire French nation. The resulting Mississippi Bubble has forever been regarded as the apotheosis of market bubbles, but it shares with all bubbles one dominating characteristic.


Even though prices move far out-of-line with an asset’s fundamental value based on any prudent measure, people do not react as one would logically think. Instead of recognising a bubble for what it is, people instead tend to rationalise why prices are so high. They try to explain to themselves and others why prices are supposedly reasonable.


This attempt to rationalise what is illogical and abnormal is a unique characteristic of bubbles. But it is not too difficult to see why this foolhardy thinking happens. When you are living in a bubble, it is very hard to accept the reality that you are indeed in the midst of a bubble.


Thus, the inability to perceive foolhardy thinking is a result of most everyone saying, doing and thinking the same things. This mutual, identical action reinforces one's view to mistakenly believe that what they are thinking is correct and normal instead of what it really is, namely, the erroneous and illogical pervasive thinking that characterises a bubble.


As an example, today this rationalisation explains why US government debt cannot possibly be overvalued because [....]. Go ahead. Fill in the blank. We have heard the countless reasons why US government debt is supposedly a safe haven.


In short, while technology and other circumstances are constantly changing the world, the common denominator is that human nature never changes. Consequently, bubbles are possible because people are always willing to believe the unbelievable, such as the delusory thinking that one is buying a safe haven with the debt instruments of an over-leveraged government that has made far too many financial promises.


Only after it pops does the bubble become obvious. It is only then that the stark realisation dawns on people that they had been living in a bubble, and the serious questions get asked. To take but one example from the 2000 stock market bubble, why would anyone have bought Cisco at $75 a share (which is more than four-times higher than its current price over a decade later) when it had a market cap more than 20-times annual sales and no earnings when properly accounting for the cost of employee stock options? But many people did buy it.


Law's scheme was based on the false premise that the lands of Mississippi were worth far more than they really were worth. Though false, this premise became widely accepted. People bought into the bubble, inflating the stock price of his Mississippi Company. At the peak, price far exceeded value, but this reality was only recognised only after the bubble had popped.


Clearly gold is not in a bubble. It does not follow the pattern of bubbles. Gold is not widely owned today, which stands in stark contrast to what would be expected if it were in a bubble. More importantly, instead of gold owners trying to rationalise a high price, people who do not own gold are giving reasons not own it.


There is a bubble today, but it is not gold. It is the debt instruments of the US government and indeed, other governments that have also made far too many financial promises. Many of these promises will be broken and many debts repudiated, but most people do not understand or refuse to accept this reality. Ignoring prudent financial analysis and even the lessons of history, they still believe government debt is a safe haven

 

 



<< Previous article
Rate : Average note :5 (4 votes)
>> Next article
James Turk is the founder of the Free Gold Money Report and of GoldMoney.com. He is also the co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).
WebsiteSubscribe to his services
Comments closed
  All Favorites Best Rated  
confidence in the system is in a bursting bubble !!!
Rate :   2  1Rating :   1
EmailPermalink
"As an example, today this rationalisation explains why US government debt cannot possibly be overvalued because [....]. Go ahead. Fill in the blank."

[US government debt is 'quality.' That's why whenever there is uncertainty and fear elsewhere in world markets, there is always a "flight to quality." -EVERYONE knows that!]

"Try to find out what EVERYONE else is thinking, then do the opposite."

Thank you for the great article Mr. Turk.

You may not be able to get blood from a rock, but you sure as hell can get it from paper!
- Platinoid
Rate :   2  3Rating :   -1
EmailPermalink
I tried putting an ounce of gold in a bubble today.
Couldn't get off the ground!
Rate :   1  1Rating :   0
EmailPermalink
Latest comment posted for this article
confidence in the system is in a bursting bubble !!! Read more
c4.carbon - 2/7/2012 at 4:33 PM GMT
Rating :  2  1
Top articles
MOST READ
TOP RATED
The Gold Bug (Edgar Allan Poe) - Treasures and Gold Fever - Edgar Allan Poe  (13)
Discovery of Governmentium, the heaviest known element - Food for thought - Hat Trick Letter  (19)
The US Constitution and Money - Michael S. Rozeff - Mike S. Rozeff  (8)
Introduction to Economic Sophisms - Frederic Bastiat  (4)
Most commented articles More... 
MOST COMMENTED
100 Items That Disappear First in a Disaster - Beans Bullets Bullion and Bible - 24hgold  (17)
Most commented articles More... 
Latest Comments
In broadcast to India, GATA secretary says free market in gold woul...
29 MarChris A.2
Only a bimetallic standard would work with Gold and Silver. Gold alone would be a prison for the 99% as only Elites and Central banks own any of si...
‘Real’ Performance Comparison
26 MarChristopherbalz
Question: In the method of figuring inflation referenced, what is the rationale for adding population growth to productivity growth? Sugge...
100 Items That Disappear First in a Disaster
23 Markevthorne
68, 69 probably not that safe - particularly if you're growing your own vegetables - keep a Maine Coon cat instead: does the job automatically.
Farage Interviews Le Pen: “Prison of the EU”
21 Marneville1
BRITANNIA RULES THE WAVES AND NOW BREXIT WAIVES THE RULES. GO FOR IT FRANCE AND RID YOURSELVES FROM THE CHAINS OF IDIOTS. NOT SIN...
How the Fed Operates — And Why It's a Problem
20 Marramasart
In a nutshell, the Fed facilitates the theft of the value of the dollar, as they can control the increase in supply which at the same time inverts ...
How the Fed Operates — And Why It's a Problem
20 Marneville1
With all due respects for outlining how the crooked american Fed works or should work. From all our research we find the following the Fed...
Sparta - Gold prohibition in a collapsing economy
18 Markevthorne
You've answered none of the authors points: your comment is flat rubbish.
America Too Broke to Fix Crumbling Infrastructure? “Bridges, Roads,...
16 MarCameron Waugh1
Just like the leaders of the Bolshevik revolution were not Russians, those formulating belligerent US foreign policy are not Americans, and they ha...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS