Saturday, September 10, 2011
IS GOLD A BUBBLE?
Well, well, well. Is gold a bubble? How will you know when the gold bull is about to crash?
Over the next several weeks, months, years you'll be hearing analysts and pundits repeatedly ask this question.
At the same time you'll be hearing answers based on the gold to Dow ratio, the gold to silver ratio, the gold to oil ratio, the slope of the yield curve, the ten year yield to the Dow interest ratio, the debt to GDP ratio, the slope of the gold chart, Fibonacci arcs, open interest in the bullion banks, the hedging strategies of the majors, etc. etc. etc.
All of these totally miss the point. Why? Because they rely on reversion to the mean analysis, and this type of technical plotting is something any moron with a computer can do.
Does that mean it doesn't work?
Well, think of it this way: Over the last five thousand years the average height of a human male is about five feet two inches. So according to reversion to the mean analyses when will humans start to shrink?
Or how about this: Over the last 100 million years Dinosaurs have been the dominant species on earth. So according to reversion to the mean analysis when will Dinosaurs again rule the earth? Should be any time now, wouldn't you think?
Things change. Sometimes permanently. Change doesn't have to be radical. Imperceptible or barely perceptible changes in inputs can radically change outcomes. And these tiny changes can entirely invalidate reversion to the mean analysis.
So what might be changing now? How about this: The efficacy of debt as a means of controlling the modern economy.
As country after country defaults - Greece now - then Ireland, Spain, Portugal, Italy and then when the US goes into recession GDP and tax receipts will shrink while debt explodes - the zombie banks will go under - one by one - and no policy involving debt spending - the only policy Western Economy knows - will work.
That simple. Does that mean that Gold will go up forever? Of course not. But Gold will go up until the particular change has run its course and the next phase of economy has a chance to develop.
That could easily take a few lifetimes. Until then it's a safe bet that humans will revert - not to the mean - but to known solutions. And the one thing we do know is that gold is the most reliable inhibitor of debt. Gold based currencies inhibit the creation of debt. And no amount of debt can erode the value of gold.
So it's a safe bet Gold will be relied upon as debt based paper currencies are printed into oblivion.
There's a reversion you can bank on.