RE: FYI....all the copy
Part one of 3.....WSJ - all the copy. :)
Is Gold the Next Bubble?
It'sbeen the amazing, runaway boom of the past decade. If you'd putyourmoney into gold at the lows about 10 years ago, you'd have made anearly400% return. That's left pretty much everything else—stocks,China, letalone housing—in the dust.
But with gold now trading near record highs, the big $1,200-an-ounce question is obvious.
NiallFerguson: Investing Amid Uncertainty Economic historian and author ofThe Ascent of Money: A Financial History of the World, Niall Fergusongives his predictions on gold prices, emerging markets and the Swissfranc.
Is the gold rush over?
Somesmartpeople wonder. "The time to buy gold was in 1999, not 2010,"Harvardprofessor Niall Ferguson tells The Wall Street Journal—though headdedthat momentum might still drive it higher. Others will tell youthat"the smart money got out of gold months ago." But then people havebeensaying that for years.
They could be right, of course: The future by definition is unknowable.
But if gold is a bubble, here's why it may not be over—and, indeed, may it may be about to go vertical.
First,therecent rise is deceptive. Yes, gold has risen from around $250 anounceto $1,200. But that rise started at very depressed levels. Goldhad beenfalling in price for two decades. In 2000-01, it was at thebottom of avery deep bear market. It had touched historic lowscompared to consumerprices or other assets like shares. A lot of thepast decade's boom hassimply seen it recover toward longer-termaverages.
Second, beforewe assume the gold bubble has hit itspeak, let's see how it compareswith the last two bubbles—the techmania of the 1990s and the housingbubble that peaked in 2005-06.
(CHART IN PREVIOUS POST)
Itcompares the rise in gold today with the rise of the Nasdaq inthe 1990sand the Dow Jones index of home-building stocks in the 10years leadingup to 2005-06.
They look uncannily similar to me.
Sofargold has followed the same path as the previous two bubbles. And ifitcontinues along the same trajectory—a big if—gold today is onlywherethe Nasdaq was in 1998 and housing in 2003.
In other words, just before those markets went into orbit.
Maybethesmart money is out of gold today. But how easily we forget thatthesmart money got out of these past bubbles way too early. The really smart money knows you make the most money in a bubble right at the end, when it goes manic.
There are other reasons to think that gold is still a long way from that point.
Likethefutures market. It is predicting gold will rise by just a fewpercent ayear over the next few years. That's less than you'd get frommunicipalbonds.
When the market thinks an investment is going to underperform munis, it's safe to say we are not in the midst of euphoria.
Andtakea look at the coverage of this industry. At the peak of a bubble,theWall Street analysts covering a sector are usually all bullish.Thistime around? Far from it. Of the analysts covering gold-mininggiant Barrick Gold, only about two-thirds are publicly bullish, according to Thomson Reuters. By Wall Street standards, that's very restrained. Among those covering Newmont Mining and Randgold Resources, it's about half.
Andon an anecdotal level, this doesn't feel like the peak of abubble. Taxidrivers and bartenders may be talking about gold. But theyaren't yethanding out mining tips.
Bloomberg
Gold bullion in the vaults of the Bank of England
Thereis,of course, no guarantee gold will turn into another mania. But thefactthat we now seem to live in Bubblonia—the land ofperpetualbubbles—would suggest there is a current opening for the role.And inmany ways, gold may be well cast.
It has a "This timeisdifferent" story line: The world's central banks are floodingthemarket with liquidity. That should inevitably devalue thecurrencies.Gold is the only "currency" they can't just print.
Ithas an armyof true believers behind it, ready to claim each rise as a"victory"and to mock skeptics with the words "They just don't get it."
Andit'seasy to untether from reality. You can't value gold bytraditionalfinancial measures, as it generates no cash flow. So there'splenty ofpotential to value it by other means. Eyeballs, anyone?
DylanGrice, a strategist at SG Securities in London, thinksglobalconditions today could unleash another gold boom like the one inthe1970s. Then, as now, the world lost confidence in the U.S. dollar asastore of value. Back then, central banks started hoarding gold instead.Today, he notes, they are net purchasers of gold for the first timesince 1988.
Andalthough gold has risen a long way, so has theU.S. money supply. Mr.Grice calculates that even at today's prices,the bullion that the U.S.government holds in places like Fort Knox isstill only worth enough toback 15% of the U.S. monetary base. That isnear a record low.
Atthe peak of the gold mania in 1979-80,gold prices rose so far that thebacking exceeded 100%. How far wouldgold rise if that happened again?To around $6,300 an ounce, Mr. Gricesays.
Once again: I am not saying gold is going into the stratosphere. I am saying there is a good case for saying it might.
Gold is a high-risk and potentially dangerous speculation. Anyone thinking of investing needs to do some serious thinking first.
This is the first part of a three-part series on gold, "The Gold, the Bad and the Ugly." Next up: The dangers of gold.
Write to Brett Arends at brett.arends@wsj.com