Spotting a Gold (or Other) Bubble 101

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leeson_was_framed's picture
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Spotting a Gold (or Other) Bubble 101

Many of us know that despite the mainstreams best efforts,  gold is not in a bubble. Nobody in the mainstream ever defines the term, since they would then have to use the term properly.

So it is time to blow the whistle on the bubble, and show why gold is not in one. This explanation can be applied to homes, silver or any other asset, but simplicity I will refer to gold.

To form a bubble you need in general terms:

1. More money chasing an asset than the buyers can afford.

So if people are spending money on Gold, that they really need to spend elsewhere (like on food, mortgage payments, rent, school fees, utilities) then gold is in a bubble.  The market will collapse when the buyers have to draw on this money to use it for its required purpose. I don't know anyone spending rent money on gold!

Furthermore, there are billions of dollars losing money in equities, savings accounts and bonds that could (and should ) be in gold. Gold cannot be in a bubble until this money is spent on gold.

2. The price of the asset has risen above the level that cash buyers can afford.

This is what killed the housing market. Cheap money allowed people to bid up house prices until nobody but the super rich could buy a house without a loan.

This puts the banks in total control of the housing market. To crash it they just needed to stop lending, and since nobody can afford to buy cash, there are no buyers, dead market!

I don't know too many people borrowing money to buy gold. There is a lot of money earning nothing in savings accounts, that should be in gold. Gold cannot go into a bubble until that money shows up.

As long as all the money in gold is there with a sound reason. And money that should be in gold (like cash savings) is not, gold cannot enter a bubble.

As a caveat there is a lot of big money in long US treasuries. You can bet as it matures it will be going into gold and silver. This will spike the prices, but that will not be the bubble, it will be the trigger for the bubble. That's when folks rush in and get killed.

Well I hope that clears is up. As long as cash buyers can afford to buy and hold Gold long term, it cannot enter a bubble.

Edited by admin on 11/08/2014 - 06:31
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