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Gold Never Has Been (and Never Will Be) in a Bubble



November 09, 2010 – Comments (6) | RELATED TICKERS: GLD

Most serious gold investors follow a basic principle: that gold is stable in value. Changes in the “gold price” represent changes in the currency being compared to gold, while gold itself is essentially inert.

This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that “gold is money.”

From this we can see immediately, that if gold doesn’t change in value – at least not very much – then it can never be in a “bubble.” There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.

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6 Comments – Post Your Own

#1) On November 09, 2010 at 3:14 PM, Sozurmama (< 20) wrote:

no sign of speculation whatsoever :)

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#2) On November 09, 2010 at 3:26 PM, chk999 (99.96) wrote:

Sozurmama got it in one. If you bought gold at the 800 peak in 1980 and held it to the low at 250ish, you lost 2/3 of your purchasing power. So how is gold stable in value? Given the basic principal is false, the conclusion in the article is false too.

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#3) On November 09, 2010 at 3:32 PM, ikkyu2 (98.14) wrote:

Gold is the true north of value.  The chart linked above reflects mispricing of dollars.

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#4) On November 09, 2010 at 3:43 PM, chk999 (99.96) wrote:

No, it doesn't. That would imply that the price level fell to 1/3 of what it was over that period. This was actually a period of inflation and the price level rose. You really did lose purchasing power in a serious way.

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#5) On November 09, 2010 at 3:44 PM, Valyooo (34.48) wrote:

Eh. Theoeetically you are right...but it can be in a bubble compared to USD (or I guess that would make it that USD is in a negative bubble?) If the demand is ridiculous since we use it as a commodity more than a store of value

If the supply of dollars increased by 50% and the price of gold triples, that is a bubble relative to dollars

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#6) On November 09, 2010 at 3:50 PM, JeremieP1 (< 20) wrote:

No asset is free from speculative pressure.  Even if you hold to the idea that Gold (a "commodity" which essentially has very little uses other than as jewelry) has maintained a fixed valuation over the course of history (say the last 10,000 years); it is ludicrous to think that its purchasing power has remained constant over the geographical, societal, and temporal scope that "history" encompasses.  

Ignoring the value of a dollar, renmibi, ruble, pound, or euro - if a pound of gold bought less "stuff" in 1980 than it did in 1995 then its value was "different" in 1980 than in 1995 and an impartial observer would be correct in calling the 1980 prices a "bubble".  At least if you mean a bubble is an unsustainable increase in value brought about by unsustained demand.

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