Monday, August 22, 2011

Gold Breaks $1,900

Gold broke $1,900 today.

I am getting a trickle of emails that ask "Is the bubble in gold prices about to burst?"

First, I would categorize the now eleven year old bull run in gold as a bubble market for the simple reason that gold has no intrinsic value other than its use as an industrial metal or in jewelry.  Gold is not like wheat that can be eaten or oil that can burned for fuel.  Gold bars just sit in bank vaults like Fort Knox looking pretty.

Corn you can burn for fuel.  Soybeans you can eat.  Gold bars make great paperweights.

So nearly all the gold market, aside from the few manufacturers who really need to fix gold prices, is pure speculation.  The run in gold has been caused by the instability of the financial system (especially since 2008) and the increased demand for gold from investors worldwide but also the new middle class of China and India who love gold jewelry.

So, is the bubble going to burst?

Yes.  All bubbles burst and the gold market is historically extremely volatile.

When will it burst?  That is the magic question and there is no rabbit under my hat.

Right now all the fundamentals on gold look extremely strong and that is not a good situation here.  It suggests a strong lack of confidence in the banking system and especially the governments that manage their currencies.  The recent downgrade of the United States does not help matters at all.

If the fundamentals change, I'll tell you.