This bubble won’t burst

The gold rush in today's economy doesn't seem to be coming to an end any time soon

Identifying asset bubbles before they pop is a mug’s game. And gold is no different. As its price continues to set records, now closing in on US$1,500 an ounce, a long list of skeptics has emerged to warn that the gold party is on its last legs. “Naysayers started calling gold a bubble back when prices hit $250 an ounce, and though gold’s bull market has tossed and flung the bubble callers around for almost a decade now, their voices have only gotten increasingly louder as prices broke through $1,000, $1,200 and now $1,400 an ounce,” Frank Holmes, the CEO of San Antonio-based U.S. Global Investors, Inc., wrote in his blog recently.

Now Holmes and a few others are questioning whether current gold prices should really be viewed with gaping jaws. Gold has long been viewed as a “safe haven investment” during shaky economic times, and Holmes argues the recent gains in the price don’t seem as severe when compared against other asset bubbles, including Japanese equities in 1986 and tech stocks during the dot-com boom. Nor is there much evidence that average investors are piling into gold.

Canadian investment guru Eric Sprott is also in the no-bubble club. He argued in a March letter that new investment in gold over the last 10 years totalled a relatively meagre US$250 billion compared to the nearly US$100 trillion funnelled into other financial assets. Sprott noted that ownership of gold as a proportion of total financial assets has remained less than one per cent since the early 1990s, compared to as much as five per cent in 1968. “Investors can rest assured that they are not participating in any speculative bubble by owning gold,” Sprott concluded. “They are merely protecting their wealth.”

Indeed, there would appear to be abundant “fundamentals” to support continued price increases, what with the continued economic uncertainty in the U.S. and Europe, and political instability in the Middle East. Holmes, for one, predicts gold prices could double over the next five years. Of course, another frequently cited bubble warning sign is the emergence of those who would tell you that, with respect to the boom in question, this time it’s different.

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